Transcript
Dean Wehrli:
Hey everyone, this is Dean. Today in our episode we’ll be talking to Mark Wolf from AHV Communities. He’s going to be kicking off our build-for-rent extravaganza. It’s going to be part 1 of 3 consecutive build-for-rent oriented podcast episodes. Today Mark’s going to talk mainly from an operational perspective, but in the next couple we’ll talk a little bit more from a financial perspective, from a financing perspective. So I’m looking forward to it, I hope you guys are as well. Here is the first with Mark Wolf. Enjoy.
Dean Wehrli:
Welcome to the New Home Insights Podcast by John Burns Real Estate Consulting. I am Dean Wehrli, your host. Each episode, we’re going to bring you some of the best minds in the housing business, talking about some fascinating topics, or a trend, or innovation, or issue, just like the one you’re about to listen to. Enjoy.
Dean Wehrli:
Welcome to New Home Insights, the John Burns Real Estate Consulting podcast about the US housing market. I’m your host Dean Wehrli. Regular listeners to this podcast are going to already know that we like the BFR, the built-for-rent, or BFR space. We’re interested in it. We’ve covered it before. But it’s changed. Initially, three years ago or so, we were talking about, what kind of legs does it have? Is it going to last? Is it going to be a permanent?
Dean Wehrli:
That’s a clear yes. So now we can get into the shape of those legs and how big they are. This is a weird metaphor. Anyway, to help us do that, we have today, Mark Wolf. He’s the CEO and founder of AHV Communities. They’re a major BFR builder and operator in Texas. Mark, say hi to the folks.
Mark Wolf:
Hello everybody.
Dean Wehrli:
Let’s start real quick, before we get into the meat. Tell us just a little bit about your background and then about AHV.
Mark Wolf:
Sure. Well, great to be on the show. I appreciate it. I do listen regularly, so I’m thrilled to be a part of it. I started my career in 1995 doing credit risk management at a bank holding company in South Florida. So I’ve been a long time real estate, capital markets professional. Done billions of dollars of value add, participating mortgages, debt and equity raisings, mostly for apartments.
Mark Wolf:
And so, post downturn, after doing a stint in mortgage banking, started an apartment acquisition company looking to do value add, multi-family projects throughout the Southwest. In doing so, I stumbled across the up-and-coming Built For… Not Built For, I’m sorry. The aggregation model of the post economic meltdown, the Invitation Homes, previously Blackstone, American Homes 4 Rent, Starwood Colony, all very big players in aggregating these huge portfolios of dislocated assets.
Mark Wolf:
We saw an opportunity to approach it a little differently, and that’s when AHV, and at least the concept of AHV, was started. We thought about managing, maintaining, and amenitizing new build communities, much like an apartment, of single-family homes. And so, that was the built-for-rent model that we intended to start back in 2013.
Mark Wolf:
We had basically pitched the idea at a dozen management companies, tons of equity, and nobody believed in it. Everyone said we were crazy. Nine years later, looks like we were spot on, so it’s exciting. But it’s been a painful, long, drawn-out road. But it’s good to be vindicated here, eight years, nine years later. We do operate in multiple states.
Mark Wolf:
We are in Washington state. We’re in California. We’re in Colorado, Texas. And we are just now breaking into the Tennessee markets. We’ve expanded and grown tremendously in the last 24 months. But most of that, as you know, the space has really blown up in the last 12.
Dean Wehrli:
Yeah. Yeah. A lot of people didn’t believe early on. So I’m not surprised to hear that. As I said at the top of the show, it’s been proven out here. Let’s start with what AHV focus on. We’re going to talk about product first. For you specifically at AHV, do you focus more on I think what you call the luxury BFR product? Is that fair to say?
Mark Wolf:
That’s fair to say. We consider ourselves the Mercedes-Benz of the business. We’re a class A multi-family equivalent, high touchpoints, full amenity packages, management and maintenance onsite. You have to have a premium product to make that work in locations that we at least chase.
Dean Wehrli:
Is that how you define it? You touched on it there. How do you define this luxury product? Is it because you have on-site? Is it anything to do with the product? What are the definition of a luxury BFR community?
Mark Wolf:
Yeah, I mean, really, it comes down to service. We have exceptional locations, and those locations are pretty pricey, from a land perspective. So you have to build a nice product. It attracts very strong working class, family, and up. We have a full amenity package, and typically, that adds up premium to your rent, to build it and to operate it. And then we have management that’s on site, along with maintenance. So, again, you have a lot of payroll. And so, it does warrant a higher end product.
Dean Wehrli:
Let’s step back a little bit. I’m going to ask you to offer your opinions a little on product within the BFR space, a little more holistically. I think traditionally there’s something like three core product types with BFR. Tell me if you agree. There’s the horizontal apartments, very much like apartment, even in terms of size, very much like traditional apartment projects. It’s just no one’s above or below you.
Dean Wehrli:
There’s the small lot, very dense, but they have their own garages, let’s say, kind of a middle category. Then there’s more what you do, more traditional detached homes within a purpose-built built-for-rent community. Does that sound right to you?
