Workforce Housing Development Strategies, With Chris Marsh And Alex Bhathal

What are successful strategies for developing workforce housing? Chris Marsh and Alex Bhathal, Co-Founders and General Partners for Revitate Cherry Tree join the show to offer their perspectives.

We also discuss the outlook of multifamily workforce housing in Kansas City, Missouri, and the story behind the Revitate Cherry Tree partnership.

Click the play button above to listen to the conversation.

Episode Highlights

  • Why understanding what definition of workforce housing is being used is so crucial.
  • How Revitate Cherry Tree’s partnership came about, and why a great team is so critical to success in multifamily property development.
  • What makes Kansas City, Missouri an attractive location from a multifamily real estate perspective.
  • What types of properties Revitate Cherry Tree is developing, including size and unit mix.
  • What some of the keys to maintaining workforce housing that’s attractive to residents and has low vacancy rates are.
  • Current intriguing trends in multifamily that Alex and Chris have observed.
  • Why experience matters when it comes to multifamily housing development.
  • What’s next for Revitate Cherry Tree.

Industry Spotlight: Revitate Cherry Tree

Revitate Cherry Tree was formed to acquire, reposition, and manage multifamily assets across key markets in the United States. The Revitate Cherry Tree team has a demonstrated track record of success across multiple real estate sectors spanning 65,000+ multifamily units and $8B+ of equity capital previously invested.

Learn More About Revitate Cherry Tree

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

Show Transcript

Scott: Hello, and welcome to another episode of “The Multifamily Investor Podcast.” Scott with you once again and another fantastic show on Tap Today where we’re going to be continuing our discussion on workforce housing. We’re also going to be covering multifamily in Kansas City, Missouri. And joining me to help us with this and share some great insights is Chris Marsh, who is the co-founder and general partner of Revitate Cherry Tree, and Alex Bhathal, who is the co-founder and general partner as well of Revitate Cherry Tree.

And Revitate Cherry Tree was formed to acquire, reposition, and manage multifamily assets across key markets in the United States. And the Revitate Cherry Tree team has demonstrated a track record of success across multiple real estate sectors, spanning 65,000-plus multifamily units and 8 billion-plus of equity capital previously invested.

So, some big numbers there, a lot of success. And as for Chris, he has had 10 years as president of Irvine Company’s apartment division and he grew Irvine’s portfolio to be the 10th largest owner of multifamily in the country, added 22,000 units, and oversaw strategic repositioning and renovation of 13,000-plus units at Irvine Company. That’s kind of some of his backstory there.

As for Alex, he’s co-owner and executive director of the Sacramento Basketball Holdings, which owns the Sacramento Kings, Golden 1 Center, and Downtown Commons entertainment and sports district. And of course, he is also the co-founder and managing partner of RevOZ Capital, which is a leader and early adopter in opportunity zone real estate investing, which you may know quite a bit about because we are big on opportunity zones here.

So, Alex, Chris, thanks for joining us.

Chris: Pleasure. Thanks for having us.

Alex: Thanks for having us, Scott.

Scott: Yeah. I really appreciate it. To kick things off, I always like to sort of have a stage-setting type question. So, why is workforce housing so crucial in 2022?

Chris: Thanks, Scott. And maybe, Alex, I’ll take that. And thanks for the very generous and gracious introduction.

Scott: Absolutely.

Chris: I’ll perhaps start out for the audience’s benefit on what we actually mean by workforce housing because I think it means many things to many people. The workforce housing as we’re characterizing it, really is what we’re referencing as apartment housing stock that is attainable. And that’s the word. Attainable to a middle-income workforce. So, blue-collar workers, service workers, entry-level white-collar workers, perhaps.

So, we’re not talking about, in this instance, government-financed programs or Affordable, with a capital A, housing. We’re talking about typically ’80s, maybe ’90s vintage assets, maybe characterized as Class C assets or B-minus assets that provide much-needed housing to individuals or families that for whatever reason are not typically renting by choice.

These are renters by necessity. So, by that definition, workforce housing has been and will continue to be, to answer your question, a crucial asset class moving forward. We see that this year, but, of course, well into the future. In most cities across the country, it’s increasingly difficult for middle-income workers to buy or even rent housing in some areas in which they live.

