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March 1, 2021

What Real Estate Can Learn From The Tech Industry

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Brad Hargreaves | Founder and CEO, Common

Brad Hargreaves joins Richard Green to discuss how COVID-19 has impacted product typologies of co-living and the role tech plays in managing multifamily properties. 

As it varies across the industry, Hargreaves lays out Common’s definition of co-living that distinguishes itself from visions of student housing or roommate matching and management. While co-living makes up a portion of Common’s management portfolio, Hargreaves sees the lowest hanging fruit for most property managers as basic tech upgrades to increase efficiency and centralize efforts like sales, marketing, and leasing to better and more quickly serve tenants. Green fields questions on which cities seem to be making big wins from the increased adoption of remote work, how renters making choices virtually will persist after the pandemic subsides, and what co-living financing really looks like to lenders and borrowers.

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- Good afternoon, everyone. I'm Richard Green, I'm director of the USC Lusk Center for Real Estate. And it's my pleasure to welcome you to Lusk Perspectives. We have a terrific guests today, Brad Hargreaves, who is the founder and CEO of Common. I think it fair to say that Brad is a founder. It's kind of amazing how different or maybe they're not so different, that the two companies he founded are. The other is called General Assembly, which was a global education institution with campuses in more than 15 cities worldwide. He was a Venture Capital partner. And Common now has a platform involving tech enabled property management for eight cities with 3000 members. And while they do traditional apartments, I think they're best known for micro units and even more so for co-living. So as we're thinking about housing in the aftermath of COVID, and I am becoming increasingly optimistic that we will have this largely behind us by the summer, fall at the latest, to hear someone who has sort of had to rethink some of what he has been thinking as he has gone through the period of the last year, I thought it would be great to have someone who's visionary as Brad join us today. So Brad, thank you very much for being with us.

- Of course, Richard, thank you so much for having me on.

- So let's start, Brad. Talk a little bit about over the course of the last year how you've been thinking about product development. Has it changed or is it pretty much what it was before? And of course maybe make our Lusk board members a little more familiar with what your product is and the process.

- Yes, absolutely. So it's been a wild year, but ultimately a positive year in many ways and overall for Common. Just to take step back, we started Common five years ago, seeing the opportunity to address the affordability crisis in major world cities, by offering new typologies. Things like co-living and micro apartments, 25 million Americans live with roommates. It's been one of the fastest growing segments, sub-segments of multi-family over the past 20 years. But there really haven't been any developers, certainly not when we started in 2015 or management companies that are focused on high quality design and high quality management of co-living micro apartments and these new typologies. So we started back in 2015. I previously built what became the largest trade school in the U.S., General Assembly. And that really got me cued into some of the challenges that came with the affordability, particularly for newcomers coming to a city for the first time. And co-living, living with roommates is where many of these people find themselves. So we built a solution, and we did it as a designer and as a management company, not as a developer. That is really keeping the good parts of living with roommates, the affordability and the social environment, while getting rid of as many of the annoyances as we can control by doing things like providing en suite cleaning, shared kitchen and bathroom supplies, furnished units, that really decreased the friction and surface area of roommate conflict. And that's been a great business for us. And that's gotten us from where we started to where we are today with about 5,000, today, units under management. And we have around 20,000 units currently under development in about two dozen cities in the U.S. and Canada. Obviously as just getting to this year, when COVID first hit, we were worried it was existential for us. Obviously, it was unclear how long people were going to leave cities, how many people would leave cities, where occupancy and rents were going to go. And certainly for those first couple of months, things were pretty dire. Our renewal rate, which is typically around 50%, dipped down into the 20s in April and May, as people just didn't wanna stay in cities, they didn't wanna stay in places like New York, Los Angeles, San Francisco, DC where we have the largest concentrations of our portfolio. And the rents were also dropping. And it took a while for that to show up in the data because people were offering concessions, they were offering things that kept those face runs high. But to the best of our understanding, net effective rents across the 10 largest cities in the U.S. have dropped anywhere from 10% to 25% in places like New York and San Francisco. In San Francisco, I believe rents are actually continuing to drop. In other cities we've probably found the bottom. And in some cities we're actually seeing rents start to go back up.

- I think the New York is starting to see that, right? They have found a bottom. You are seeing people at these prices move back into the city.

