Essential Housing Insights, With Clark Spencer

With an ongoing housing shortage, there is a need for quality housing at many different income levels. Essential housing is a unique multifamily property type that both fills a need and presents investors with exciting opportunities for returns.

Clark Spencer, Managing Director of Investments for Grubb Properties joins the show to offer his insights on essential housing, including what it takes to get it right, and more.

Click the play button above to listen to the conversation.

Episode Highlights

  • How Grubb Properties specifically defines “essential housing” and the types of residents who rent in these buildings.
  • The key differences between “workforce housing” and “essential housing.”
  • Why essential housing is so crucial and offers significant return opportunities for investors.
  • The story behind Grubb Properties, and how their current projects continue the original company mission.
  • Why Opportunity Zones are so attractive from an investor perspective.
  • How OZs provide unique benefits, particularly when considering housing for essential workers.
  • The impact that supply chain challenges and inflation in general has had on multifamily projects.
  • How multifamily development will change in the future, particularly with new and innovative technologies.

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Grubb Properties, founded in 1963, is a vertically integrated real estate fund manager focused on the Essential Housing space through its Link Apartments℠ brand. The company targets residents earning between 60% and 140% of area median income (AMI), directly addressing a growing crisis for essential housing, while providing residents with exceptional living spaces. Grubb Properties maintains a long-term perspective and its careful and measured approach to real estate investment has delivered resilient and impressive returns. Grubb Properties has received numerous sustainability designations and recognitions and undergoes annual ESG assessments through GRESB.

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, everyone, and welcome to another episode of the “Multifamily Investor Podcast.” Scott with you once again, and a great show on tap for you today. We’re going to be talking about essential housing and multifamily investing. And joining me on the show to offer his insights is Clark Spencer who is the managing director of investments at Grubb Properties.

Clark, welcome to the show.

Clark: Thanks, Scott. Thanks for having me. I’m really excited to be here. Always happy to talk about essential housing and multifamily.

Scott: Absolutely. Again, thank you for being here. Like I said, today, we want to talk about essential housing. So, I guess to kick things off, can you, sort of, set the stage? What does essential housing really mean from a multifamily real estate standpoint?

Clark: You know, that’s a great question. I think a lot of times, you know, once you get into it and start explaining, and you’ll see why in a second, a lot of people say, “Oh, well, how’s that different from, you know, a traditional workforce housing which is similar?” But workforce housing, I think, and why we at Grubb Properties and I think the industry broadly is starting to really create a difference between multifamily workforce and multifamily essential housing is really who that product is trying to serve.

So if you think of traditional workforce housing, you know, a lot of what you’d be thinking of, particularly here in the southeast but really all over the country, is, you know, more suburban, garden-style, three-story walkups. You might have a clubhouse with some amenities and pool but, you know, much more suburban and spread out and really focused towards working families.

So the distinction there being larger floor plans, larger numbers of bedrooms, sometimes three, four, maybe even five bedrooms, because, you know, they’re going to service working-class families. Whereas essential housing, you know, still tries to reach that same income level, you know? At Grubb Properties, our Link Apartments brand, which is an essential housing brand, targets people making 60% to 140% of AMI, Area Median Income, so generally the same as, sort of, the workforce band.

But it is more urban. It is generally tailored towards younger professionals or, you know, essential workers, you know, that, sort of, coming out of the pandemic, I think actually essential housing makes a lot more sense because everyone knows now what an essential worker is. You know, your nurses, teachers, you know, city administrators, police officers, firefighters, these kinds of workers, but younger, generally, you know, looking at the Gen Z and millennial sets who want to live in urban areas and, you know, don’t need three, four, five bedrooms.

They want one bedroom or two bedrooms if they’re with a roommate or, you know, dual-income, no kids, or something like that. They’re more monetized on-site and really, sort of, situated in those, kind of, urban or urbanizing corridors, you know, live, work, play environment.

That’s what we think of when we talk about essential housing.

