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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (01:35)
Hello, everyone. Welcome to another episode of Deal Full Friday. I'm your host, David Mogavam. And today we got Adrian Berger from Cypress Equity Investments. It's good to see you. Of course. And we're sitting in LA. So flew all the way across the country for this. ⁓ Not for a wedding. It's really for you. I just happened to have a wedding that go to this weekend. So exactly. Exactly. How you been?
Adrian Berger (01:46)
to see you too. Thanks for having me.
Yeah, I know that's an I'm so
Two birds killed two birds with one stone.
I've been great. I've been great. I've been, you know, navigating this market, which has been pretty crazy. But you know, got a, got healthy kids and roof over our head and living in a great city, sunshine. mean, yeah, things could be worse.
David Moghavem (02:07)
Yeah, to say the least.
Exactly. These are like humbling times, right? Yeah. Where you're going through this down cycle that just feels way too long and you start also appreciating what you have.
Adrian Berger (02:27)
Yeah, you've always got to appreciate what you have, even in like the, in the good times, right? That's the thing. It's, know, when the market's going really well and there's lots of deals happening and money's flowing and equities and deals, then you don't have time for certain things. And you're very focused on, you know, just doing the deals. But when the market slows down, like you've got to find time, you know, to be with your family, you got to find time to reconnect with people, but you got to do that no matter what.
You got to find that rhythm, which is hard because we all work a lot and we all want to do more. We're all motivated. ⁓ But yeah, it's been a very, very strange couple of years.
David Moghavem (03:04)
Yeah, so I guess what what's been I guess the biggest surprise for you during this kind of couple years
Adrian Berger (03:09)
Yeah, I think the biggest surprise is, I think it's no secret that a lot of lenders have loans on their books that don't really seem to make sense from a valuation standpoint. for example, they lent money to a multifamily operator or whatever asset class it is. And the value of that loan, the face value of that loan is worth more than the real estate in many cases. What's been surprising has been how little pressure there has been
for those banks to actually move on from those assets. And I totally understand why. Like they don't want to take a write down. They don't want to take a loss. They don't want it to become a public thing. But there was, I think, a lot more expectation that at least some of it would happen. But really, none of it's happened. I mean, at the very beginning of this down period, we thought we would see a bunch of mid-construction deals that
froze because the developer used MERS or pref equity and didn't, couldn't fund overruns, et cetera, et cetera. And that the banks would step in and take them out and recapitalize these deals. We did see like four or five of those, but only like two of them really traded. And the other ones, like I know of a couple specifically that are still in the same place they've been three years later with a lender just not willing to meet where the market needs to be to get that.
David Moghavem (04:17)
mid-construction.
Adrian Berger (04:37)
project finished. So that was a little surprising. I thought there would be more of that.
David Moghavem (04:43)
And that was probably like a thesis you guys had going in maybe.
Adrian Berger (04:46)
Yeah, we went and raised, we had one of our partners allocated a hundred million dollars for us to go and do deals like that. So we were ready to do it and we were chasing it, ⁓ but it just sort of didn't really come to fruition. There were two that happened, one in ⁓ Orange County and one in Colorado, two of those that we chased really hard, but we just didn't end up being the highest bidder. So that's probably been the biggest surprise.
David Moghavem (05:12)
I actually think I remember seeing the Colorado one. think it's exactly what you said. You have these situations where you think might translate to a sale, but there's just so much other rescue capital out there like that Colorado deal. I remember vaguely there was some sort of either preff provider or some sort of ⁓ rescue capital that come in, reset the basis and give yourself a little bit more runway.
Adrian Berger (05:35)
Yeah, we just, think, are a little bit more conservative and in many ways. so we want to feel like we're getting the risk adjusted return for the risk that we're taking. And that usually makes us not the highest bidder. We've always been the most successful buying things and doing deals that are off market or doing deals where it's a relationship situation where people understand value that we bring and like working with us.
That's usually been where we've had the highest rate of success. But a blasted out deal that the whole world's gonna see, we're very rarely the highest bidder. I think that's been the biggest surprise, ⁓ seeing how few of those, quote unquote, distressed transactions, or even restructured transactions. I think a lot of people are thinking there'll be more of those. So I think that's...
That's been the biggest one.
David Moghavem (06:33)
I would say, I agree that before we were always kind of getting creative. And when I say before, I mean like pre-rate hike, we were always getting creative of finding the off market deal, finding the deal. Now what we're seeing is off market channel is not priced appropriately. And maybe the on market deals that get bid up, go under contract and the highest bidder ends up getting over their skis a bit, falls out of contract. Those broken sale processes, you're finding a lot more value.
Adrian Berger (07:01)
100%. I think that the off-market seller is off-market for a reason in many ways. And so their expectations are yesterday's pricing. so yeah, like the bid ask spreads too wide, but there was many processes, market processes where a broker brought it to market, you know, a year ago and it didn't transact or went on to contract and fell out and they took it off-market and then it came back to market.
⁓ And then everyone's like, okay, now they're ready to transact and a deal will happen. In fact, there's one I was chasing in Texas that was like that. ⁓ And the transaction's gonna happen at a really low basis. I think whoever's buying that is gonna really be happy in a few years. ⁓ But yeah, I agree with you. mean, we also find that right now, I say this to my team all the time is why is a seller selling? Like if anybody...
is selling right now, you've got to really understand like why they're selling because most people don't want to sell today because it's the lowest market in whatever 15 or 20 years. So why would you be selling? So a lot of time wasted by groups that are trying to sell or trying to just price the market or brokers or trying really hard to get listings or trying to generate activity, which all makes sense.