- Correct, New York has absolutely found a bottom. South Florida where we have a decent amount of inventory is also climbing. LA I think has found a bottom as well. San Francisco, we haven't found it yet. Seattle, unclear. Seattle hopefully is hitting a bottom around now. So we do see things start swinging up and our own models anticipate that we'll see rent growth across the board in Q2 and Q3 of this year. There's one thing though that's really been the other side of the double-edged sword of COVID, which is, we structured ourselves in the early days as a management company. We partner with owners, we partner with developers, to innovate around these new typologies, but increasingly to bring a layer of technology and thoughtfulness around leasing and marketing to their projects. The majority of the projects we're doing these days are hybrid. So there a mix of co-living and conventional, where we're managing and branding the whole building. And the co-living really, think about it in those situations as it's creating a lower rung of a ladder to get into that building. So rather than your cheapest unit being a $1,600 studio now your cheapest unit is a $1,200 co-living room. And that really differentiates the asset from the buildings nearby. We can do this in conventional three bedroom, four-bedroom apartment layouts as well. So we're doing more of that kind of thing, and also adding value beyond co-living. Over the past couple of years, we've been doing a lot of transformation, adding value to, adding technology to the leasing and marketing funnel, and I can talk more about that. But I would say that projects without co-living at all are probably about half of what we're taking on today. So the past six months, have actually been our biggest six months ever of new signings and new buildings under management coming online. So it's been a mix and happy to tell more about the journey.

- Just a quick clarification, when you say half the projects, how does that translate to units? So you say half of your projects have co-living.

- Yeah, so today we are a majority. About 60% of our units under management are not co-living, they're something else. They are conventional apartments, which includes micros. But we look at that as there's one lease and one occupancy term in that unit, is how we define it, it's not roommates.

- And another point of clarification, when you talking about co-living, you're not talking about a model where you have a room with no kitchen and you go to this big mass kitchen. You're basically talking about people sharing a three or four bedroom apartment or do I have it backwards?

- No, that's correct. So our model of co-living and it's used somewhat differently by different companies and certainly differently when you go into other geographies, is a shared apartment. We'll do three and four-bedroom apartments. We also have some owners that build substantially larger apartments, five, six, and in some cases more bedrooms, sharing a living room and kitchen. We do operate some more SRO style units. But those generally what we found is that the challenges to permitting and financing just don't, like the NOI bump you get from building those doesn't quite net out. But the shared apartments is the bulk of what we do on the co-living side.

- So from a typology standpoint, all you're saying is you're doing more three or four-bedroom apartments than you generally will find in apartment buildings nowadays or there's something physically distinct about these three or four bedroom apartments relative to other three and four bedroom apartments.

- Yeah, so when we design them ground up, which we do in some cases and not in others, there are some physical distinctions. One is we try to get as close to one-to-one bed to bath parody as possible. People are totally comfortable sharing a kitchen, but in most markets outside of New York, Los Angeles and San Francisco, they don't like sharing a bathroom. So there's a substantial rent premium if there're private bath rooms. There's also a lot of mechanical differences that we've learned over time. You need more gallons of hot water per bedroom than you do when building traditionally, because you may have four separate people living in each bedroom that all wanna take showers between the hours of 7:30 and 8:30 in the morning. You have to build for that. There's slightly different HVAC requirements. There's a lot of little things, but from a layout standpoint the biggest is going to be particularly in your secondary markets, one-to-one bed to bath parody whenever possible.

- When you talk about that $1200 rent, are you talking about that in the secondary market or you talking about that, I mean, that sounds very cheap for a Los Angeles or even in New York right now.

- You mean the $1,200 rent?

- [Richard] Yeah, yeah, yeah.

- Yeah, that's typical in Los Angeles or New York today. And that might be anywhere from 10 to 20% discount to pre-COVID, but you do need to offer a discount in order for co-living to make sense. The social environment does add a benefit, the cleaning, the utilities add benefit, but generally you're offering a 20% rent discount versus a studio. So if a studio is going for 1600, you're offering a co-living room for 1300, 1200, something like that. But on the NOI side, co-living is going to generate typically 30 to 40% higher rent per square foot, and anywhere from 20 to 25% higher NOI per square foot. And that's true pre and post-COVID. That hasn't really changed.

- So let's talk about property management, and start with, do you sort of do, are you sort of a dating service as well as a property manager? Do you match up roommates that are compatible with each other or do you just let them find each other?

- We do not do roommate matching.

- [Richard] You do not do roommate matching.

- That was a strategic decision we made very, very early in our journey. And it still surprises a lot of people, but it's a hundred percent the right way to do it. There are a lot of issues with roommate matching. One is, you usually don't have a full suite that needs to be filled up. You have a vacant room and you have to decide, you have an applicant and rejecting that applicant from that room because they're not a culture fit or whatnot for the suite, for the other roommates, is problematic for a whole host of reasons, both financial, ethical, and legal. So when you back it into that, it makes sense why we don't do roommate matching. We've seen a lot of success solving it on the backend. One, the amenities we're providing, the cleaning, the shared goods, they reduce that surface area friction. And if someone really doesn't like who they're living with, we let them transfer, no questions asked. Transfer to another room that opens up. And that happens, it happens rarely. We deal with across our portfolio of 2000 or so co-living units, we deal with 20 or so transfers a month.