Mark Wolf:
It’s really spot on, Dean. We look at the horizontal multis as really an extension of multi-family. That’s not to say that they’re not a part of the conversation. They absolutely are. The product that’s done today is phenomenal. They do a great job amenitizing and laying them out and designing. Cute product. I wouldn’t go as far as calling them a single family home necessarily. The Lennars of the world, and Horton, and KBs that build traditional single family homes would probably say the same thing.
Mark Wolf:
Then you have your attached product, which is duplex, townhome, which has been around forever. People been living in one side of a duplex and renting out the other for 60, 70 years since probably the beginning of the post-World War II evolution of housing. And then townhomes, brownstones, those have been around forever as well, as part of the rental class. So we don’t really call that built-for-rent. An apartment’s always been built for rent.
Mark Wolf:
So the vernacular has a little bit morphed a little bit and everything is slapped with the BFR moniker. We look at it, and we’ve been doing this probably longer than anybody in terms of a true built-for-rent, single family, new build home, we look at that as a three, four bedroom, five bedroom home that’s got its own lot. And it could be a small lot, but certainly its own lot, 90 deep, 120 deep by 45, 50 foot wide traditional lot.
Dean Wehrli:
Do you see any of those… Let’s stick with those three broad categories? What do you think the future is, in terms of, what comes to dominate? Do you see more of one or the other coming in the near future or…
Mark Wolf:
Well, I can tell you, it’s certainly getting harder and harder to do true single family detached build for rent. That is something that we started out doing. We’ve been very fortunate that our portfolio has a lot of infill locations. But those are becoming more and more challenging to find. We’ll be announcing a bunch of new acquisitions and developments coming this year that are holes in the doughnut in very good locations. It’ll be true single family detached.
Mark Wolf:
But even we have morphed a little bit into doing some duplexes to make these infill locations work, to pencil, and even townhomes. We got into the town home business recently because we’ve had some exceptional locations that warranted our involvement. But maybe four years ago when capital wasn’t prevalent, that we would have maybe passed on. So our brand has actually branched out a little bit as well. We’re not just doing single family detached homes anymore.
Dean Wehrli:
Okay. Okay. This question might sound a little odd, but I’m going to ask you about the importance of product. It seems like product and getting the product right for your renter is really obvious. That’s a necessity. But you’ll hear sometimes, in this sector, of almost like the BFR units are just widgets, and demand is so strong that product really doesn’t matter. You’re going to find a tenant. For you, is really designing the right product, for your intended target market, critical, important, not important?
Mark Wolf:
That is a great question. For us, we have a long-term hold mentality. Now, whether we sell it in three or five years is a whole nother story. But our hold period right now with our capital is 10 to 20 years. And so, when you have that mentality, you build a different product. You design a different product. So for us, product is paramount. I think, look, first off, location, and second, what product?
Mark Wolf:
Now, product, to us, is inclusive of an amenity and management maintenance package. Can we amenitize, manage, and maintain it? At what scale can we do it? What product do we design? These are designed to be true functioning communities for the duration, that we’re not building a trade, we’re not building a flip. We care about the quality inside and outside. We care about the design and flow of the community, as well as the house and the efficiency to live in that house and maintain it and operate it over a long period of time.
Dean Wehrli:
Yeah.
Mark Wolf:
A lot of folks, to your point, I think, they’re building a trade. There’s a lot of activity. There’s a ton of money pouring in the space, starved for product. I think a lot of people are going to make a lot of money initially on that. But with that comes long term ramifications and we’ll have to see how it plays out.
Dean Wehrli:
I think exactly right. In a couple of minutes, I’m going to ask you about categorization, about segmentation, the class A, B, C. I’ll ask that in a few minutes.
Mark Wolf:
Sure.
Dean Wehrli:
But it strikes me that the folks who are looking at BFR as these widgets and these short-term plays, they’re making future class C BFR communities, I think.
Mark Wolf:
You said it, not me.
Dean Wehrli:
I’ll get in trouble for that. Is a product, for you, when you design it, is it market specific? Do you change it from market to market, or is it very household type or demographic specific?
Mark Wolf:
Demographics do play a part of it. We come into a market, and from a macro perspective, we look at it. Then we start drilling down to the micro market, the locational attribute of that particular project. It might warrant three and four bedroom homes. It might warrant a duplex. It has some two bedroom product stratification in it. But design and touchpoint functionality carries market to market. We are trying to build a forward-thinking, thoughtful interior living space, and that should translate from market to market, need to need.
Mark Wolf:
Where we differ a lot is basically our amenity package and exterior design elements. We definitely try to come in and be appropriate and applicable to a market that we’re in. For instance, San Antonio has a much different touch and feel than a Houston, and a Colorado, and a Tennessee. And so, while we might use very similar or exactly the same product, it’ll look an awful lot different in each of those markets.