Scott: I appreciate you breaking that down because I do think that there’s been confusion around that, and so that’s really interesting how there is that distinction. And so when we are talking about essential housing, why is it really important as a multifamily property type with, like, growth potential, with really a lot of opportunity there specifically?

Clark: Yeah, I think it’s a really important property type because of that demographic and, sort of, the demographic underpinnings of, you know, the millennials. Everyone talks about the millennial generation and knows about the millennial generation, but actually Gen Z is bigger.

Peak all-time in the history of the United States happened in 2007. There are more 14-year-olds than there are 28-year-olds right now. So we have this wall of demand for multifamily housing which really, sort of, kicks off for an individual around the time, you know, 18 to 22 when they’ve either graduated college or high school and are getting those first jobs.

And particularly the way, you know, who essential housing is serving, those essential workers, it’s really important for them to be in the urban environments that they’re working. You know, a nurse needs to be near the hospital he or she works at, right, not driving an hour in and an hour out and, you know…

Scott: For the night shift or whatever.

Clark: Exactly. Do you want your nurse, you know, having to have driven in for an hour, or your teacher, or your police officer, or a construction worker? These are jobs where, you know, being able to be in the area, you know, that you work in is really important.

And we have this massive demand that’s stacked up while, at the same time, we are actually undersupplied with this. It’s really hard to create housing for people making 60% to 140% of AMI, particularly in urban areas. You know, everything from, you know, inflation, and materials costs, and building costs, which I’m sure we’ll talk about to, you know, the cost of land, you know, getting to a rent rate that these types of renters can afford particularly in these areas is tough.

And that’s what they want. You know, they don’t want to be out in the suburbs tripling up in a smaller apartment, living at home. An incredible amount of these people still live at home. They want a place of their own. You know, they want a housing solution that works for them.

And I think that building out the essential housing segment is really how we can address that.

Scott: A hundred percent. And just as you were saying that, I was thinking back to my early days, fresh out of college. And, you know, I moved to Chicago and I loved living in a one-bedroom in an urban environment and, kind of, having all of that. And, you know, I could get to work easily. So it makes total sense to me that there is that demand there, right?

Clark: Exactly, exactly.

Scott: So shifting gears before we go further, can you tell us a bit more about Grubb Properties and any projects current or even recent that you’re particularly excited about? And I know you guys presented at our multifamily investor expo. So, yeah, if you could just share a bit about some of the projects you have going on.

Clark: Yeah, absolutely. You know, so Grubb Properties, we’re a vertically integrated real estate developer, fund manager, and property manager. So we were actually founded in 1963 by our current CEO’s father. Actually, it’s interesting. I like to tell this story.

Going back to essential housing and really housing equity in a lot of ways, we were founded in a town called Lexington, North Carolina, which is a suburb of Winston-Salem, North Carolina. If you haven’t been on a barbecue tour of North Carolina, you may not have heard of it, but they are famous for their barbecue.

But the company was started as a single-family home builder, and what Bob Grubb did at that time was, in order to finance the homes, he actually did something really interesting that kind of went against the grain. Back to that time, there was the practice of redlining where systematically and okayed essentially by the federal and banking authorities, essentially minority borrowers or potential borrowers were locked out of the home financing market simply by…you know, it was actually done based on geographic boundaries, but it was essentially out-and-out racial discrimination.

So what Bob did was actually, sort of, worked to help break that system. He borrowed from the bank on his own credit and then went on to the home buyers with no markup, essentially creating a not-for-profit financed income. Over 400 individual families in homes that he built in Lexington, North Carolina actually had a lower default rate in the bank.

But starting from there, we’ve always been focused on housing and housing affordability and equity, and that’s what we’re doing today. That’s what our Link Apartments brand is. Like we’ve talked about, it’s essential housing. You know, it’s rental housing, it’s apartments, it’s different, but we think it carries forward some of that tradition from our early days.

Like I said earlier, it’s a product that is targeted towards people making between 60% and 140% of area median income. We have I think over 2,500 units currently delivered and operating. And actually we do hit those numbers.