It's always about like, is this group selling? And if there's a real situation, like the most common one we see is it's some kind of a family structure situation where someone in the family has passed away and the descendants aren't in real estate, don't want to deal with real estate. And like those are really good because all those people that are left in the deal, they just want their money in to go and do whatever they want.
David Moghavem (08:43)
Regardless of the cycle, you have some of those.
Adrian Berger (08:45)
Right. And that's always happening because you never know what's happening in people's lives and their people's businesses and people's partnerships. Like those things are always changing when the market's good and when it's bad. In fact, when it's bad, a lot of those sort of partnerships tends to break down because that's when there's kind of conflict or issues or challenges. So those are the kinds of sellers where you're like, these people want to transact, right? Versus somebody that, you know, we get set deals where someone's got an existing loan for the next however many years at this crazy low interest rate.
And I'm like, well, why, like, why are they selling? Oh, you know, they want to recycle capital. Into what? Like, what are they going to buy? It's not going to buy. So I think that's really pretty critical right now. I mean, you tell me, you guys are buying more existing than we're trying to, but you guys are more successful at that than we are. Yeah.
David Moghavem (09:34)
I mean, in the eight states that we're covering right now, ⁓ what we're finding is we're trying to pick our spots, right? As you said, like it's very tough for deals to make sense, but we're picking our spots. I think what you're seeing market specific is the newer vintage stuff has a little bit of a better risk adjusted return than some of the older stuff right now. There's a flight to quality ⁓ and I think some of the older vintage products.
Although the cap rates have expanded like tremendously, you need a lot more capital that you have to spend into those deals. It's harder to ensure. You're running into more bad debt issues. You're running into a lot of different challenges that you can't really predict or quantitate. Whereas on the newer vintage stuff, there's a lot of merchant developers that are trying to get out of their deals and their basis is lower than what replacement cost is today. So there's a lot less of a...
bid ask spread on those. And so I think those are pretty good opportunities. Now, once you get to the more institutional grade assets that are newer, those get bid up really strong with discretionary funds that are buying and seeing longer term. But maybe on the sweet spot, I guess for us right now is where it doesn't necessarily check every box from like institutional discretionary funds. And maybe it's a little smaller, maybe it's a little older.
⁓ Maybe it's in a B location. I think what you're seeing is there's a huge drop off in liquidity and therefore stronger cap rate expansion on those type of vintage.
Adrian Berger (11:13)
Mm, makes sense. Yeah.
David Moghavem (11:15)
⁓ I know for you guys and I know we jumped straight into the weeds. But to give like the audience a little bit of background. Pre-rate hike and correct me if I'm wrong. You guys were primarily focused on doing more developments or were you guys?
Adrian Berger (11:28)
Yeah. So the company has been around for 25 years. It started off by buying multifamily in LA, smaller properties, older vintage. This is early 2000 stuff. our principal sold 80 % of a 3,500 unit portfolio in like 2006, 2007. He's an ex bankruptcy attorney. So he kind of saw what the banks were doing, had experience helping those same banks get out of previously bad loans and thought that it was
going in a bad direction, so he exited. Did very well. But really since 2010, we've been primarily focused on ground-up development of luxury class A multifamily. First off in LA, we've built now between that and then deals that happened after that 2010 cycle, about 3,000 units in LA. We have about a 2,500 unit pipeline of development opportunities in LA. Currently. Yeah, in Santa Monica mainly.
⁓ And then when I joined around 2015, right as we were trying to expand our business outside of LA. And that's when we started doing a series of co-GP investments as like an active co-developer. So the idea is you find groups that have some experience doing development, but they're missing some things like there, maybe they need some, you know, some capital to do more deals, or maybe they need introductions to institutional equity, or maybe they need a balance sheet support. So these are the kinds of things that we were able to provide.
David Moghavem (12:56)
And you were doing partnering with local developers in other states.
Adrian Berger (12:59)
In
other states, yeah. And we would do it also in California. We never really found the right group in California, but we we partnered with groups in Vegas and in Portland and in Denver and Florida and New So that got us a chance to diversify geographically and ⁓ expand the company and do more. so sitting here today, we've actively developed and operated in about 16 states, 16 markets, I should say, around the country.
⁓ We did acquire some stuff along the way, but it was mainly sort of development. We got involved in a couple of big master plan developments, which was really interesting. Like one up in the Bay area, one in Boston. ⁓ then we also, mean, multifamily, I'd say is our 90 % of what we do. And market rate is the majority of that. We did also find a partner as a co-GP who did low income housing tax credit deals, both development and acc rehab.
And so we partnered with her and we did a lot of deals with her and ⁓ we got exposure to that part of the industry. And that's another reason why we like to co-GP. So we'd never done light tech and then we partnered with her for the last almost 10 years. And now we've learned that business and that's one of the tenants of our strategy going forward is to grow that business. And then similarly, we partnered with a guy to build a couple of self-storage projects in LA and he was a self-storage developer and we co-GP'd and we learned.
self storage development business and now we are that's another one of our key growth functions for the company going forward all through co-gp to either get market exposure or to learn something new.
David Moghavem (14:34)
Yeah, and it sounds like the synergies with these co-GPs, correct me if I'm wrong, but they have their expertise in their respective fields. You guys have capital and your own expertise in development and therefore there's a little bit more synergies there.