And this is in large part due to wages not keeping up with the increased cost of living, but also due to limited supply of for-sale housing as well as for-rent apartment product that caters to their income needs, i.e., workforce housing. And I’ll say, ironically, these are the very people that are the blood life of American industries.

They make up most of the population. They work in sectors that make up a large part of the GDP of this country, and we, therefore, see a perpetual need to preserve this housing for these very folks. And aside from it being a strong real estate play from an economic standpoint and a macro-backdrop, it’s a crucial mission that we believe as a company and a partnership here.

Scott: Absolutely.

Alex: And I’ll just…

Scott: Yeah, go ahead.

Alex: And I’ll just add to that. I think Chris did a wonderful job speaking to the macro and to the needs of the communities and also touched on something that unites us in our beliefs and our culture in what we’re setting up and the positive social impact that investing in this category can produce for residents across the Midwest. But I’ll also add from an investor perspective how important and how attractive this segment can be.

We’re in a very low-interest-rate environment, although, you know, that may be creeping up a bit, but still, historically, compared to standards, it’s very hard to find yield in the marketplace and workforce housing is a sector where there’s a relative safety to the investment. These are existing assets with existing cash flows that can be improved through operational expertise and also through potential value-add improvements to the physical structure.

But having an emplace cash flow yield that’s greater than what you can identify in fixed income markets with the added benefit of growth and improvement, we think it’s really attractive for investors to consider.

Scott: A hundred percent. And then also considering, you know, the ongoing housing shortage that we’ve seen that there’s just tremendous opportunity there and need, right?

Alex: Absolutely.

Chris: Well, particularly, Scott… Sorry. Particularly because, you know, this is housing that isn’t being replaced. In fact, it’s flowing out an economic use faster than it’ll ever be replaced. The replacement of this category would be, you know, government finance, government-sponsored Affordability, with a capital A, type housing for which, you know, waitlists are decades-long. And these are assets that are flowing out an economic use, you know, faster than that.

So, certainly, from an investor’s perspective, we like the supply-demand imbalance. We like the fundamental stage for investing in assets, which are perpetually in strong demand.

Scott: Absolutely. So, I think we really did set the stage fantastically kind of moving along here then. Can you share a bit more about the story behind Revitate Cherry Tree’s partnership and all that’s gone into that?

Alex: Sure. Thanks, Scott. I can probably kick that off. And I’ll just start with a little bit of my background, and then how Chris and I came together in this venture is I come from a family that’s been in business for a few generations in Southern California, always in the real estate. My parents started an apparel company in the 1960s, which is still around 55 years later and allowed the family to take the profits from that business and buy land and develop on those properties.

So, that was the world that I grew up in. I always had a real estate component to our business activities as a family. After selling the apparel business and exiting that business, we acquired the Sacramento Kings basketball team, and its principal co-owners. And I became involved in especially the real estate side where we built the new…the ownership built the new Golden 1 Center that houses the Sacramento Kings NBA franchise and 200 events per year between concerts, and Disney on Ice, and all the other fun activities that happen in the arenas, and I was able to activate and reactivate the Downtown Core in Sacramento.

So, there was a $1 billion redevelopment that the ownership leadership group spearheaded called Downtown Commons that includes hotel, condominiums, restaurant, retail space, office projects. So, it was a great experience, not just from an economic standpoint, but also for the community and the positive social impact that it resulted in there.

And from that experience, the opportunity zone law was enacted as we were completing that project, and so it was a natural transition to take the lessons learned from that urban redevelopment experience and translate it to other up-and-coming markets across the country utilizing this new opportunity zone program.

So, we were successful in that venture, building out a firm called RevOZ Capital focused on development. And as we built that out, we saw the need for…we saw an opportunity to expand that platform into other asset types. And the first step on the docket was multifamily. Given the historical resiliency of the category from an economic perspective, we knew that having a stabilized multifamily portfolio would be something that would be attractive to investors, attractive for our capital, and also a complimentary offering to what we were doing on the development side.

That coincided with getting to know Chris better. Chris and my sister, who’s my business partner for 20-plus years, sat on a board with Chris for 10-plus years, became friendly, and started conversations with Chris about business and life. And as he was looking to leave the Irvine Company and contemplating his next move, we were thrilled and very fortunate to be able to partner up with him in Revitate Cherry Tree to take advantage of his remarkable, one of a kind experience and skillset and the team that he’s put together to execute our strategy.