Dean Wehrli:
So how many gun racks you put on the living room wall, something like that for…
Mark Wolf:
Yes. Correct. Antlers.
Dean Wehrli:
Yeah. It’s pregame hunting trophies in the den. How about unit sizes, bedroom counts? Is there a sweet spot right now for a BFR, that’s generalizable?
Mark Wolf:
Yeah. I mean, I think with the household millennial formation, with young working professionals, three bedroom is really a sweet spot. It’s got an extra bedroom for an office. And then if they do have an addition to the family at some point, that can be the third bedroom. But space is a premium today, as you know. I don’t think that’s going to wane. I think it’s here to stay. But we like the two bedroom when we’re doing attached product, because it opens up the bell curve to a larger group of people that we normally don’t talk to or cater to.
Mark Wolf:
The three and four bedroom, which we traditionally have focused on, has been the bulk of what we do. It’s still remains the bulk of what we do. But when we do attached product, we offer the dual master two bedroom for the roommate situation.
Dean Wehrli:
Okay. Is bedroom count, in your mind, that key advantage for a BFR versus traditional apartments? Is that where the demand shifts to in favor of you when you get to the higher bedroom count?
Mark Wolf:
Well, I think it’s a big differentiator. I mean, for decades, municipalities frowned upon any three bedroom unit counts in apartments. I think traditionally 92 or 93% of all multi-family units were studios, ones, and twos, and three bedrooms made up seven to 10% of the unit count. It’s been a very small number nationwide. That was a lot due to parking and traffic impacts.
Mark Wolf:
Now you’re seeing that catch up and say, well, there’s this huge society that wants to live in rentals. And so, naturally, the first jump is going to be to a house that has that extra bedroom or two. And so, I just think there’s an efficiency and there’s a municipality movement that has forced apartments to be something that they may have otherwise not done. They may have gravitated to three bedroom units over time, as things changed. But they really weren’t able to because of legislation or your local zoning.
Mark Wolf:
It’s interesting. I think that this is a big growing sector. The one bedroom, two bedroom horizontal multi projects are perfect for that apartment correlation. What we do is really the growing family.
Dean Wehrli:
See, but that brings up the horizontal apartments, bring up the advantage that they have over apartments, which is the-
Mark Wolf:
Correct.
Dean Wehrli:
… other big advantage, which is no one above or below you. Is that also critical for you folks?
Mark Wolf:
I mean, we don’t look at it as that much because we’re really not focused on ones and twos. We really like the true single family nature of having a direct access, two-car garage, a true front yard, back yard, side yard. What you see in a lot of horizontal multis is extremely small yards. I mean, it might be eight feet by 20 feet, so it’s not really a functional backyard. They typically don’t have garages embedded in the units.
Mark Wolf:
They’re definitely a good product. I’m not besmirching any of those projects. There’s a fundamental difference in what they’re accomplishing. I think a lot of these guys pull it off pretty well. But it’s a very different product.
Dean Wehrli:
Yeah, it is. Let’s switch over now to amenities, what they are, what they should be, and how critical they are. There is also some disagreement, but I think more rational here than it is about product, there’s disagreement about how critical amenities are to successful BFR community. For you, how critical is it to have an amenitized community in your space?
Mark Wolf:
Yeah, paramount importance. I think you know that we have always valued the amenities, management, and maintenance of our communities, at the highest level. We believe that we are an apartment company masquerading as a home builder. That’s how I’ve always defined AHV. Our product happens to be single family homes, but our operations and our approach to the business is extremely multifamily-esque.
Mark Wolf:
And so, we’ve always put a lot of value in having eyes and ears every day on site. And so, if you’re coming out of an apartment and you look at the demographics of apartment dwellers, if they’re in good locations, they’re typically high incomes. Well, we always looked at that and said, “Well, people could easily come and rent a house for a similar price or more with a garage, and with a yard. But would they do that if it didn’t really have the familiarity and comfort of the management, the maintenance, and the amenity package?
Mark Wolf:
What makes apartments great is a sense of community, and it starts with this wow factor. When you come into the community, you see this beautiful clubhouse. You have management and maintenance on staff, if anything ever goes wrong. And then you have a pool and a fitness center and a dog park. These are great things. This is a country club environment when you add houses to it. So we get the top-dollar rents in marketplaces purely because we are providing a level of service that other people don’t value. And that’s okay. There’s a differentiator between us and most others. But we put that at the absolute highest level.
Dean Wehrli:
You are feeding perfectly into my segues, by the way, Mark, because my next question was, are amenities most critical for pricing? Are they critical also for absorption? And retention, I guess, too.
Mark Wolf:
Yeah. I think they go hand in hand, I mean, if done properly. You’re integrating everything and you’re building a sense of community. Our Pradera project, 250 units, virtually 100% occupied, with a waiting list. Our management team does a phenomenal job of creating community events on a monthly basis, and holidays. When you drive into Halloween at our community versus other communities, you have the clubhouses decorated, you have a pumpkin carving contest, you have kids running around.
