Multifamily Investing In Highly Resilient And High Growth Markets, With Grubb Properties

In this webinar, Clark Spencer discusses Grubb’s unique approach to multifamily investing.

Webinar Highlights

  • Grubb’s differentiated approach, which is driven around essential housing.
  • Grubb’s history, from its origins as a single family builder with a not-for-profit financing arm.
  • Unique advantages offered by Grubb’s “boots on the ground” capabilities.
  • The impact of demographic trends in recent years on demand for multifamily housing.
  • The distinctions between essential housing and workforce housing.
  • Grubb’s focus on transit-oriented projects in urban areas.
  • A two pronged approach to site selection, including focus on highly resilient and high growth markets.
  • Grubb’s goal of “doing good while doing well.”
  • Live Q&A with webinar attendees.

Grubb Properties’ funds are laser-focused both in resilient and high-growth U.S. markets. The company has been in these types of markets since 2003 providing our investors with above-average returns, while benefiting communities and addressing the critical essential housing gap.

Learn More About Grubb

Webinar Transcript

Jimmy: This will be Grubb Properties coming up next here. I’ve got Clark Spencer waiting in the wings here. Hey, Clark. How are you doing?

Clark: Good. Good afternoon, Jimmy. How are you?

Jimmy: Good afternoon. Good to see you. I’m doing well.

Clark: Fantastic. Thank you. Thanks, Jimmy. I’ll share my screen with a presentation in just a moment. But just to introduce myself, I’m Clark Spencer, managing director of investments here at Grubb Properties. I fill two primary roles. Initially with Jimmy, actually, I am the portfolio manager of our Qualified Opportunity Zone program, but also sort of spearhead our broader private wealth, capital formations team, along with James. You know, in talking today with AltsDb, you know, we’ve participated in Opportunity Zone Db in the past. We have a great opportunity fund that we’ll mention in this presentation. But we also have our flagship fund, which is our Grubb Real Estate Fund VII. I’m happy to talk about some of the individual assets, or terms, and things like that in each of these funds. But at Grubb Properties, what we’re really focused on is multifamily housing, and what we call central housing and diving in. And that’s really what I want to talk about today. Actually, you know, seeing the last presentation, there’s a lot of commonality to that, but we wanna sort of give our take on it, and really talk about what Link Apartments is.

So, just some highlights for the managing member, the manager Grubb Properties of both of these funds. You know, over the past two decades, we’ve deployed about one and two-thirds billion of total equity with a weighted average property level return, gross internal rate of return of 39.6%. And a weighted average, probably over a multiple 2.4X on all realized transactions. And I think there’s a strong track record. That’s 30 realized investments since 2002. So, it’s over a long time. And actually, now at this point, going into a third economic cycle. So, I think it really shows the staying power of the company.

We are a, I guess, this year 58-year-old owner-operator developer in the real estate space. We launched our fund management platform back in 2010, coming out of the GFC. But we do have a somewhat differentiated approach to the housing crisis. It is demographic-driven. And we’ll process some of the same statistics that we just saw. But the demographic strategy-driven around a central housing is really what sets us apart. And I’ll talk about what a central housing is throughout this presentation. But really coming out of the pandemic, you can think about a central housing as being for the central worker, and particularly the youngest central worker. The millennial and Gen Z sets coming out of what we now know as central workers.

And I’ll talk about who those people are, how we target them, and what we were trying to do with our Link Apartment strategy, drive value there. It is a value-oriented strategy. It’s all about efficiency across the platform in this Link Apartments brand. But, you know, as a contrast to what is a lot of times thought of as workforce housing, these are very urban locations. We target countercyclical employment anchors, some of those things that we’ve been talking about already today, you know, large state universities, hospitals, state capitals. We also focus on transit and local amenities, you know, the live-work-play environment. As I mentioned, we’re a 57-plus-year-old company founded in 1963. You know, we have a real focus on long-term value and deep relationships in the industry. I do, and we talked about this in our last AltsDb conference, but one thing that I think really is important about Grubb Properties is our commitment long-term to affordability and housing equity. And that actually comes out from our founding.