- So let's, and by the way, the floor is open. If you want to ask a question, please put it in the chat. And if you want to actually ask the question, just raise your hand and we will make you a panelist so you can participate live. So talk a little bit about, when I hear people tell you about their property management being a differentiator, I think of what Sam Zell said about equity residential property 30 years ago. And he was saying something along, may have been 25 years ago, but I remember hearing him give a speech. And he said, "Yeah, the difference is "we're going to have such great property management "that we're gonna be branded buildings "and everybody's wanna pay to live in an ERP building. "And they will pay a premium in order to do it." I actually think ERP is a very fine company, and when I lived in DC for a year recently, I rented a property from them because I actually knew that they were a fine company. But I don't see people going around and saying, yeah, I'm gonna rent an ERP building or any other particular company's building. So tell me, what is it about your property management software that's a differentiator or platform? And the other thing, you use it as a franchise builder or is it a way to more efficiently run buildings?

- Yeah, so there's really two questions there.

- Yeah.

- And you can kind of believe that I would say the weak hypothesis or the strong hypothesis. The weak hypothesis is that we can add NOI value or other property managers can add NOI value through technology. And that manifests mostly on the efficiency side. The biggest change that we've made is centralizing a lot of things that most traditional property managers happen locally on site. Biggest one being leasing. We still have leasing agents, but we have fewer of them. And more of the sales and leasing process happens centrally with individuals who are full-time employees, who are trained to lease specific buildings. So the main benefit you get from that, and this is something that a lot of other industries who sell the consumers do really well, is you can call those leads extremely fast. Like within five or 10 minutes of them applying to live in a building. Back when I was in education, we would build form field, like multi-page forms on our website, when people were applying to take one our courses. Not because we needed all of that information, but we saw that if you are able to keep them on your website for long enough that they can get a phone call from a sales rep while they're still completing the form, vastly higher likelihood to convert. So there are a lot of techniques that have been demonstrated in other industries that we're bringing into residential, such as the use of AI and lead routing. Somebody applies to a building, we basically can route them to the right place. We schedule on site tours, we do a lot of virtual leasing. That's been a big benefit to us since COVID. So a lot of opportunity for technology to add value through high quality property management. Has nothing to do with brand. The strong hypothesis is that we can add value and increase occupancy and rent through creating brands. We have three brands today. Common, which is our kind of young, urban millennial co-living brand. Kin, which is our roommate, oh sorry, our family oriented brand, where there's a lot of family services in the buildings, on-site daycare, stroller parking, things like that. And then we have Noah, which is our workforce housing brand. We have three brands today. Common is by far the best well-known. We've seen on listing sites that there is a double digit higher percentage click through rate on ads that are branded than ones that are unbranded. That doesn't necessarily translate to rent increases, we don't claim that. But it does lead to more efficiency in marketing spend and lower vacancy. So it manifests in kind of funny ways, but we do believe that, like every other industry there is a role for brand in multi-family residential. I just think you have to be careful what assumptions you make about the impact it's going to have.

- So talk about your family oriented brand, that brings me to, are you getting involved in single family rental? Do you see single family rental as being a competitor of yours? Do you think it's going to, so right now about 2% of single family rental in the country are institutional, is that going to explode or are there inherently large property management problems with it such that it will continue to be a fairly small part of the market?

- Yeah, it's something we're watching really closely. I'm actually an independent director on the board of a company called Loftium. They're offering a really innovative model that creates a both lower rent experience. They take single family homes, they rent them to Airbnb hosts. They take an accessory dwelling unit and then rent that out. They work with the host to rent that out over Airbnb. It's a really cool innovative solution. They've done well through COVID. So I think there's going to be a ton of innovation in the single family home space. I'm watching it really closely. From a property management standpoint, I think it's a nightmare. And as we've grown have been much more focused on more institutional assets, working with larger partners, going from our average size being, two years ago we were doing 50 unit projects, a year ago our average was around 120 units. Today our average deal size is closer to 200 units. So working on larger projects. I think it's tough to both build the, as a startup to build the muscle memory and build the capability to work with institutional clients like Nuveen, like Invesco, like Heinz, who are all of our clients, and also work with a single family homeowner. I think those are really, really, it's really tough to like do both those things at the same time. So we've decided to focus for now on the multi-family space where we think there's a real need for innovation.