Mark Wolf:
It’s a different environment when you have a nice amenity that centers the social aspect of a community. I think it drives the rents. It drives retention, and it definitely helps with absorption.
Dean Wehrli:
Yeah. Okay. Is there any community size where you have to have amenities? Or even vice versa where, actually, even you would think about not having amenities because of the size of that community?
Mark Wolf:
Yeah. We only have two projects in our portfolio that won’t and don’t have amenities. Both are under construction at present. They’re both unique positions. One is in a very infill location in Austin, that’s only 65 units. We just don’t have the landmass. It was one of those deals where we bought it fully approved, and we said this is a deal that we have to do. We’re extremely familiar with the location. That’ll be remotely managed.
Mark Wolf:
I wouldn’t say that we would do that nine out of 10 more times. But it was an opportunity that we said, “Look, it doesn’t have to have an amenity. We would prefer to amenitize and manage, but it doesn’t mean it’s a bad deal. It’s just a different deal. Our other project is in a very unique area up in Washington state, outside of Redmond and Bellevue Washington called Duvall.
Mark Wolf:
It’s 99 units and it’s right on the Snoqualmie river trail. And it’s got some outdoor exercise equipment in a beautiful quaint part of the village. And it just doesn’t have the ability to manage or maintain onsite either. But it’s not large. These are 65 and 99 units. We have amenitized and managed onsite, smallest 82, and upwards of 250. We will always seek to manage, maintain, and amenitize. It doesn’t always work, especially when you’re inheriting someone else’s vision, which is why we typically design things from the ground up ourselves.
Mark Wolf:
But these particular deals were way far down the road in terms of approvals, practically shovel ready or finished lots. And so, we had what we had. But I’d say that we always look to insert that component into our designs.
Dean Wehrli:
Are there one or two just absolutely critical must-have amenities, like clubhouse or pool, or is it something a little more funky?
Mark Wolf:
Yeah. I mean, as we move into other markets like Nashville, for example, the pool is probably less of a need due to the short season of pool time. In a place like Texas, it’s important but not end of the world. California, absolutely have to have it. Colorado, we’re going to have a pool, but probably not as high up on the list of must-haves. We can actually design it in. So we’ll design it.
Mark Wolf:
We’ll always go to the extent of providing it because we believe it’s a holistic value proposition to our prospective tenants. But it doesn’t mean we will always have it. But today we’ve pretty much amenitized, managed, and maintained in the very same capacity I outlined, pool, fitness center, dog park, every community we’ve had, except the two.
Dean Wehrli:
Let’s switch over now to premiums. So what I mean by that is not that unit-specific conditional kind of premium, but actually premiums that BFR is able to gain over other housing types. Like to like, I know that’s a tough question, but like to like you had the same community amenitized, versus the same community non-amenitized, what do you think is the price premium for that amenitized community versus the non?
Mark Wolf:
I think today you’d probably say very little, just due to lack of availability and alternatives. Today is not the norm. If we can agree to that, I think it’s a several hundred dollar premium.
Dean Wehrli:
Okay. So-
Mark Wolf:
We have experience with this. We know a little bit about what we’re seeing in the marketplace versus what we offer. And we’re typically a couple hundred dollars more per month. Today, that has narrowed a little bit and anyone will pay anything for a house for sale or a house for rent, it seems. We’re in that supply crazy, what do you want me to call it, Twilight zone right now?
Dean Wehrli:
Yeah. Yeah. I like that.
Mark Wolf:
When the things normalize, it’s a couple hundred bucks.
Dean Wehrli:
Couple of hundred bucks for your rents, what does that translate into roughly, as a percent? Are you talking upper single digits or…
Mark Wolf:
Yeah. Seven, 10%.
Dean Wehrli:
Okay. Okay. Okay. So a pretty sizable premium when things are more normalized. How about the premium, if you can conceive it this way, separately for that services and maintenance… In other words, that kind of thing that apartment complexes offer. You have this well-maintained and you have the services of your BFR committee, versus say a mom and pop SFR. Is that another separate, critical premium versus the SFR?
Mark Wolf:
Absolutely. That’s part of the driving factor, is people don’t want to wait or call a helpline to ultimately have someone else call someone else to come out and take care of a problem. Having eyes and ears on site every day is helpful. It allows us to build a relationship with our tenant base. They see the maintenance folks. They know them by name. Hopefully don’t have many problems, but if they do, “Hey, Jim. Can you come? I have a leak in my faucet,” or, “The light bulb went out,” or, “I need a filter from air conditioning.”
Mark Wolf:
Those are really nice things to have. It also builds a sense of community. Our management team and our maintenance team know virtually everybody on site. They see them every day.
Dean Wehrli:
Would you do off-site leasing and or maintenance? Do you do that anywhere, or would you?
Mark Wolf:
We have two communities, as I mentioned, that are smaller. So those will be remotely… I mean, we’re basically leasing out of a makeshift office in the garage of one of the units. But as we approach 100% occupancy, which we expect to at some point, that will go away. We’ll lease that unit out. That’ll be the last unit to be leased. Then it’ll be a third party, remote management setup. That’s never an objective of ours.