Adrian Berger (14:47)
Yeah, there's going to be equal belief that both parties are bringing value. Where it makes it hard for us is if people are looking at us as like an LP in the GP. we've never, we've never been an LP investor. I shouldn't say never, but we're not, that's not our MO. We are an operator. We're a developer. We're a GP. So if we're coming in, we're going to be a little bit more hands-on. That means we're going to be probably a bit more expensive. We're not the right fit for everybody.
It's really when you find a group that has a need and we can fill that need and it adds a lot of value to them. That's typically when we see really good synergy. And the goal for us is to help those partners to really scale the business. Like we don't want to do this just to do one deal. I mean, some of our GP partners, whether we did one deal and it didn't work out and everyone goes their separate ways, it's fine. Some of them we did five, six deals with.
David Moghavem (15:41)
Yeah, I mean, it's great foresight on your guys' because to be a developer in LA from the past 10 years, you've seen the trajectory go sometimes the wrong way. Development in general has been tough with what's going on from the macro economy. In LA, it's been super tough to get things entitled, to get things past plan check and building and safety. After COVID, it was even harder to entitle. ⁓ So I guess, was this CodeGP kind of an avenue for you guys?
to diversify a bit more into these other traits for the risk that you're a little bit too focused on just development and in LA.
Adrian Berger (16:19)
Yeah, I mean, that was definitely part of Michael's thinking, our principle. You know, I joined, like I said, right in 2015, right at the time where we were sort at the end of that initial run between post 2010, right around 2015, it was really hard to buy land in LA because the deals just weren't penciling anymore. And there'd been a lot of development, a lot of deals tied up, a lot of deals in process and entitlements. A lot of capital had been deployed. lot of institutional equity had entered the market, invested in deals.
So there was a lot of activity going on and slowly we started to see that those JV equity groups were thinning out that the margins on the deals, the development deals were getting also thinner. The yields that we were solving. this was in 2015. It was like 2015, 2016, we're trying to 2017. We're like trying to figure it out. And at the same time, I think we wanted, Michael wanted to diversify geographically. And that's, that's really was part of the impetus of the CoGP platform. And it was.
We were kind of agnostic, generally agnostic about where we wanted to go. Obviously top 20, 30 markets, but it was really about who we were doing it with, right? Our philosophy is like people, location, deal. It's like, who are we going to be getting married to? And that's the most important thing. Like what experience do they have? Like how do they see the world? You know, how do they handle, you know, tough decisions, pressure, all that kind of stuff, right? Cause you know, you're going to be in the trenches. ⁓
And especially if you're backstopping a construction loan, like, you know, there's risk. So ⁓ that was really a great way to diversify nationally and it worked out really well. So, know, to today, you know, we were, we've got actively, like I said, we're actively operating in all these different markets and we've got now market knowledge there. We've got relationships there. So if we want to expand any of our other business lines,
You know, it helps us. We've got a network and places, know, we've got to, our name has recognition in places, which is so important in our business. So yeah, that was sort of part of the impetus was to like get across the country.
David Moghavem (18:25)
Yeah, and pre-rate hike, it sounded like you guys were co-GP'ing with other developers. Now, I guess, in this new, you know, in this down cycle, it feels like development's super tough. And so, are you still seeing past it and trying to co-GP with different developers today? Or are you guys focusing on more existing? What's your guys' criteria at this point now that it's much harder to build?
Adrian Berger (18:49)
We've always been open to co-GPing pretty much anything asset class wise that we liked and we're interested in. So we went down the path of trying to co-GP in the senior living space about, I don't know, six or seven years ago. Like I said, we did the self storage. ⁓ That was a development strategy. We recently were trying to co-GP with a group that tied up a portfolio of existing storage deals in Texas. It was like a hundred million dollar portfolio. so bringing in a co-GP to write a check and help.
you know, so we will be interested in existing as well as development in that way. We've always wanted to co-GP with operators of multifamily because there's, you know, they're, got a whole business set up to go buy assets and we'd love to own assets again. So really it's, we're open to it. mean, maybe not in like an esoteric type of asset class, right? But something that's in the major food groups, like we've always loved, wanted to get into the industrial space, you know, and,
And we're happy to, we know what we don't know, right? And that's, think, valuable because we're not coming in and saying, industrial, yeah, we know industrial. We don't, but we'd be happy to get involved. Like another great example, you know, in our master plan in Boston, there's a lot of life science ⁓ development. And so that first one that we built, we did it with a local life science developer in a co-GP because we've never built life science before. So I think we're pretty open. And I think it's, again, it just comes down to the people.
and the strategy really, ⁓ can we really bring value, right? Like for example, even in the low income housing space, we've raised some equity that's helpful if there's a gap in these projects, because they're capitalized in different ways. And so we're out trying to find co-GPs in the light tech world and having that partner be really experienced at like successfully.
getting bond awards in those states is like the most important criteria. We don't care if it's development or if it's ⁓ a value add. ⁓ We like the space and we want to expand in that space. So we're really targeting certain things.
David Moghavem (20:53)
It sounds like you guys have partnered in different asset classes and asset spaces. Are you guys geographically agnostic or are there geographies and sub markets where you guys are really bullish on or trying to stray away from?
Adrian Berger (21:07)
I think we're open again to the top 20, 30, 50 markets maybe. think it depends on the business plan. I think if you're doing something like storage or low income housing, like as you sort of get out to those second tier secondary markets and tertiary markets, it gets a bit harder. know, it's like who's going to be the buyer, right? And like, what's the exit going to look like? So it's like, we think through that a lot.
David Moghavem (21:26)
Primary MSAs.
Bless Liquid today.