We were founded by Bob Grubb, who is our current CEO, Clay Grubb’s father in 1963 in a town called Lexington, North Carolina. It’s outside of Winston-Salem, and you may have only heard of it if you were in Central North Carolina looking for some good barbecue because they’re famous for that there. But in the ’60s, and even into the ’70s, there was this practice, across the United States it was particularly pervasive in the south, but of redlining. And, you know, redlining being a practice, basically to get around the Fair Housing Act, where banks would basically literally draw red lines on maps around neighborhoods that was approved by the government that they did not have to lend into. And not surprisingly, as I’m sure you can guess, the vast majority of them were minority neighborhoods. Clay Grubb’s father, Bob, did not like this strategy, but also saw it as an opportunity both for, again, equity and investment. And Grubb Properties started out as a single-family house building company that he financed through what he set up as a not-for-profit, essentially, finance arm of this business where he would lend or he would borrow on his credit from the banks, and then extend loans with no markup to those buyers in those redlined communities, for the houses that he was constructing.

And in that way, you know, we grew out of that desire for housing equity. And, actually, if you go back and look at the records, he actually had a lower default rate than the banks. So, not only was it a strategy that was good for the communities and positive for growth, and head on confronting a problem that we had in the country but it was actually a good business decision, too, because, you know, there was nothing about those borrowers or about those locations that actually made them any less creditworthy, other than simply prejudice. And that strategy evolved out of that and set us up for the long-term success that we’ve had over 57 years.

We are an integrated, vertically integrated developer. What that means is we have an in-house construction management and development team. We don’t offer self-perform GC services, though we are a licensed GC, we can take over if we need to. But that is development and construction management services all the way through the asset management, capital raising, and debt sourcing, that is more than the investment side of the shop, all the way through a vertically integrated property management to company across that we have managing these assets across the board for the life of the hold. That gives us a lot of advantages in the market and allows us to be really boots-on-the-ground, hands-on with the projects, we’re able to identify problems more quickly. But then also, it allows us to incentivize and drive performance, which we’ll talk about it as well.

So, what is the market opportunity? Just to go back over some of the things that we’ve already been discussing today is about demand and an imbalance of demand and supply. The demand actually is really interesting. And this is the graph on the bottom left here. There are currently more 14-year-olds in generation Z than there are 30-year-olds. And that’s because peak birth happened in the United States in 2007. If you look at that graph on the bottom left, sort of heading over to the middle, you actually see that peak in all-time births in the United States happening right before the financial crisis. But even the downtrend after that, you can see doesn’t actually get below the millennials, you know, it’s actually sort of coming up to a peak together. What that shows you is that this demand is not only just today because there is massive demand today, sniffily due to supply issues, but that will be growing demand over time. I mean, we have a pipeline of apartment renters for the next decade-plus because those people born in 2007 won’t actually enter the general apartment renting market until 2029, 2030, 2031 as they’re coming out of high school or college, and entering into their own homes.

This is the same time the median home prices in the U.S., now exceed $404,000. And the average apartment rent in the U.S. has reached $1,594 a month. What that means is that 80% of the current millennial and Gen Z, or the beginning of Gen Z, workers can’t afford to qualify for that rent without a cosigner or a roommate. If they want to live by themselves, 80% cannot qualify because 80% or so are making $50,000 a year or less. This is coming from a constrained housing supply, as we talked about earlier. This is primarily due to cost. And what you see on the bottom left here is the Turner Construction Cost Index. And you can see inflation and construction pricing over the last, you know, a significant number of years, going all the way back to 2013. There’s only been one year below 4% in the last eight years, and you have three years, actually four years there are over 5% or higher. That is causing this dearth of supply. In the bottom right, you see the 50-year average of housing deliveries in the United States. And in the last 10, actually now even closing in on almost 15 years, 14 years, has been below that historic line. And most of those years actually below, actually, even any individual year, if you look between 2009 and 2015 on this chart, those were each lower than any other year in the past 50 years.

So, what do we do to solve this problem? It’s actually investing, as we said, in central housing, this asset class. It’s the asset class between affordable and luxury. It is different from workforce housing. Workforce housing traditionally being your more suburban garden style, three-story apartments, actually generally larger floor plans. We focus on a different type of apartment. It works like luxury, it feels like luxury. But the ways that we get to it, both on a cost basis and other interesting methods from design and things like that, get us to a point where we can offer these apartments at a price that those central workers can afford, a nurse, a teacher, a municipal worker, whether it’s police officer, firefighter, city worker in these areas can afford. That’s generally targeting between 60% and 140% of the area median income. That’s not just an idle target, actually, 65% of our renters in our stabilized Link Apartments products are below 120%, are at or below 120% of area median income. Again, the location is key. These are urban locations, transit-oriented close to major fixed employers, as we talked about earlier, that are driving the demand for these apartments.