Dean Wehrli:
Okay. Overall, you aggregate all these, where it’s amenities services, management. I know another brutal question. I apologize by stealing an answer, Mark. What is that overarching premium for an amenitized serviced BFR community versus that single family home mom and pop rental?
Mark Wolf:
I mean, it could be is upwards of 15%, but I’d say it’s probably 10 to 15%.
Dean Wehrli:
Do you think it will be a little more when the market is a little more normal, closer to that 15 than the 10?
Mark Wolf:
I think so.
Dean Wehrli:
Okay. Okay.
Mark Wolf:
I think so. I mean, we’ve seen plenty of examples in our underwriting, our comps that we pull for our projects. Could be four or 500-dollar deltas between our rents and the competing aggregated or mom and pop.
Dean Wehrli:
Yeah. Yeah. By the way, just FYI, I’ve seen even higher than 15%. We’ve seen some huge, huge deltas. It varies all over the place, but yeah, it could get pretty extreme.
Mark Wolf:
Yeah. I mean, we look at apartments and you see three-bedroom apartments or even two-bedroom apartments that are more than what these one-offs are getting as a single-family standalone home. And that’s proof positive that maintenance, management, and amenities do drive what people… Look, whether they use it or not, doesn’t matter. It checks the box from where they’re conditioned. Their entire college and professional career, early twenties and late twenties, they’ve always been in apartments, typically, and they’re used to that level of service. I think that carries forward as they come into the big boy, big girl house. And they’re going to want that.
Dean Wehrli:
Let’s switch over now to renter types.
Mark Wolf:
Sure.
Dean Wehrli:
How do your renters differ from those apartment renters in the area, demographics, income, things like that, or even from SFR folks in the same area? Are there differences you see in terms of demographics, or household type, or income, anything like that at all?
Mark Wolf:
We’ve seen some interesting multi-generational households where you might have… We have a phenomenal tenant in one of our communities, the two girls live with their dad who’s a war vet. He’s got some disabilities. They’ve been now with us for three years. They keep renewing. That’s something that I don’t think you’ve seen in a traditional apartment. But we have very high demographics. I mean, these are six-figure household incomes.
Mark Wolf:
Plus, most everybody could afford to go out and buy a house. Their credit scores generally tend to be extremely high. That’s the biggest light bulb moment that I think everyone’s realizing today is that there are people that just don’t care to own a home.
Dean Wehrli:
Yeah. We hear that a lot, by the way. I think a lot of people don’t believe that still, but we hear a lot that, essentially, if you have your BFR community and right next door is a normal for-sale community, and otherwise, there are similar product pricing, whatever, that demographically, those BFR renters are virtually indistinguishable.
Mark Wolf:
Absolutely.
Dean Wehrli:
Yeah. I mean, because BFR really does… It has that bedroom count factor over apartments, do you think families is another differentiator?
Mark Wolf:
Yeah. And I’m sorry, I should have mentioned that. I think families is probably the single largest differentiator. I mean, to raise a child other than a need base in an apartment is unfortunate. Doesn’t mean makes them a bad person, but I think everybody would strive to have a traditional house to raise a family. I have plenty of friends that grew up in New York City. They lived in apartment buildings, and it’s just a different lifestyle.
Mark Wolf:
But suburban America, I think generally speaking, you’d prefer to have your child in a neighborhood, in a traditional home. But needs based, I’m sure that varies all over the country. I think that everyone strives to provide their child that.
Dean Wehrli:
But you’re still getting the dual income, no kids, professional couples, the retirees, empty nesters. You’re still getting those folks?
Mark Wolf:
100%. I’d say it’s a third, a third, a third. It’s a third of the household, millennium formation. It’s a third empty-nesters, and everyone else in between.
Dean Wehrli:
What do you think are the primary motivations for going to BFR rather than for sale? We hear a lot about a lot of down payment, mobility, whatever, testing a neighborhood. For you, what do you see as those? Why are they renting a BFR rather than in the for sale world?
Mark Wolf:
I think it’s really the load of a house, the down payment. If you’re a first-time home buyer and you’re buying a house, 250 to 350 range. There’s a ton of financial engineering that can occur out there with unique loans and all kinds of things, to go ahead and get a low down payment on that house. Maybe it’s twice as much as a security deposit on a built-for-rent. But it’s really that long-term unknown of, am I going to be here long enough? Do I want to be here all this time? Do I want to take care of the house, to maintain it?
Mark Wolf:
You have taxes and insurance. And so, while the payment might be attractive, you still have tax load, insurance load, maintenance, and all kinds of other things that come with home ownership that I think that many of the younger folks are learning this, and so they choose not to do it. Plus, it’s a very mobile society. So they want to lock and leave, go have fun, experience life.
Mark Wolf:
Some of the older folk’s transitioning down from homes and saying, “I’m sick of that house. I had it for 30 years, and I’m so glad to get rid of it. I just want to lock my door and leave.” Sounds a lot like the millennials, right?