Adrian Berger (21:35)
But we're also open to someone convincing us why the Midwest, for example, should be a place that we should invest dollars. We're really pretty open mind. That's probably a bad example. A few years ago, one would touch that. So I think we're open to being educated on.
David Moghavem (21:47)
It's a little too late for that. he's already done. Yeah, no. I get what you're saying. Yeah.
Adrian Berger (22:02)
parts of the country on business plans that we aren't as familiar with. And then we'll just make a judgment call. Like, do we agree with that thesis or not? Right? And can we, do we feel confident that there's capital for that? Which is always really where everything starts. We still get approached by people who want us to co-GP with them as a developer. And right now, you know, we are, our first question is like, is there an LP in the deal? Yeah. Cause it's just really hard. I think that, know, traditional institutional equity, which is how we've capitalized our deals.
David Moghavem (22:24)
And it's super tough.
Adrian Berger (22:32)
They just seem to be very much in observation mode and they're getting into deals, they're very unique opportunities or there's a story involved that there's something that's compelling them to write a check. But for like a generic garden deal in Texas, Florida, Colorado, like it's very hard to convince capital to get into that. ⁓ we're trying to really identify
co-GP opportunities that have like a good chance of success. So like a really good one that we did recently here in LA is around a more localized strategy of buying older buildings and using ADU law to increase density. you know, that we love that strategy. Yeah. And buying
David Moghavem (23:21)
And it's in your backyard.
Adrian Berger (23:22)
Buying
small buildings in LA, we've always talked about wanting to do that again, because that's how the company started. back to roots. Yeah, but we didn't have the team set up, but we didn't want to go and invest in building that team. ⁓ And so we found a group that we really liked and so far so good.
David Moghavem (23:37)
Yeah, and I think in these times where you're not getting the rent growth, you're not getting market tailwinds, you kind of need to find these, identify these strategies that you can squeeze a little bit more juice in the return. So whether it's adding like an ADU or increasing density or making the building more efficient, like you got to kind of get creative at this point to get that return.
Adrian Berger (23:58)
Yeah. mean, when the market, when interest rates move by more than 500 basis points, like, you know, the old underwriting goes in the trash and you're like, how do I make anything work? So that's been sort of, think such a huge impact. So we also locally impacts like transfer taxes have been really, you know, problematic for developers. think if that hadn't the ULA in LA and then the measure GS in Santa Monica, they're pretty much the same thing in terms of, ⁓
David Moghavem (24:20)
lie.
Adrian Berger (24:28)
you know, percentages, but it just, really takes a big chunk out of the deal. So it just, all of a sudden a development deal that was marginal to maybe that would probably work now suddenly doesn't work like really badly. So that kind of just makes it tough.
David Moghavem (24:43)
Yeah, there's definitely a lot of people I know podcasts that we're listening to, ⁓ LACRE chats that like the whole sentiment with LA is just horror stories, soft stories. It's definitely tough. You guys have 2,500 units under construction. You're saying in your pipeline in LA, how are you making those deals pencil if at all?
Adrian Berger (25:01)
In our pipeline.
I think we had a very specific strategy in Santa Monica for all those deals and we tied up those sites during COVID. And then we were lucky that the city then went through an upzoning process ⁓ because every eight years the state forces each city in California, the renal obligations to identify ways in which they're to increase housing supply. And that forces cities to go and look around their own backyard and say, this area.
that was zoned industrial, we're now going to allow high density apartments to be developed there, or they identify individual properties and up zone specific properties. So all the cities in California went through this a few years ago, and the result was a increase in density in Santa Monica along major commercial corridors. we were like, luckily, the beneficiary of that. So that just helped even with the rates changing,
it really helped the deals to still work because we were able to, in some cases, you know, double or triple the density of the sites. And so that's a pretty big deal. ⁓ you know, so that that's been one of our sort of saving graces. ⁓ and you know, the timelines to get these things done is long. So we're in entitled, we're entitled on all of our deals, but the permitting process takes a long time. So like we're, we're sort of just figure out the way we're going to time the market for that. ⁓ but luckily Santa Monica still is a desirable place.
to live. It's the highest rents in LA per foot. you know, there's not much competition. So we feel pretty good about
David Moghavem (26:43)
That high barrier sentry almost helps you as a developer if you can get it off the ground. So how have you guys, you you call it luck, but have you guys been putting yourselves in these positions to kind of get this up zone or is there any strategy involved with, you know, after buying the deal, being able to maximize its potential?
Adrian Berger (27:05)
I don't believe
in luck. believe we're fortunate. should say I would use that word instead.
David Moghavem (27:11)
know,
fortune involves luck when you're dealing with the city.
Adrian Berger (27:14)
We're fortunate in the sense that we've been working in with and building in the city of Santa Monica since 2010. So we've been there for 15 years. So we have a really good track record where we're very, ⁓ we very much stay within the realm of what you can do. We don't try to like do sneaky things or push the envelope unless we can push the envelope and the city understands.
David Moghavem (27:39)
It's
a report with the city at this point.
Adrian Berger (27:41)
But there's a lot of back and forth and you've just got to like, at end of the day, build what the code allows you to build and either it works or it doesn't work. But then, staying close to the city and working with them has been beneficial for us. I like I said, 15 years there, we've completed, we've round tripped seven projects. We still own five in Santa Monica. So that's...
David Moghavem (28:05)
This is Justin Sanmonica.
Adrian Berger (28:09)
That's good. We planted a flag there and we've been there for a long time and that helps.
David Moghavem (28:15)
So I guess to wrap that conversation, it's like, how can you make development made sense? It's in Santa Monica, high barriers to entry, high conviction, strong demand, strong.