How do we get this? It’s through this strategy. You know, it’s focusing on these moderate price renters where they want to be located. We are vertically integrated, that allows us to infuse ESG across our platform, both from the inherent nature of the lower rent but through things like the link innovation lab, where we’re testing out new construction methodologies to create efficiencies to drive our pricing lower the use of tax subsidies, making sure we are building green and all of these communities, both for the environment but also to drive down cost. And again, passing on all of this to our tenants, and ultimately, to our investors through a more stable product. Because, ultimately, it is rent roll and turnover and apartments that is really the killer. And being able to establish these types of communities with consistent tenant bases is key to driving long-term value.

So, I know, I talked about some of these methodologies that we use to get to a lower pricing point. It’s really approached through two different categories. The first is these value methods. We’ve 59 methods that we use to drive either our costs down, our going-in capital costs, our recurring operating costs that are capitalizable, whether that’s through efficiencies or things like that, generating non-tenant revenue, securing tax subsidies, lots of different methodologies, also innovative site acquisition and shared parking is huge for us. A case study that we have is actually this office that I’m sitting in, we purchased this value-add office, actually two office buildings that we have. You know, because we also do have deep commercial experience, we made sure they were good investments and turned an initial $7 million equity investment into buildings that are now valued at over $65 million. But at the same time, we received entitlements in those existing surface parking lots to build a multifamily housing with an internal parking deck that shares parking with the multifamily, creating zoning for over 540 multifamily units, and actually achieving some bonus earning on a fifth pad. But that will turn ultimately this investment into a $250 million of total capital deployment.

Again, we approach markets very, very selectively. We talked about two different types of markets. There’s high-growth markets that we heard a lot about in the last presentation. You know, Charlotte, Atlanta, Raleigh, Nashville, these are markets that are fantastic growth. But as I also pointed out, they can be incredibly cyclical. So, to balance that we also like highly resilient markets. You know, those state capitals, the National Capital, D.C. is an incredibly resilient market, but also, generally, the gateway markets. And we’ve seen an incredible opportunity in the gateway markets during the pandemic. As people left some of those areas, we were able to secure a great number of assets at really compelling prices that we think will provide long-term stability to our portfolios. And we’ve already seen a lot of that bounce back, even in some of these gateway markets.

You know, if you see these charts on the bottom of the page, these are generally your gateway markets. And apartment rents pre-pandemic, pandemic in the red and then bounce back. San Francisco, that San Francisco Cropper, it’s coming back. But actually, the Bay Area more broadly is doing significantly better than that. You know, Washington, D.C. is already actually above its prior trend line. New York City is basically at its trend line and is the highest rent growth market in the last three months, I believe, consecutively. But then you also see the growth markets, Atlanta and Charlotte. You know, you barely had a dip in Atlanta, and you didn’t even really have a dip in Charlotte, and obviously, these markets are screaming hot right now. So, we have, you know, good long-term investments there, as well as balancing those out with these investments that we’ve made in these new markets.

This is our sort of national footprint. Growth markets here in the southeast that we’ve been traditionally investing in, and these more resilient markets, you know, entering in Los Angeles and the Bay Area, Denver, New York, and Washington along with our traditional markets, you know, primarily focused in the southeast.

We have two current investment opportunities. As I said, we have Grubb Real Estate Fund VII. This is our traditional flagship Fund. It has dual market exposure in both, the growth and resilient markets. So, we talked about some really fantastic opportunities, including in the Financial District of New York, that is a really fantastic site that comes with an incredible tax abatement from the city of New York, that will drive long-term value there. And just a really distinct traditional seven-year fund, and happy to talk about terms. But this is sort of the primary entrance into our Link Apartments program. But then we also, as we said, have an opportunity zone fund. The great thing about it, as I said, it’s the same Link Apartment strategy, the only real differentiator is the location. But instead of having our traditional vintage year funds, what we now have, because we’ve merged those three funds is the Link Apartments Opportunity Zone REIT. Nineteen total secured assets in eight markets, including New York City, D.C., San Francisco, L.A, Charlotte, Chapel Hill, North Carolina, Winston-Salem, North Carolina, and in Charlotte, North Carolina, and Denver, Colorado. The 15 multifamily assets totaling over 3,000 units, 1.6 billion in total cost, as well as 4 commercial assets with over 750,000 square feet of total commercial space, and a really robust portfolio that we’re raising through the opportunity zone program.