Dean Wehrli:
Yeah.
Mark Wolf:
And then the folks in between are maybe transitioning or have gotten burned in the past with home ownership. You never know. I think it’s a whole variety of things. I just think that today’s society is a lock leave mentality, less the weighing you down with obligations, especially financially, is here to stay.
Dean Wehrli:
Yeah. That low maintenance lifestyle, I think that gets overlooked in terms of BFR demand and motivation.
Mark Wolf:
Absolutely.
Dean Wehrli:
How about markets? Let’s switch over to markets now as a topic. What do you see, or want to see in a market, to want to be there? Is it jobs? Is it population growth? Do you look at metrics when you’re judging and assessing markets?
Mark Wolf:
Yeah. Jobs, jobs, jobs, I mean, first and foremost. Then taxes, population growth, which usually go hand in hand. Jobs, population growth follow tax environments. I think that’s proven today, statistically speaking. But we started very broad macro level. We study it. Then we drill down from there as to where in those markets we want to be.
Mark Wolf:
The markets we’re in right now, Seattle metros, Inland Empire, California, all four majors here in Texas. We’re in the Denver Metro in Colorado Springs, and we’re in Nashville. You look at all those markets, they’re all top tier for growth right now, if you pulled up a map, where the hotspots for growth are.
Mark Wolf:
Inland Empire’s the only one you head scratch, but it’s our backyard. We saw the huge presence, even though I moved to San Antonio, Texas, to grow the company. We saw the huge presence in Southern California. And so, we have two big projects out there.
Dean Wehrli:
Yeah. Well, the 909, that’s the Inland Empire. Correct?
Mark Wolf:
Yeah.
Dean Wehrli:
For the non-Californians. I mean, it’s traditionally been a pretty high growth area.
Mark Wolf:
It is very high growth. And then, so the head scratch, because all the craziness in California right now, it still seems to be a very hot spot for growth. So we’re very happy being there. The biggest challenge or the biggest unknown for California is regulatory. That’s the unknown. It’s not a fact of, do I want to do business there? It’s what could happen down the road during my ownership cycle?
Dean Wehrli:
Okay. Okay. How about in terms of city responses? We’re starting to hear, I’ve even heard anecdotally, some cities are doing moratoriums in BFR, or other cities are looking at it with leeriness. Are you finding that? Are you finding hesitancy?
Mark Wolf:
Yeah. I think there are some players out there, and I don’t want to call them bad actors by any means. I mean, everyone is doing their thing, and one person’s Picasso’s another person’s mess. But I think the cities are seeing some product. They’re experiencing some folks that maybe aren’t executing to the level that they’d like to see. We’re always concerned about our neighbors in a for-sale neighborhood because we have eyes and ears every day on site.
Mark Wolf:
We’re building a hundred million dollar community. We’re not building a $200,000 house. So we argue that we’re more concerned about you next door to us, not keeping your house in good shape. But there are some groups that don’t manage and maintain on site, that don’t have eyes and ears on there every day. And so, technically, I understand the city’s questions of, will this be a property that’s kept up? Who’s going to take care of it? So we hear that a lot from the cities and municipalities.
Mark Wolf:
It’s fairly unconstitutional, in a lot of markets, to do that, from a state perspective. I’m not talking about United States constitution, but from a lands rights or a land use type of constitutional… The rights are infringed upon when a city says, “You have to do rentals.” Now, and most developers don’t want to fight back, and I understand that reason as well. But we’re finding a lot of markets that, we’re talking to folks, and when we do run into that, we’re trying to politely remind people that they’re overstepping their bounds. If we get a little bit of resistance, we move on. It’s just not worth to fight the fight.
Dean Wehrli:
You mean they want you to do for-sale, not rental.
Mark Wolf:
Yeah. They want for-sale. We try to remind them, “Look, we’re going to be one of your largest taxpayers here. What’s it matter to you?” We try to prove that we do it differently than everybody else, “Here’s examples of our product. Here’s what it looks like. Here are some people that live here. Hear their commentary on it.” But it’s a challenge. We hear it a lot in a lot of the municipalities that we go to.
Dean Wehrli:
Is there still a stigma in favor of for-sale over rent? In other words, renters are sometimes looked at with a little bit of a stigma. Is still true?
Mark Wolf:
It’s shocking, yes, and mostly for the municipalities and these councils that, frankly, it’s just ignorance. It’s just not understanding and knowing what they’re talking about. So we try to politely educate people on the granularity of understanding who our residents are versus a for-sale person. You might not know anything about that person. They come with a suitcase full of cash, that’s that.
Dean Wehrli:
Yeah. It could be a grow house. You never know.