Adrian Berger (28:27)
I mean,
at the end of the day, rents drive everything for development, right? Because construction costs really haven't gone down at all. you know, land is, can influence, but at some point, because construction costs are so high and you have to build high density. So you're going subterranean on your, to provide parking, the fact that cities are, the zoning allows you to build no parking.
David Moghavem (28:52)
Is that what they're doing in Santa Monica?
Adrian Berger (28:53)
In
a lot of places, there's requirements and you can add, you know, with the state density bonus laws, like you can waive out of parking requirements, but the issue is that tenants, the demand, they still want parking. They still drive cars. even if they walk to work or ride a bike or take a subway, they still want to, they still park a car for six days of the week and drive it on one day a week. It's LA, right? So.
David Moghavem (29:08)
out the units that's all.
Adrian Berger (29:20)
You know, that subterranean cost is really expensive. And then you're building, you know, you're building concrete with, with wood above. So the issue is, is to solve for these yields, you've got to be hitting minimum rents to even make it work. And unfortunately in 90, 90 % of probably 99 % of LA, you know, even with free land, you can't get to the yield that you need. So that's a really tough dynamic. And I think again, transfer taxes play a big role in that. Oh, for sure. Cause like,
David Moghavem (29:48)
Sure.
Cause you're saying getting to a yield, then even that yield doesn't factor in like the transfer taxes once you have to sell it.
Adrian Berger (29:55)
You
have to factor in on your IRR calculations, obviously, but really at the end of the day, you're sort of handicapped because the entry point of construction is so high that equates to rents that are so high that there's not really many places in LA that can support those rents. So that's the dynamic today. Obviously, if interest rates go down or if transfer taxes situation changes, then you'll start to see
other parts of LA make sense again. This is for high density stuff. I'm not talking about garden style. If you were to go out, know.
David Moghavem (30:30)
I mean, LA doesn't necessarily have garden cell to be able to go outside of LA for that. So you mentioned transfer taxes and interest rates really affecting the development business. We haven't really mentioned tariffs. Has that even seeped in yet in your calculations and how you're underwriting that? Are you underwriting increased costs? Are you underwriting something more, lower consumer confidence? How are you as
And Cypress has a developer looking at.
Adrian Berger (31:00)
Yeah, right now we're certainly including a higher escalation of our hard costs ⁓ year over year, because the stuff that we own, obviously that's effective, but then we're also buying land or controlling land for some low income housing tax credit development deals in California, which are garden style deals or really more sort of surface park sort of slab on gray deals. But we're factoring in higher escalation percentages per year, because those are going to take two
years to get in the ground. Yeah. And then we're just beefing up contingency. And that's, you know, really sort of thinking about tariffs and, the impact of that. ⁓ And also, you know, like I said, we, there was a lot of belief that, you know, construction costs would come down during COVID and after COVID and like the opposite happened. Yeah. And then, you know, it'll be interesting to see what happens in the next couple of years, because I saw some charts yesterday.
David Moghavem (31:50)
Yeah, the supply chain issue.
Adrian Berger (32:00)
where new starts in LA are just like, like just went off a cliff, like less than 5,000 units are. Before it's. Yeah, even before. Just naturally. Because the market was going that way. So there might, we might see a period of, of two, three years here where there's very little built. Yeah. You know, and so what does that do to contractors, subcontractors, the employment base today? Does that benefit us or is it not going to benefit us because like,
we're going to build a bunch of stuff for the Olympics. And there's the rebuilding of the fire affected areas. so it's just so hard to predict. Yeah. But we putting in more ⁓ conservative underwriting assumptions.
David Moghavem (32:44)
Yeah, and as you said qualitatively, there's like nothing supplies off a cliff. think LA has like a million units and there's only like 20k being built or something like that. And so as a developer, you might say, yeah, it doesn't pencil, but you're like, man, if I can make a deal work and build today, like you're not competing against anything. And that's, are you guys kind of seeing through that a bit on some of your deals?
Adrian Berger (33:06)
Yeah.
Yeah, I mean, that's sort of what gives us some confidence in the stuff that we own right now. And then we are still looking at land sites, but we're just, we're being really picky because we obviously have a big, big pipeline. And we will, we'll take down sites, you know, if it's, if the basis is just insane, if it historically is just so cheap and there's a fallback position, right? Then that gives us a lot, lot more confidence to sort of still be buying land.
you know, for the future. There's going to be a plan B though, right? Cause on the land, right? So you're to be buying something that has existing building on it that you can lease out and you're in your underwriting, you're assuming whatever conservative assumptions and that still supports the value buying. And at that value, the land historically is so cheap that it, you know, inherently it makes sense.
David Moghavem (33:46)
the land.
Almost like a covered lamplay.
Adrian Berger (34:09)
It
is, if it's least. We just closed a deal that's a covered land play. And it was like a true covered land play. I've always laughed when over the last 10 years that I've been here where I get a phone call saying, oh, Adrian, I've got a covered land play for you. I'm like, oh, great. What's the yield going in? It's 2%. You're talking about a partial covered land play? This was like a true covered land play where we buying above a seven yield going in with income.
It was like a commercial user for three years. So we had really good coverage. And at that basis that we were buying the deal at that seven, the developments all made sense. So like that's sort of the equation that we use. And so if it never makes sense to build it, we can extend the tenant and we can bring in a new tenant. We ran all of those scenarios and we're like, oh yeah, we're going to be fine. So this is something that we feel
David Moghavem (34:59)
Good night.