So, I’ll leave it with… it’s incredible that we have somebody like Chris that we partnered with because of his expertise, but more importantly, the quality of the person, and the values, and the work ethic, and the character, and alignment in our mission towards positive social impact is something that makes this, I think, very special and unique in the marketplace.

Scott: Absolutely. Absolutely. Chris, anything to add to that about the story from maybe your end?

Chris: You know, I think Alex killed it. No. I think he hit it, though, you know, I obviously came into this having an appetite for scale. Irvine Company is nothing if not scale and I was used to that as an operating environment. And beyond that, you know, if you’re going to have an impact and a social impact and a meaningful one, have it be a big one. And so, you know, I was looking for effectually a good fit with a financial partner.

And for that to be harvested out of, you know, as Alex mentioned, a long-term friendship and with a family, with a deep reputation for, you know, honesty and integrity in their dealings, all of which underpinned by radical mission alignment was, you know, as good as it gets and has been proof of the pudding experiencing that partnership as we go along here with Alex and Lisa.

So, yeah, couldn’t be happier. And it’s been a great journey so far.

Scott: That’s fantastic. And I want to now dive in a bit more to, you know, where the rubber is meeting the road in terms of, you know, achieving your mission. Your multifamily strategy really centers around existing workforce housing in the Midwest. And then you’ve had a recent portfolio in Kansas City, Missouri. What makes that an attractive location?

Chris: Yeah. So, Alex, I’ll take that. We target markets generally in the Midwest that have experienced steady, strong population growth and corresponding strong diversified job growth. So, you know, there are many other factors that make markets appealing, but they are prime among them, and certainly key drivers for us when we’re looking at attractive location in which to invest.

So, you know, we recently closed as you mentioned, Scott, on three assets in Kansas City, Missouri because we believe this is a market, you know, first of all, we like, but also meets that criteria. non-farm Payroll, you know, gaining 47,000 jobs last year in corporations such as Cerner, who were in the medical IT space have significant expansion plans, $4 billion expansion plans in the neighborhood of some of these assets that we just purchased, 16,000 jobs in the pipeline coming with that.

So, it’s a great growth story driving that need, of course, for workforce housing. I think an advantage in investing in this asset class, as was the case with these particular acquisitions and, you know, I kind of referenced this, but we’re able to purchase assets well below replacement cost.

What does that mean? It means that the price we are paying is typically around 70%, 65% to 75% of building new. That matters a lot in terms of the supply-demand picture because it effectively shuts off any, you know, we refer to it as supply-side pressure for any new development. So, new developments, aside from what I referenced, you know, the government-sponsored programs, for the most part, are built as Class A product necessarily, and they have to be to be economically viable.

Developers need to charge the higher rents to justify the construction costs, and development costs, and the associated risks with that. So, if no one can build those new units for the same prices we’re able to purchase perfectly, you know, good cash flowing existing assets, then we have a very investable asset and workforce, housing force, there’s very little competition, if any, and for which demand will continue to grow, provided we’re targeting strong job growth markets.

So, those were the underpinning tenets of why Kansas City, Missouri is appealing to us. And in fact, you know, again, as I referenced, workforce housing is falling out of economic use or being transitioned through the rash of value-add improvement programs that many investors are focused on such as not to be workforce housing anymore.

And as investors, we like the supply-demand imbalance. And as people who care about social impact, we work to actively preserve as much of that housing as possible.

Scott: It’s fantastic. Can you expand a bit more on the types of multifamily properties we’re talking about here, the size, the unit mix of these buildings?

Chris: Yeah. So, you know, I mentioned that the vintage got typically ’80s, ’90s, some are older, some are more recent. These are typically what we call in the industry, you know, garden-style or walk-up properties such as the economics of development when they were built typically. So, two and three-story, walk-up, product, low-density housing, certainly compared to newer development, which, again, has to pursue density to make the economics work.

Typically, in many ways, candidly, it lives more graciously and typically strong landscaping components and feels like a bucolic setting in which to live. Typical community size would be on the low-end, around 100 units that we’re targeting. On the higher-end, you know, maybe around 200.