Mark Wolf:
Yeah. We have actual information on every one of our tenants. So we actually have more control than a regular neighborhood does. But it falls on deaf ears oftentimes. They have their–
Dean Wehrli:
Yeah. Although I shouldn’t knock on grow houses. That’s a sizable part of the market too. A little grab bag of things I’m interested in is location. It sounds like location is critical to you. In micro aspects of location, are you looking for… Like apartments would look for visibility, being by a freeway or a major thoroughfare. Are you almost the opposite because you don’t need… And except for the initial absorption period, that’s not as important to you and be more in a suburban environment?
Mark Wolf:
I’ll tell you, the aggregators where they first started, the big boys back in ’09, ’10, ’11, they proved that you don’t have to be visible, because all their product is needle in the haystack. I mean, they’re invisible to most people. You get online, you look around, you surf the internet, you find your product. So technology has been an incredible differentiator in the market today versus how we used to do things.
Mark Wolf:
We still put location at the absolute top of the list in terms of deciding on a deal. To me, real estate is fundamental and location, location, location are the three principles of real estate. Everything else comes in fourth, fifth, and otherwise. So location to us is extremely important. I think you’ve seen an erosion of fundamentals and real estate choices, as we talked about earlier. Those are tomorrow’s C assets.
Mark Wolf:
We don’t necessarily want to be on the freeway, but we want to be near it. So we have a couple of locations are freeway proximal. We won’t shy away from that. We have a brand new site that’s on the 35 and 1604 here in San Antonio, which is main and main, a couple hundred yards off the freeway, so we do have a good buffer. But it’s an infill location, phenomenal visibility. That’s probably 20% of our portfolio. Most of it is neighborhood driven and a few minutes off the main track.
Dean Wehrli:
Okay. Let’s talk about the future. Let’s look at your crystal ball a little bit, as we wrap up. Do you see the BFR world segmenting and diversifying? I mean, have we not seen the end of, say, the product type, or how we rent them, and how we market them? Is something else coming up?
Mark Wolf:
Yeah. I mean, you don’t know what you don’t know. I don’t know what else would come up. I mean, I think that pretty spoken for, there’s a variety of product that’s utilizing the built-for-rent moniker. I think you’ll continue to see it evolve. I think the newest part of that equation isn’t the horizontal multi, it’s really what we’ve did and had done initially, which is the single family detached residential neighborhoods.
Mark Wolf:
I think it’s here to stay. I said it back in 2014 in an interview, and I always said it would be part of the multifamily conversation. I’m glad to see it, part of that. I’m a big fan of multi-family, from an operational efficiency perspective. We’re going to stay true to those roots. I don’t know about everybody else, but I think it’s an operational advantage that will carry forward with us.
Mark Wolf:
I think other people will see that in due time, but for the time being, the market’s hot. There’s a hundred billion dollars of product, of demand out there from capital. So I think for a while here, we’re going to see a lot of the same and the market will sort itself out over time.
Dean Wehrli:
Do you see it segmenting into that class, A, B, C kind of system that traditional apartments have?
Mark Wolf:
I think it will. I think it will. I’d like to see it really differentiate into real product class. You have your horizontal multi, and I think that’s exactly what it is. I think you have your attached brownstone townhome, duplex product, which is its own product class. We participate in that, by the way. But I also think that the built-for-rent, the single family, should be truly defined as single family. It’s unique, it’s different, it’s new, and I think it’s special.
Dean Wehrli:
Do you see the players in this space changing?
Mark Wolf:
Yeah, I do. I think it’ll thin out a little bit. There are some well-backed groups, from a capital perspective, that’ll be here for the future. I think some of the big names have figured out how to get in the space. Folks we pitched in ’14, ’15 and ’16 that said “No, thank you” are all now doing it. So, no surprise. We have a long-term plan in place with a single capital partner we’re very excited about. I would never say never, but I don’t think we’ll ever sell or merge with anybody else. And I know there’s some other groups out there that probably feel the same way.
Dean Wehrli:
You anticipated my next question again. Do you think we’ll see consolidation in this sector?
Mark Wolf:
I think you will. I think you’ll see some people have trouble competing on a broad basis, that will… Not say throw their hands up, but come across an attractive opportunity to join forces with another group. We’re building a national platform. It’s always been an objective of AHVs, to be coast to coast. We’re well on our way, being Seattle, California, through the South, into the East. I think other folks will probably merge in with other folks to create that larger footprint with scale.
Dean Wehrli:
Do you see more consolidation in terms of the actor type? Let me explain that. Let’s call it an institutional actor in the single family world, the overarching single-family, inclusive of BFR, is very small. It depends on how you define it, but it might be 3%. It might be 8% of the market. The vast bulk of this market is literally mom and pops with just a handful or one property. Do you see that rising exponentially or just very, very gradually over the, say, next five, 10 years?
Mark Wolf:
I think it will grow due to new bills, more than gobbling up the little person. If you think about the daunting task of buying twos and threes at a time, from individual people versus bank tapes, where we can go in and buy 10,000 houses from a bank, that’s a different approach than going and buying individual one-offs from people who probably are reluctant to sell in the first place.