Sixty-five percent of our renters are at 120% AMI or lower, and actually 10% are at the 60% AMI and sometimes even a little lower. So we actually really are truly delivering this product into the market. I specifically work as the portfolio manager of our Opportunity Zone program. So I have a lot of really interesting properties to go to the second part of your question, but the great thing about Link Apartments is opportunity zone or non-opportunity zone, you know, we’re doing the same thing.

We’re pursuing the same strategy. Actually, the first Link Apartments building was built in 2012 in the Manchester neighborhood of Richmond, Virginia, which is now an opportunity zone. We were finding these investment opportunities before the program even came about. To really, you know, talk about how essential housing and some of the deals that I’ve been working on that, you know, go to that, and particularly in the opportunity zones but I can probably talk about some others as well, one is a great project in Aurora, Colorado.

It’s called our Link Apartments Fitz, which is right next to the Fitzsimons Innovation campus, a three-hospital and university medical center campus in Aurora, currently 25,000 jobs. The full buildout is 50,000 jobs. And we are catty-cornered across the street from it, building 405 units of this product, you know, going to hopefully be getting those, you know, like I said, hospital administrators, nurses right…

Scott: That’s a good commute.

Clark: …there right across the street.

Scott: That’s a nice commute.

Clark: Exactly, exactly. So, you know, we have stuff like that. We’d like to locate near hospitals, public universities. We’ve done a lot of really good work in Chapel Hill, North Carolina where the University of North Carolina is. Go Tar Heels. NCAA tournament this week.

Scott: There you go. Yeah, big week.

Clark: Got to get a plug in. So, you know, some great projects there. You know, we do this… opportunity zone and on an opportunity zone. You know, another great example of a project would be, you know, and some of the interesting ways we get to this price point, it’s like here in Charlotte, in addition to our multifamily product, we have a commercial division.

And we often use our commercial division to find interesting ways to get to multifamily. So actually our corporate headquarters sits here on a site. It was two office buildings about 10 acres. We bought it, separate purchases but combined them together. Ten acres, big sea of surface parking.

Well, we took that surface parking, and went into the city, and got it entitled. And I actually got entitlements for what…currently, we’ve delivered one of what ultimately is probably three phases of 750 units of multifamily housing. We build a parking deck, wrap it with multifamily, and then share parking between the office and multifamily obviously because they share it very well.

Office needs it during the day, multifamily needs it at night. So we build less parking than we would otherwise need, saving on costs. We’ve been entitled this site after a good underwritten investment on the office of essentially free land. You know, you’re saving taxes, insurance, common area maintenance on the split. Just massive subsidy, which we then pass along to our tenants.

And that’s, you know, one of the ways that we get…actually that probably counts for about three, but one of the ways that we get to that lower cost. We actually 59 individual techniques like that. You know, some are green buildings, some are local tax incentives, things like that to either lower our cost or increase our revenue to pass the savings onto our tenants.

And then we also have a really, sort of, tight focus on design. We have six units we repeat across the entire portfolio, you know, saving, you know, construction efficiency, operating efficiency, all that kind of stuff really to, you know, like I said, deliver this product into the market.

And that’s not an Opportunity Zone project.

Scott: Yeah, it’s so creative.

Clark: That’s traditional.

Scott: Mm-hmm, absolutely. I want to actually dive in a little bit to opportunity zones here because, you know, you manage Grubb Properties’ qualified opportunity funds, and you were mentioning you guys have projects in those. And you’ve even selected sites that became opportunity zones. What makes multifamily properties specifically, as opposed to maybe other assets in opportunity zones, so attractive from an investor perspective and maybe a development perspective?

Clark: You know, that’s a good question. I think that, you know, it goes back to, sort of, what the intention of the Opportunity Zone program is, right? So the government created the Opportunity Zone program to spur private investment in historically underinvested areas.