Again, we got outliers to that. Of course, we’re opportunity-driven. Once we’ve identified markets that we like, but that would characterize probably 80% of our transaction, you know, target volume. And then in terms of the mix, because we’re targeting, you know, well-located suburban markets in growth, you know, towns and MSAs, they tend to invite strong family cohort.

And so our typical renter, you know, could be a first-time renter, of course, an individual, but more typically a couple or a young family. And what we, therefore, find in terms of unit mix is there really is a strong components of two-bed units in those.

Typically, that’s the majority of the units by count with, of course, you know, a healthy contain unit of one bed, and then maybe even some three beds, again, so it’s a better cater for those families. So, that’s what we’re typically finding of this asset class. They tend to be larger units than are typically being built today. And again, especially in this sort of post-COVID environment, if we can call it that yet, we are tending to find that larger units have, you know, great demand from the rental cohort precisely because many are still working from home or at least in hybrid work situation.

So, it’s a great product asset class for many reasons, but those are the kind of key characteristics that I think of the products, Scott.

Scott: Right. And I love that you mentioned the size of the units because more and more with this sort of revolution we’ve had with work from home, it’s just caused so many renters to reevaluate their living space. And when you talk about families, they’re thinking, you know, “How large can this be? And if I’m going to be working and there’s a child running around, where can we provide some separation, perhaps, and things like that?” Right?

Chris: We’ve all been there.

Scott: Exactly. So, these aren’t new buildings. They’re not being built. You’re maintaining a lot of these buildings. What are some of the keys to maintaining workforce housing that’s attractive to residents and can really maintain low vacancy rates? I guess size is one, but when you’re talking about the maintenance aspect.

Chris: Yeah. It’s an important question. As we’ve mentioned, there is this implicit supply-demand imbalance in this asset class. So, occupancy rates do tend to be high. These communities are generally stickier, is the term in the industry used for high retention rates, you know, candidly, because there aren’t a lot of choices beyond, you know, the very living standards we’re providing here.

But having said that, taking the time, as we do, to really invest in a level of care and service provided to residents really does matter. We have a program, for example, where, you know, I have a passion for education, and Alex mentioned, I actually met his sister many, many moons ago.

We were sitting on a school board together and, you know, where appropriate in the assets we’re purchasing some of the more family-oriented assets, for example, we have a program where we’re looking to incorporate learning centers within those communities. And that’s a fanciful term for something that could be as simple as, you know, a modest room equipped with, you know, several laptops, a big screen and some piped educational content.

It may, in other instances, mean we’re perhaps subsidizing a teacher’s rent in order to get some curated tutorial content from the teacher. But having that be available to principally these young kids and these families who, you can only imagine with the COVID effect, you know, has their typically public school reopened yet or has it not?

And beyond that, you know, perhaps the family is not in a position to afford, you know, a MacBook to do their homework on remotely. And so, you know, there’s a significant homework gap there too. And so provide that as an amenity at the community level and be very intentional about that we feel has enormous effect on and really binding that community. Almost whether, you know, the residents are participating in a program or not, the fact that it’s there and the fact that the landlord cared enough to provide it and curate that over time means something.

And it means you’re investing in the community as well as just buying communities. And that all translates from the investor’s perspective to, once again, stickiness, so better retention rates. But we feel it’s part of the social impact that goes beyond, you know, simply preserving, actively preserving workforce housing in the workplace, but actually enhancing in a service manner and amenity manner the communities in which we’re investing.

Alex: I think Chris said it fantastically. And I’ll just add to that. In terms of the positive social impact of maintaining these workforce housing and adding amenities, it really is and can be a form of non-concessionary impact investing. Just prioritizing the social needs and the community needs of the tenants isn’t something that’s going to cost investors money.

It’s not going to dilute the returns of the investment. In fact, it is enhancing to the value of the property because it makes those properties more valuable to the tenants that live there and, therefore, stickier like Chris mentioned. So, I do believe that this is one of those rare finds when you can do well for the community and for the investors by also doing the right thing and prioritizing social needs.

Scott: It’s the definition of a win-win, I’d say, right?

Chris: I’d like to think so. Yeah.

Scott: So, taking a step back when we look at the multifamily landscape across the country, I’m curious, what are some of the most intriguing current trends you’re seeing when you consider that?