Adrian Berger (35:08)
compelled with and ironically, that was a deal that received more equity interest than any deal I've looked at in five years. Because usually in the last five years, it's been really hard to you know, equity to commit. Maybe you get, you know, one or two groups interested like prior to that, you know, in the 2010s, you, or you were having five, 10, 10 sheets on every deal.
David Moghavem (35:18)
Ironically.
Adrian Berger (35:33)
⁓ so this was one of those deals where we got a lot of term sheets. So it was like, this is great. We have options. This must be good. We're going to do this. You know, once, you know, smarter people than us are like, willing to give us their money. We're like, ⁓ this must be a good.
David Moghavem (35:49)
Deal.
Yeah, exactly. It's good because you're protecting your downside with the covered land play. So you guys have like an awesome lens. You have your development arm in your backyard in L.A. and then you're co-GPing in all these different markets. So you're seeing what are the other experts doing? Naturally, I'm sure you're somewhat comparing, OK, this is what we can get in L.A. These are the yields. This is what we're getting out of their markets. In your in Adrian's point of view.
What are you guys, I guess, are you down on LA, up on LA compared to what you're seeing out there on other opportunities? What's your take right now in the market?
Adrian Berger (36:28)
think LA is still compelling from an economic standpoint, given the historic under supply in the market. And it's still a great place to live, even though taxes are super high and the city can be challenging at times. ⁓ I do have concerns around what's happening in the entertainment industry and how that could ripple through LA at some point. it's a pretty big industry.
diversify a little bit within itself in terms of content creation and how that whole industry has changed.
David Moghavem (37:05)
Are you sorry to clarify you worried on the entertainment industry as a whole just not needing to be in LA? Yeah.
Adrian Berger (37:13)
I think that what we've been seeing in the last few years with a lot of production going out of state and overseas, I think is a concerning trend. ⁓ I do think the industry is so important that that will sort of be counteracted politically at some point. do think that it's almost like when people during COVID are like, New York's done.
All the New Yorkers were like, New York's going to come back. always comes back. And New York came back. And now look at New York. People, I know if you've seen those videos of people trying to rent apartments.
David Moghavem (37:50)
Yeah, my sister just had to rent an apartment. It's like a bloodbath.
Adrian Berger (37:54)
And look at San Francisco as the same thing. Everyone's like, oh, San Francisco is done. And now it's like, yeah. every place sort of ebbs and flows. And it feels like LA's in an ebb. And I think it will flow again, right? Because it's LA. And I think it's the second largest city in the country. It's a huge market. California is still one of the top five economies in the world, which is crazy to keep thinking about.
But short-term, sort of like, I don't know, it feels a little, it doesn't feel as good as it did. I know a lot of people personally and through other friends who are leaving, these are high-performing people that produce things, make things, run companies. ⁓ But I think long-term, I think LA will be okay. ⁓ But I mean, compared to other markets, it kind of just depends. Like our storage strategy is only Southern California focused.
Why? Because it's such a high barrier to entry. It's very hard to find the zoning to do it. Most cities don't like it, but tenants really need it. And the demand side is really, really strong. So if you can find those little pockets where it works, like it still works and there's still capital interested in that. So like I really have always disliked the way our industry generalizes things. It's like, multifamily, that's doing great. You're like,
What vintage, what market, what street are you talking about? Like, you know, what's sub market or all that stuff? ⁓ so I think we definitely aren't like, ⁓ are we going to invest dollars in LA versus invest all in Florida? We'd like to invest all in both places and deals that make sense. Yeah. Yeah. I mean, we want to just continue to diversify geographically through product type, diversify through the types of.
David Moghavem (39:34)
Which you are and that's you try to do it. Yeah, which you have a great lens on.
Adrian Berger (39:47)
income streams. So development is very chunky and very timing driven. Like you build something, you time the market and you sell it, it could be a really very successful project. Whereas buying assets is a very, it's different. You're buying income streams and with the belief that you can improve income.
David Moghavem (40:04)
There's no income flow when you're developing and titling your first dollar that you get is when you just finished lease up. Right. So as you said, chunky is the right word. Yeah.
Adrian Berger (40:12)
And then like, and so all your eggs are in the basket of like, what's the market doing at the moment that your capital partner's like it's time to sell. Whereas with income stream properties, it's different, right? Cause you can weather different storms. So we're trying to diversify in that way as well. So we have both, cause development can be really awesome. In the right market cycle, it's like a it's a great risk adjusted business, right?
David Moghavem (40:40)
So I guess looking forward, looking ahead the next five years, 10 years or so, what are you seeing as the biggest opportunities and like as your investment thesis moving forward at Cypress?
Adrian Berger (40:55)
think we believe in, there's two main strategies that we believe have great tailwinds. The self-storage strategy in Southern California, not just building, but also buying. you can find those deals, they're very hard to find. Just because of the general relationship between supply and demand, Southern California generally has the highest rents per foot in the country.
You know, it's a sticky business. We like that and we think that there's room to grow that business. And we think there's a lot of tailwinds for affordable housing. So there's a lot of different levels of affordable housing, but where we have focus is on the low income housing tax credit side. And a lot of market rate developers are coming into that space also now because that seems to be where you can get deals done. It's a very complicated part of our industry.
David Moghavem (41:53)
Yeah, it's almost like a different industry.