Actually, opporunity zone investing isn’t just real estate. You know, you can invest in operating businesses in opportunity zones. But one of the things that you need because they have been historically underinvested, one of the first things that really needs to happen in these zones is often multifamily development because it gets the infrastructure, both the housing infrastructure itself but then just the general broader infrastructure improvements that often come with multifamily housing to get to a place where, you know, a community like that can really be positioned to grow and increase economic activity and economic opportunity in those areas.

So I think that multifamily is in any new, emerging area, if you look at any opportunity zone or non-opportunity zones, new trendy area of, you know, some of our cities, you see multifamily often going in first before a lot of other businesses or other infrastructure comes in.

So I think that that’s the, sort of, standard path that makes it a good investment because, you know, you’re getting in early and then having additional auxiliary investment come in on top of it. So, you know, a commercial development that comes in and is going to put in office, and retail, and restaurants that enhances the value of the initial underlying multifamily investments.

So I think that’s one reason why multifamily is so compelling, but I think, you know, there are a lot of good investments in opportunity zones. There’s been significant, you know, industrial investment as well. I think what you’ve seen is, sort of, a few different types of investing.

You know, because opportunity zones were based on the 2010 census, some of the areas that were zoned had, kind of, already started that transition before the zone was, sort of, put underneath them. So I think particularly in those areas, you see a lot of multifamily development.

But you do have industrial development in other types of opportunity zones that are, you know, underinvested for other reasons. But, yeah, I think that, you know, those sort of transitional areas, there are a lot of opportunity zones there and that’s, kind of, fundamental to the story of the transition of an area is that multifamily development.

Scott: Right, where are people going to live?

Clark: Yeah, with a new program like this, that tried and true story around the growth of a submarket really helps investors because, like I said, this is private money coming into underinvested areas. They have to be confident that they’re going to get returns. You know, they’re great tax incentives, but the tax incentives are based on essentially having a good investment that…

Scott: Right, you need that capital gain.

Clark: …returns good money because the big power of the program is backend capital gains. If you don’t have capital gains on the backend, you know, you’re not driving the values for the investors that they’re expecting. So that’s why I think the multifamily has been so popular but frankly is still needed in those areas.

Scott: Mm-hmm, absolutely. When you look across the multifamily landscape, what are some of the most intriguing current trends you’ve seen? Just, I guess, things happening that might be particularly interesting.

Clark: Yeah, it’s interesting. You know, I think that… There’s so many different directions I could go. So I think one of the things that you’re seeing, and, you know, we have a project like this here in Charlotte, is rethinking transit. Obviously, if you’re in a city that has good public transit, whether it’s fixed track, rail, or even just a good bus system, transit corridors have always obviously been attractive, but I think you’re seeing that accelerate.

I think one of the reasons is, you know, if you…again, back to these essential workers, these young millennials and Gen Z, they’re so debt-burdened often from college, they have apartments which they’re renting, and then the other big expense on a monthly basis for a lot of these people is a car.

But I think what you’re seeing is you can’t really afford all three of those. You can kind of afford two without stretching yourself too thin. So you can’t get out of the school debt. If you’ve taken it on, you got to pay it back. Obviously there’s some, you know, relief programs.

There’s other stuff happening, you know, in the country right now. But broadly speaking, you know, that’s kind of fixed. And so you kind of got to choose between housing and car. So I think you’re seeing a lot of people giving up the car. Two-income, you know, a young couple, married, not married, whatever, might only have one car route. Whereas, 5 years ago, 10 years ago, they were going to have two.

So I think parking counts are going down. We actually have a project here in Charlotte that is, you know, we actually received zoning from the Charlotte City Council to have zero resident parking. No parking on site.

In our lease, you will sign in our lease that, “I do not and will not own a car.” And if you violate that, we can evict you. But it’s right next to a greenway. It’s going to have an amazing cycle center, you know, ride-sharing, and all that kind of stuff. And actually, in doing that by reducing that cost, actually this is part of our community development initiative, 50% of those units, it’s 108 units.