Chris: Well, you know, the renter cohort that was created by the great financial crisis in ’08 has certainly remained a very sticky cohort as home prices have accelerated in many instances out of reach and they now have families that still need a place to live.

So, certainly, relative to the space that we’re actively, you know, investing in, that is a key trend that seems set to continue. COVID has exacerbated the flight to affordability, typically, out of urban cores. Rent growth nationwide, as a result, has hit double digits as demand for these communities has soared.

High transaction volume both pre and post-COVID continues to demonstrate high interest in this asset class from both debt and equity, including, you know, the government agencies. Hybrid working, allowing households to move to more affordable markets in which to live has, again, been a demand driver and more specifically in some of the markets in which, you know, we’re active or seeking to be active in suburban markets, specifically, though not exclusively.

And so COVID really has begun a trend where households value more space, more green space than typically what is offered in urban cores. I’d entirely say it’ll be a bounce-back in urban trends, for sure. City-living is a fun and an exciting thing to do, certainly, you know, perhaps a life-stage thing.

But this COVID effect that we have seen we believe is set to continue, not least, because of the radical imbalance on the supply side, especially in those markets, you know, in which we’re particularly active. So, those would be noteworthy, especially, central to, you know, our thesis here. Alex, I don’t know if you’ve got any observations to add in terms of trends that we’re seeing.

Alex: I think it’s well said. In terms of the capital flows, there was a period when a lot of capital was focused on the coastal markets, and that’s shifted kind of post-COVID. The Sun Belt continues to grow and that’s a very, very hot market where a lot of big funds and big dollars are scouring underneath rocks to find good deals.

I think what we’re seeing in the Midwest is it tends to be a bit overlooked. And there are some great markets you can look at the underlying demographics, their job growth trend, the stability of these markets where from a risk-adjusted return perspective they can be really attractive and compelling.

And the big dollars, the big funds, unless it’s a direct flight from JFK or LAX or SFO, they tended to overlook them. So, we think there are some really great opportunities to invest in these markets.

Scott: I love that you mentioned that. The Sun Belt gets a lot of attention and a lot of hype, but it’s a pretty big country and there’s a lot of different markets out there, right?

Chris: You bet.

Alex: Absolutely.

Scott: So, as we kind of wind down our discussion here, I always like to look to the future. So, are there any exciting developments or projects coming down the pipeline at Revitate Cherry Tree that you can share, of course, which our listeners might find to be interesting?

Chris: Well, of course, the biggest development for Alex and I here is the creation of Revitate Cherry Tree. We’re currently in the process of raising our debut, a multifamily fund together, a first of many, we hope, in which, as we’ve referenced here, we’ve already closed three seed assets in Kansas City. The fund will be focused on workforce housing.

We’ll also be assessing, you know, opportunities for value-add multifamily investments in the Sun Belt. We’re going to be selective about those. It’s a market that’s pretty heavily pursued right now, but to the extent, we do find good opportunities, perhaps off-market opportunities to layer into the fund.

Then that is our intent, to really offer a hybrid fund vehicle to allow investors to enjoy both, you know, the relative stability of workforce housing, cash flow, coupled with perhaps stronger overall returns generated by some of the more opportunistic value-add strategic repositioning.

So, we believe this presents a nice balance of income and growth strategies and we’ll be heavily focused on, you know, pulling that off over the course of certainly this year and beyond. Otherwise, you know, obviously, focused on social impact initiatives, and getting involved in the communities we’re investing in is a key development and, for me, an exciting one for the platform.

Alex: And I’ll just add to that. As you know, we’ve created a small portfolio in the Kansas City Market. And Chris and his team are really doing a fantastic job in building out the pipeline. And when we’re able to announce the next focus markets as we close the next set of deals, I think it’ll be exciting for all your listeners. So, stay tuned.

Scott: It’s going to be exciting to see where you guys take it all. Alex and Chris, thank you so much for joining me on the show today. And before I let you go, if our listeners want to connect, learn more about Revitate Cherry Tree and the things that you all are doing, where can they do that? Where should they go?

Chris: Well, you know, our website, we got or, of course, look either Alex, or I, or the platform up on LinkedIn and we’ll be happy to chat and educate listeners further.

Scott: Fantastic. Thanks.

Alex: Great.

Chris: Thank you, Scott.