Adrian Berger (41:55)
Yeah,
I mean, it's also like, in many ways, it's almost less about like the land acquisition part of it and the design as it is about like, how can you win the bond award? That's in California. Yeah. And every state has a different process for winning bonds. So it's very nuanced and very complicated. But if you think about affordability, if you think about, you know, the population that hasn't seen a lot of new supply, if you think about
aging population, because you can also build low income housing for seniors. We think there's really great tailwinds there. And so that's one of the things that we're very, very focused on. then that's going to be, that's nationally. then I think, know, the other thing we would like to, the other thing we believe in is just multifamily. And we believe in the idea of buying it.
David Moghavem (42:37)
Just LA or are you?
Adrian Berger (42:53)
And then when the time makes sense, to build it again. So right now, we would love to be buying assets again. It's good today because I think that the basis makes a lot of sense today. To buy. And that, as a developer, we're always like, everyone is now as well. But we've always were keeping an eye on.
what our cost of bill was and what stuff was selling for. When the market was booming, we're like, ⁓ this is great. Like 80s vintage, you know, garden in Phoenix is selling for 30 % above replacement costs. Like you should keep building.
David Moghavem (43:31)
my God. You're looking at a deal like in McKinney, I remember, during the zero interest rate period, selling for $2.25, $2.50 a door where there's land for days you could just build and that's what people were doing.
Adrian Berger (43:37)
Yeah.
Yeah, but the problem with land is that before you get a shovel in the ground is usually, you know, caught two years and before you have something to rent, it's another two years. So you're making a four year bet, right? And that's where it gets risky. So yeah, just to, guess, say it more succinctly, like the third thing that we're thinking about is just acquiring assets. Just good assets, good markets.
David Moghavem (43:55)
You're
making you miss
below replacement costs. ⁓
Adrian Berger (44:14)
You know, we prefer newer vintage, but we would consider slightly older vintage if it makes sense, if it's well run, if it's in the right. I think location is really, really important. Like you said at the beginning, it's like a flight to quality and quality can mean both vintage and it can also mean location, right? People want to be in the best places where people are going to want to rent. Yeah.
David Moghavem (44:40)
⁓ And you know what's interesting with going back to your second strategy with the tax credits, ⁓ I feel like in LA, building market rate has been so tough and politically, you have a lot of headwinds on market rate, whether as in affordable, there's so many incentives. There's a culture behind building for affordable. So I think in LA, being in that space is super advantageous. Obviously it's.
very competitive and winning the bonds and that's tough, but there's just such a huge demand and you have some more political certainty in that space, in the affordable space.
Adrian Berger (45:21)
For sure there is. think building LA proper is tricky still because your cost of bill doesn't really change that much to build affordable versus to build market rate. Maybe you're not building as crazy amenity package or whatever. So it does make the infill strategy really hard to pull off because land's still expensive and construction's still expensive.
and the landslides are small. So even if you wanted to build, let's say a surface park deal, you know, on a half an acre, you're going to like, there's not enough density to make it work. Right? So that's what's tricky about doing it in LA proper, which is why we've been much more focused on, you know, small suburban county. And all that whole business is driven by AMI rents, you know, and, and every county has their own AMI rents. And so
David Moghavem (46:08)
I've got it. Okay.
Adrian Berger (46:18)
that also has a big impact. It's the same as the market rate. If the rents aren't high enough, you're not going to get enough bond proceeds and you're going to be left with a big equity gap. And then the question is like, where are you raising that equity from? Right? So that, you know, the math is always driven by hard costs of rents. know, we haven't even talked about operating expenses, but hard costs of rents drive really a really big part of it. Because if you can get another five cents, 10 cents a foot in rents, you can pay more for land.
Yeah, it's just how works. Yeah.
David Moghavem (46:50)
⁓ we have a little bit more time. guess we could talk one of the operating expenses. I wanted to definitely talk about in LA's insurance. ⁓ you know, living in Miami, insurance is priority A, B and C. It's, it's, it's always been a challenge. Now you're seeing in LA in the West coast with the fires that happened and a lot of people left or diversified out of LA because of political uncertainty.
and going into places like Florida that has insurance uncertainty. Now it sounds like almost LA has both. First of all, do you guys have like a master policy or anything to kind of control insurance and how are you guys navigating through the insurance markets here?
Adrian Berger (47:33)
Yeah, on development, it's usually typically deal by deal. I mean, we're navigating it as best as we can. You we can't control the environment. ⁓ We can't control the risk adjusters. We're doing our best to find the best possible policies that allow us to continue operating and building. ⁓ Unfortunately, there's no secret sauce, I don't think, in that.
David Moghavem (47:40)
Yeah.
Adrian Berger (48:03)
part of it for us. So we're just at the mercy of the market.
David Moghavem (48:06)
You just gotta take it on the chart. ⁓
Adrian Berger (48:08)
It's like, it's another deal cost. this is again, it's like, I think one of the things that I've come to realize having worked at CI for 10 years and all development that we've done and the expertise that we have, there's a lot of different levers within the development pro forma that has huge impact. And I think a lot of people that haven't built before or have operated assets and they see the levers that affect them really tends to be rents and operating expenses.
because they already have a building, right? There's so many things that can move and move, and then all of a sudden it goes from working to not working. And we're just facing a lot of those on both sides of the, on the numerator and the denominator side of the equation. And yet you're trying to solve that equation to a higher yield when like,
The numerator is down and the denominator is going up. you're like, well, my natural yield is going down, but I have to solve for a high yield. It's just, right now, just, it just isn't, it's really, it's, I wouldn't say it's impossible because I think there's always ways to get stuff done if the deal's great. but it's just super challenge. Operating expenses are part of it. mean, it's not just insurance, it's payroll, it's contract services. ⁓ all the, all that stuff's gone up too. Yeah.