Just a couple of additional highlights, as I mentioned earlier, we are very ESG and green-focused. Our GRESB development score is 81 out of 100, which is significantly above the global average. And that benchmark improved by 20% over the prior years, so we’re doing great things. We’re significantly involved in community engagement, and we are big supporters of Habitat for Humanity, having delivered…you know, corporately, Grubb has sponsored Habitat houses in each of the last four years. We’re innovating on transportation. We work with a group called Copenhagenize out of Denmark, really focused on biking infrastructure, you know, pushing housing affordability, and just trying to have, you know, that impact doing of good while doing well.

And then finally, from our thought leadership and transparent reporting processes, we deliver to you what are really incredible high-quality reporting, both at the granular level for your investments. But actually, if you’re an investor with us, you get full transparency into our entire portfolio, the full quarterly report every quarter, which details every single fund and has an individual page for every asset in every fund that we have invested in. So, whether you’ve just come into our Fund VII or OZ Fund, you’re still getting that full transparency into the enterprise. You know, we put a lot of time into our reporting, delivering consolidated statements that have investment experience level, IRR, and multiples that combine all investments through properties into a single table but also put out a single output in addition to their individual fund level returns, so, really, incredibly high-quality reporting.

That’s about my 20 minutes. And so I’ll thank you for that. We have email addresses here for Fund VII and the link OZ REIT, if you’d like more information on either of those products and James Holman, his contact information here as well. With that, Jimmy, thank you. That’s the time with the presentation. I see a couple of questions in the Q&A have come through.

Jimmy: Yeah, terrific job. Thank you, Clark, for participating with us today. We do have a few questions. We got a few more minutes, we’ll try to get to some of those questions. If you’d like to learn more about Grubb Properties, and I’ve posted this link already in the chat, please do visit And one more announcement before we move on to the questions, we are going to be moving into a happy hour mixer at the conclusion of today’s event, in just a few minutes. This was the last presentation. We are gonna be moving into a new Zoom meeting for that happy hour. You’ll be able to turn on your camera and your microphone and we’ll be able to interact and network a little bit. I just posted that link in the chat, and I’ll post it again right now. So, please use that link in a few minutes when we get ready to move over there. But, Clark, back to you to move on to some questions here. First question is, what is the timeline for this fund, time to refi, stabilization, and asset sale?

Clark: Sure. So, that’s a good question. It’s a seven-year fund. Well, I guess, you’re looking for two different things in the QOF, it’s a little bit more complicated. It has a 10-year life from the end of next year with some potential optionality to expand, actually for the life QOZ program. You know, we are focusing on a refi event around the taxes due date, like most opportunity zone funds are there. But that’s a little bit more complicated of a story. The Fund VII is your traditional sort of seven-year fund. You know, we’ll be raising capital through the end of this year, so it’s seven years from the end of this year. I think it’s a two-year deployment period, and then five years after that. And, you know, we would be refining and stabilization generally, you know, from construction start, you’re probably 30 months… I guess, depending on the size of the asset, the average is probably, you know, 28 to 30 months stabilization. You know, if it’s a smaller asset, it might be quicker. If it’s a larger asset, it might be longer, right up to the delivery stages, things like that. But that’s generally the timeline.

Jimmy: Sounds good. We’ve got four more questions. We’ll try to get to all of them real quick here. How are increasing development costs, particularly materials impacting your projects? Are the returns due to rising rents keeping pace to make construction expense less of a concern for you?

Clark: Yeah. You know, I think construction costs are things that are affecting, you know, people across the real estate development industry. I think, you know, one of the things, and I actually didn’t get to it in the presentation, is about our sort of repeating nature of the Link Apartments product. We have six apartment floor plans that we recreate across the portfolio, essentially no matter what market they’re in. We might vary the mix, but we’ve gotten really good at those. That saves from a design perspective, it helps on the operation side. You know, managing only six different unit floor plans rather than 25 to 30 actually went on to an apartment complex with 60-unit floor plans across 400-units, impossible to manage efficiently. But that also saves on construction time because, you know, if the construction crews are having to go back to the drawings with, you know, all these different unit floor plans, and they just get better and better and better, we see construction efficiency. Also, having consistent construction partners in markets, you know, we can often get similar crews who can use what they learned on a prior project to continue those same efficiencies into future projects.