Mark Wolf:
So I think people will grow that way, but it’s a very slow, very labor intensive way to grow. I think that building anew is going to be a big part of the future, which we proved out, and shows by everyone else now doing the new builds. But growing that way is going to be really tough. Not to say it won’t happen that way, but could you imagine trying to gobble up 10 million houses one at a time?
Dean Wehrli:
Yeah. When the big actors, like you mentioned earlier, Blackstone, et cetera, when they were building, there was still a lot of that distressed inventory out there, things like that. That’s just not true anymore. Maybe the next time that happens, there’ll be an opportunity. But…
Mark Wolf:
For sure. I think that’s when the opportunities come. When bad things are out there, that’s when the biggest opportunities are. But it’s also the hardest time to act if you don’t have capital.
Dean Wehrli:
Yeah. I want to ask this question, even though I think you already answered it earlier, is that don’t you think that BFR communities have more vested interest in maintaining the appeal and the attractiveness of their community than next door cheek by jowl for-sale communities because of your long-term outlook?
Mark Wolf:
Absolutely. I mean, when you take it a holistic community, and a true cohesive, contiguous nature like we do, and some other folks do, when you have those hundred to 200 houses that are continuous in lawn and yard and infrastructure, that’s a large investment. That’s 50, 60, 80-million-dollar investment. That takes real capital that typically comes from a third-party source, that requires a very high level of upkeep and maintenance and reporting.
Mark Wolf:
You can’t let that community go by the wayside. In a for-sale neighborhood, and not picking on anybody, but you go to a for-sale neighborhood, a new community, Lennar or Horton, any of these big master plan guys that are building thousand houses, as you move through the community, it ages over time. When they sell their last house, they’re no longer controlling the HOA. It goes to a third party HOA in some remote location that their only power is really a letter, and that letter is delayed by 30 days at a time.
Mark Wolf:
So if someone wants to let their house go to crap, not cut their lawn, parking somewhere they’re not supposed to park, your enforcement is really minimal at that point. So I think that I’m more concerned, as I alluded to earlier, of my neighbor than of myself, because I’m worried that as soon as the builder’s out of that community, then that’s the decline of that community. It’s tomorrow’s slum. I’m painting a very broad brush, but we’ve all driven by communities that are five, six, seven years old.
Mark Wolf:
We know it’s five, six, seven years old. It looks 20 years old. Its fences are falling down, things aren’t stained, things just don’t look great. To your point, when you have these big communities with large investments, I think they’re going to be taken care of a lot better.
Dean Wehrli:
Yeah. I know that seems like a puffball question, but I wanted youy to answer that because I think that gets overlooked a lot when folks are assessing BFR–
Mark Wolf:
I try to tell people that. We’re not making a $250,000 bet in your market. We’re making a 50 million, an 80 million-dollar bet. That’s a substantial investment.
Dean Wehrli:
Yeah. Let’s end with this, Mark. In the battle of the acronyms, who’s going to win? Is it BFR, BTR, built-to-rent, or B4R, which is kind of clever? What do you think?
Mark Wolf:
Well, built-to-rent is… BTR and BFR are pretty much the same thing. [42:00] You know, “build” or “built”. It’s all been so silly. I told John a long time ago, I was pitching a municipality, and this was back in like 2015, on what we were doing. They were complaining about how they were worried about the inventory for… Which is still pervasive today when you talk to folks. But the inventory that I was building was not going to go to a home buyer, but it was going to go to rent, and that bothered them because I’m denying homeowners of the opportunity to buy a house in their neighborhood.
Mark Wolf:
I said, “Well, you have to understand something. This was never built for sale. This is going to be built for rent.” That was like 2015. I was pitching my Pflugerville deal up in North Austin, to the council. And they go, “Oh, oh.” They understood that. It was never intended to be a part of the for-sale conversation. So I was not robbing or denying anybody of home ownership. It was never intended for that. It was always going to be built for rent.
Mark Wolf:
And so, now that’s been used to define everything… Which is shocking that they define apartments as built for rent, because I don’t know when an apartment hasn’t been built for rent. I don’t even really have a comment, and I think it’s going to be a morphing of all that stuff and whoever can use the acronym to be relevant in the conversation or exciting.
Dean Wehrli:
That was a very good– are you running for office? That was a very good non-answer answer. I like that.
Mark Wolf:
Not yet.
Dean Wehrli:
BTR. Okay. I honestly don’t know. We use BFR, but we hear BTR all the time. So we’ll see. Awesome-
Mark Wolf:
Yes. I think it’s built-for-rent. I think it’s BFR. I really do. We registered the trademark, so we’re working on the timing for that.
Dean Wehrli:
Okay, cool. Hey, Mark, thank you. I really appreciate you coming on. This has been great. I got all these questions… This is about the most questions I’ve ever asked in a podcast. So thank you so much for helping out.
Mark Wolf:
It was a pleasure. I had a lot of fun.
Dean Wehrli:
Right on. All right. Thanks everyone for listening. This is Dean Wehrli with the New Home Insights Podcast. We’ll see you next time.