So I think 54 units are actually, you know, sub-60% truly affordable units, you know, affordable capital. So I think that, and, you know, Charlotte is a car city. I think that model is really innovative here, but I think, you know, even if you’re not going to go car-free, being able to reduce parking counts, I think municipalities in their zoning are getting more aware of that and reducing their required parking counts.

You know, one and a half per bedroom. It just doesn’t make sense anymore. You know, so I think that that’s one of the things you’re seeing. You know, and in a completely different direction, I think there’s a lot of really cool construction and building innovation in multifamily right now.

We actually have a thing that we just set up here at Grubb Properties called Link Innovation Labs. It’s, because we are vertically integrated, really focusing on design and construction technologies, panelization, you know, to reduce costs and reduce time, increase efficiency in construction.

We’ve looked at power over ethernet, which is sort of a really cool, new innovation where you can actually not necessarily an electrical outlet but like a light, you can power with an ethernet cable which is obviously much less voltage. It really relies on, you know, LEDs, which have a whole lot less draw. But that’s actually an incredible cost savings because it’s much easier to weigh and much less time.

And actually you don’t have to be a master electrician to lay that wire. And, you know, we’re not trying to put electricians out of business. Like I said, you know, we still have appliances, we’ll still have, you know, plugs but, you know, the standard subcontractors can do that, you know, much more efficiently.

Like I said, cool innovations like that. You know, not something that… I think a lot of people are thinking about is, you know, more co-living. I’m not necessarily sold on that. Like you said, you want, kind of, your own space.

I get the appeal certainly from a cost perspective for a developer. I’m not sure what the market looks like there. I’m happy to be… And I don’t necessarily think that I’m against that. It’s not something we’re doing.

So I don’t want to say that I would be proved wrong, but I’m happy to see that be successful. I think that could be very interesting. And I think, you know, some of the other…you know, I think unit size is decreasing often. That’s part of Link Apartments’ philosophy. We have more of those six units that we repeat are more efficient.

They’re a little bit smaller. They don’t feel that much smaller because we’ve gotten so good at designing and making those. But I think that, you know, as costs rise, smaller units, micro-units are becoming more popular. Yeah, you know…

Scott: You can opine for a lot longer. I mean, there’s so many great insights you have here and so many amazing things happening when we look across the space. I love that you touched on, you know, the technological but also just, you know, design and these types of things. I want to dial in because you talked a bit about materials. And when you look across the current economic landscape, you’ve got inflation, you have the cost of materials going up, other potential challenges.

How have you seen this impact or not impact multifamily projects and perhaps projects that even Grubb Properties is working on?

Clark: Yeah, absolutely. I mean, costs certainly are going up. You know, I think particularly during the pandemic and along with some of the supply chain issues, I mean, you saw lumber just scream all the way up to I think it was over $1,400, you know…

Scott: I joked with my wife. I’m like, “Okay, we got to sell these cabinets.”

Clark: No, but I think that has come back down. I think one of the acute problems there or a couple was some around tariffs, but also COVID essentially wiped out a whole harvesting season in Canada. And so, you know, between that and some of the supply chain issues, I think there were some real problems there.

It’s come back. Obviously, it’s still higher than it was pre-pandemic, but it’s not nearly as bad as well. So, yes, certainly we’ve seen costs go up. but it’s actually funny, you know, people hear about this. It’s sort of the headlines on The Wall Street Journal and, you know, anywhere else that you’re getting, you know, for business news, particularly around housing and multifamily but, you know, really any type of construction and even, you know, top-line inflation.

But I think that’s actually something that not a lot of people have realized. We’ve been dealing with this in the industry for years, going back to the mid-2010s, 2015 or so, the Turner construction cost index, which is essentially inflation for the construction industry, has been over 4%.

For the last 4 years, it’s been over 5%. So we’ve been already in an inflationary environment. But at the same time, wage growth has been really low and, you know, sub-two. And top-line inflation has been sub-two. So we’ve actually been getting it harder over the last few years because, yeah, you know, inflation is a problem right now, but I would much rather have inflation be, you know, closer to where…I mean, I don’t want it as high as it is now, but, you know, higher…you know, if inflation is going to be at that 5% rate, you know, the Turner construction cost index was at, well, I would rather that with 4.5% wage growth or 4.25% wage growth with some Delta than potentially lower inflation with very little wage growth.