So it’s sort of a snowballing effect. You know, I mentioned the link Innovation Lab, trying to drive down costs there as well. You know, it’s a certainly an industry-wide problem. I think rising rents are helping with that. You know, top line inflation, obviously, everyone’s focused on inflation right now. But I think one of the underreported things is, you know, inflation was like 7.5% in January, but wage growth was like 6.9%. So, I’d much rather have, you know, significant wage growth tied to…you know, the inflation is never good. But if you have significant wage growth, it can help keep pace, which, you know, is counter to a lot of what we’ve had in the past, you know, decade of very sort of stagnated wages, while you have significant inflation in construction cost, even if there hasn’t been significant top-line inflation. So, that’s actually a trend that despite the sort of counterintuitive, we may actually be going in our direction at this point.

Jimmy: And you mentioned essential housing as one of the themes of your Link Apartments. So, this question asks, what is the typical, or I’m sorry, who is the typical renter of your Link Apartments? Is it 20-something professional, or is it a different demographic?

Clark: That’s a good question. I think, you know, not to violate any FHA rules or anything like that, you know, our typical renter, you know, we’re not discriminating in any sort of way. But, yeah. Our typical renter is generally going to be in 20s, 30s, you know, young professionals. But again, also, like I said, you know, if we add the price point we deliver at, I think it’s probably even early career professionals or very early career professionals. But also, you know, the people that we’re targeting, I think we’re really delivering to teachers, nurses, you know, hospital administrators, city workers, police officers, people like that, people really making in that 60% to 140% range. As I said, 65% of our renters are at the 120% AMI or lower, and actually, I think a full 10% or at a 60% or below. So, it is a diverse, you know, income mix in our communities, which actually creates, I think, stronger communities. And because of the demand it’s really sort of insatiable demand because of some of those population and supply pressures we talked about.

Jimmy: Sure. What about debt? What type of debt ratios will you be using here?

Clark: Yeah, that’s a really good question. You know, we talked a lot about debt, you know, the last presenters also talked about debt. You know, we’re generally building loan-to-cost 55% to 60%, we might refinance a little bit higher on a loan-to-value ratio. But you do want to be focused on debt ratio. And we are generally conservative on that front, but you also need to be focused on debt term because if you have credit markets locked up, no matter how good your debt ratio was, if you need to refinance and can’t, you lose the property. To that end, in Grubb Properties’, entire history, we’ve never had a deed in lieu of remote bankruptcy or foreclosure on any property we’ve owned. That’s a track record that we’re very proud of and don’t intend to break. And it’s the combination of both of leverage ratio, but also leverage term that is really crucial there.

Jimmy: Good. And then final question before we wrap up the main session for the day, Clark. How do you decide if a property goes into your OZ fund, or into your other fund? Is it as simple as if it’s located in the opportunity zone or not?

Clark: It is entirely that simple. If it’s in the opportunity zone location, the Opportunity Fund has a write-on it, has first write on it and generally would execute on that project. Now, there maybe some projects, and this hasn’t happened yet. I’m a former securities attorney, so I always hedge my bets. You know, if there were a project that were located in an opportunity zone that the opportunity fund passed on, for some reason, and that would be a legitimate passing reason to, say, for example, it was a stabilized office building that you could not meet your reinvestment requirements, then, the Fund VII could take a look at it after the opportunity zone passed. But that’s never happened. We’ve never had that situation, broadly speaking, it’s sort of…you know, OZ or not, and that’s how it gets assigned. It doesn’t have anything to do with return profile or anything like that. And I think that does differentiate us from some, you know, combined managers who do manage both opportunity zone and non-opportunity-zone funds. You know, I’ve seen, you know, return hurdles that if it passes a certain return hurdle, it goes to the main fund, and that’s not what we do. It’s really kind of a bright-line test.

Jimmy: Terrific. Well, Clark, we’re way overtime now. I’ll cut you loose there.

Clark: I’m sorry:

Jimmy: We got a lot of good questions, so I want to make sure we answered them all. Clark, thanks for participating today, partnering with us on today’s event at Really appreciate it.

Clark: Thank you.