David Moghavem (49:30)
So as deals become more more impossible, that's when you spend more time with the kids and take a step back and say, you know what? Why am I banging my head against the wall? Let me just enjoy my time, my life while I'm here.
Adrian Berger (49:45)
Yeah, I I think I try to be, spend as much time with my kids when the market's good and when the market's not good, because I think it's important. ⁓ I really believe in networking. think that, and I've always loved networking, only because, mainly because I love people. I think people are really fascinating and I like places. And so understanding people, where they come from, like what makes them tick, just is kind of, I'm curious about that. You know, being a first generation Australian, where my, you know, my grandparents,
from Europe, my parents survived the Holocaust and ended up in Australia randomly. So Australia is made up of immigrants just like America. So I'm always fascinated by people. But I think what I always try to do, ⁓ no matter what the market's doing, is go out there and network coffees, events, lunches, dinners. And sometimes when the market's really strong, people are like, I don't need to grow my network. I don't need to like...
go to that event because I've got too many deals going on. But then that can change really quickly. And then all of a sudden, you're like, oh, I've got to get out there again. Whereas if you consistently just have a mantra of, I'm going to go to that annual real estate dinner every year, or I'm going to go to those, name your event production company's event every year, or I'm going to get together with five of my real estate buddies and have a dinner, our whole business is relationships. For sure. Right? And people are always
on the move, people always got new strategies. And so if you are keeping up with that, that can create opportunity as well. A lot of people who I meet with are like, we didn't know you do self storage. I'm like, yeah, well, we do. So they're like, think I have a deal. Well, great, send it to me. So if you don't network, no one's going to know what you're up to. And it's also just fun. so I try to always make time for that no matter what the market cycle is doing.
David Moghavem (51:44)
Exactly. mean, part of the reason starting this pod was the networking aspect. Yeah. Excuse to sit down with you for an hour. Excuse to hear what other people are up to. Great mind. I didn't know you were doing self storage until right now. Exactly. So it's just a great way to connect. And as you said, this is a relationship driven industry. The numbers, the yields, everything we've been talking about for the past hour. It's nothing compared to like who your partners are.
Adrian Berger (51:57)
And now world knows.
David Moghavem (52:13)
what you're trying to do, what are the relationships, who you're going in the trenches with. And networking is a huge aspect of that. It's also a great way to pick market knowledge, see, you know, this is a industry where insider trading is legal. getting that tidbits from other people on kind of like where things are trading, ⁓ that's all through social and networking.
Adrian Berger (52:37)
And it also comes down to trust. you're out there and you've got a good reputation and people trust you, they're going to be more forthcoming with information, with ideas, with what's going on. And that just helps everybody. Because at the end of the day, we all want to transact. Our whole business is driven by transactions. That's how our industry turns. And so in a down cycle, when transactions are harder,
You know, your network can be so powerful, right? Like you decide that you want to get into a new market. Savannah, Georgia. It's like, okay, I went there once, but it's like, who do I know that knows someone in Savannah that I can get a real answer. Hey, David, you guys have done something. This cross street, what's this area like? You're like, oh my God, stay away from that. Whereas sitting behind a desk in LA, you're looking at a Google map, right? Which is not how, it's how you kind of.
start looking at deals, but ultimately you always got a gap from behind the desk and go see the real estate, but be able to tap your network to understand something more local where you're not from, hugely powerful. You don't do that by not attending events and going for dinners and going to broker things and going to conferences and stuff like that.
David Moghavem (53:54)
Yeah, it's almost like with the access to information we have with Chachi PT and with AI, you think, okay, I don't need to make this 30 minute call. I can just look it up in two seconds, but that's the opposite. You need to make those calls. You need to make those meetings that may seem inefficient to the naked eye, but developing those relationships, you A, find new information and B, you're creating a relationship. Yeah. And so.
That's what it all comes down to.
Adrian Berger (54:24)
It has to also be not just within the realm of what you do, right? I think that a lot of people, know, the multifamily world will network in the multifamily world and that makes a lot of sense and they should and I do that too. But I always make time to network with people who are in a different asset class than me. Just to, even for the simple fact of learning something, but also like, yeah, but also like their industry, what they do has a tangential impact on my
David Moghavem (54:46)
intellectual curiosity.
Adrian Berger (54:53)
asset class and like what's happening for their world and what they're seeing from capital. Their capital providers are the same capital providers for us. They're just different departments within those companies. So it's like you're like, you're seeing like what's going on, right? There's, there's learning to be had. then opportunities come out up out of that. Like I was with someone the other day, was a completely different asset class and we're chatting and they're like, oh, you know, we've got this challenge and da da da da. And I was like, oh, well, you know,
David Moghavem (55:04)
but you're up again.
Adrian Berger (55:20)
we could look at that in this way. And they're like, you guys could look at it that way. I'm like, yeah, sure. And that was completely random. And it was only because we caught up for coffee. So it's like, just never know where the opportunity is.
David Moghavem (55:30)
Yeah. And
from those things. Yeah, exactly. just got to put yourself out there and put yourselves in these positions where things can come out of it. You can't predict what it's going to be, but you know, it's better than not doing it.
Adrian Berger (55:43)
And the energy of doing it is what brings that.
David Moghavem (55:46)
Yeah. Well, I'm glad we did this. Yeah. Thanks for inviting me. it. Yeah. I'm glad that we got a link up and good luck out there.
Adrian Berger (55:54)
You too. Yeah. Looking forward to see what you guys are doing. Thanks. Awesome. Thanks.