So if you’ve actually seen that, you know, top line inflation numbers are scary. I haven’t seen what the February number was, but I know in January, it was…I know the inflation number was over 7.

Scott: I believe it was 7.9 in February.

Clark: Yeah, it was 7.9 in February. In January, I think it was like 7.6, but wage growth was like 6.9. I don’t know. I can’t remember what the wage growth in February was. So you’re actually now seeing it, particularly in our industry, that the income increase is actually starting to catch up a little bit, which is a good thing particularly for multifamily.

Unlike commercial, in-office, industrial, multifamily actually I think is a really good place to be in an inflationary environment because, you know, if you have an apartment complex like the one in Fitzsimons that we’re going to deliver with 400 units, well, I have 400 leases that I sign every year, and I can keep my lease rate consistent with inflation and particularly if, you know, wage gains support moving rent.

Well, you know, if I lock a commercial lease for seven years, I’m stuck with that lease rate. And, you know, 7 years of, you know, hopefully not 7%, but even 5% compounding inflation. You know, you might have some built-in increases in the lease but, like, you can really easily get to a pretty bad place.

Whereas, in multifamily, you get to come back year after year and, you know, get another bite at that leasing apple, which I think makes it a much more attractive investment in an inflationary environment. And obviously, you know, simply that it’s real estate, I think is, you know…again, you know, the real estate values drive the same way.

It’s tangible. I don’t need to sell you on real estate investing broadly. But for the reason that real estate has always been a good investment, they’re not making any more of it. I think all of that combined actually puts multifamily in a pretty good place investing-wise in an inflationary environment.

Scott: Right, yeah. I think that really does sum it up because, yes, there are these challenges. Yes, materials. Yes, all of this. But multifamily just seems so positioned if done right to really navigate it all and, kind of, get the win-win situation where you’re providing housing to essential workers, for example, and then you’re also delivering those returns for your investors, right?

Clark: Absolutely. And like we talked about, sort of, at the beginning, you know, the other part of it is demand. Demand is high and increasing supply is low because we’ve been historically drastically underbuilt and inflation isn’t helping. So you’re in, sort of, this actual kind of perfect storm, I think, for multifamily investing where your demand is going up, your supply is not keeping up.

And I think that, you know, now is actually a really good time to be a multifamily investor.

Scott: Absolutely. Clark, thank you so much for joining me on the show today, offering great insights and telling a bit of a story about Grubb Properties. And if folks want to find out more, they want to connect, where can they do that to learn a bit more about Grubb Properties?

Clark: Absolutely. You know, grubbproperties.com. That’s grubbproperties.com. You know, that has our whole story, our active funds, our opportunities fund as well as information on our traditional, sort of, flagship fund. There are links that you can contact our investing team.

The one for the opportunities fund comes to me, but my email address is [email protected] I’m always happy to connect, you know, talk about investing, talk about multifamily. You know, people can reach out to me directly or find us on the internet.

Link Apartments, you know, like I said, I don’t know what necessarily the overlap between people watching this podcast and looking for a new apartment, you know, linkapartments.com is out there as well. If you just want some more information about the product and about what we’re making in the communities that we’re providing, I think that’s another great resource.

You know, we’re growing, we’re expanding nationally. You know, we’ve traditionally been here in the Southeast, but we have developments underway, like I said, in Denver, Los Angeles, the Bay Area, New York, D.C. So we’re really trying to deliver this product across the country. You know, it’s something that we’re excited about.

It’s something that we’re passionate about. And, yeah, always happy to have a conversation.

Scott: And no pun intended, it’s essential.

Clark: Yes, absolutely.

Scott: Fantastic. Well, thank you again and, of course, we’ll have links to all those great resources in our show notes. Thanks again, Clark.

Clark: Thanks, Scott.