- So I wanna go back to your opening remarks and ask you about parts of the country or specific cities that you're bullish and bearish about, and how that may have changed since COVID. And let's leave out San Francisco because that's just such an extreme case, I think for a whole host of reasons. But like a place like Seattle, I think it would be, the economic base of Seattle is so strong, it's hard to see how its problems last much longer, although I could be wrong about that. I just, so what are your views about, what places do you like and what places do you not like so much?

- Yeah, so I think this is really inextricably relevant to the question of, and views on return to the office and what that return to the office will look like. I think that there's going to be an increasing role. I think there's going to be a few winners here. I think it's going to be an increasing role in permanently remote work. People who never have to go back, go into any office. They can live and work wherever they want, perhaps with the boundary that it's time zone compatible with North America. So I think there's going to be increasing demand for cities that are particularly well suited to handle remote workers. Cities with fast internet, cities with affordable rent, cities with good weather and a lot of natural amenities. We actually ran an RFP process last year for a remote work hub and invited cities and developers to apply to this process whereby we would design and build these--

- This should be a brand new city.

- Well, yeah, who knows, maybe the fullness of time. But we were, really wanted to say, okay, let's pick a city that maybe has been a little bit left behind over the past 20 years as tech and the new economy has gained steam, that wants to take a shot at recruiting remote workers. And you've seen a lot of cities. You saw Tulsa introduce cash grants, Savannah introduced cash grants for remote workers who settled down in those cities. Some are tied to specific like home purchases, things like that, but you're seeing more and more of this. Basically economic development, because--

- But what does it say about a city that they have to broad people to moves there?

- Well, I think it's about overcoming a cold start problem, you know? I mean, network effects. What are the point of cities, if not network effects of a lot of things happening in one place at one time. And if you're a city that's on the outside looking in, how do you overcome that network effect, that cold start problem? Particularly given that in my view economic development is becoming a much more B to C. It's less about recruiting Amazon HQ2, and more about appealing to individual workers who have the opportunity to live wherever they want. So I think that's going to be one class of winners, are these remote work hub cities. I think another class are gonna be bedroom communities that have affordability and have a lot of natural amenities that are kind of within maybe a one and a half to three hours commute. You're gonna see a much larger class of workers that need to come into the office one or two days a week. They're not five days a week, but, hey, they can live in a place like Santa Cruz and commute into Silicon Valley. Or they can live in a place like Beacon and commute into New York. That's going to be another, I believe category of success on the other side of this.

- But you don't get the affordability in Santa Cruz.

- [Brad] That is true.

- I don't know Beacon, so I don't know where Beacon, is Beacon like up in by Newburgh if that's--

- Yeah, it's right across the river from Newburgh.

- Right across the river from Newburgh. So how expensive is it up there? I actually don't know about that.

- I mean, it's cheap by New England standards. I mean, you can go get a, you're correct, Santa Cruz is not cheap, but it is beautiful.

- It is very beautiful, yes.

- But Beacon, you can get a one bedroom apartment for 1200 a month. It has still got that like, I say upstate, it's you know, in--

- Well, people in the city think Yonkers is upstate, so.

- Still got a little bit of that old industrial Hudson Valley grunge to it.

- Yeah, so what do you think about, sort of in the context of all that, what about the Inland Empire? What about Upland? What about Rancho Cucamonga? Not that that's all that cheap anymore, or a Corono or Ontario.

- Well, yeah, where I get excited there is to the extent these cities can create real walkability. I think you have a lot of places like Rancho Cucamonga is a great example of a place that was really built and designed very much around car culture that's now looking at transit expansion, that's thinking about how to create more walkability, that has a very forward-thinking local government. So I think that there's opportunities to the extent that these cities can create real walkability and a real, a good kind of local feel to benefit from this, from this kind of need to go into the office one or two days a week search. Because I'm personally bullish on cities. I believe people wanna aggregate. I certainly hear from a lot of folks who bought houses out of the country that they're isolated, that they're dealing with a lot of homeownership issues that they weren't necessarily expecting. So I am bullish on cities and people returning to cities. I just don't necessarily think the winners of the last 20 years are gonna be the winners of the next five years.

- So let's talk about who the losers are gonna be as a result of this. I noticed you sort of sidestepped that part of my question, but you only talked about places that you like. Are there places you'd avoid right now?

- Oh, man, I find it hard to advocate hard for San Francisco and the Bay area in general. I mean, it's tough to look at what's happening from a governance standpoint there. Hostility to business, real like sclerotic development of infrastructure and get really excited about a future where people have a lot more ability to live and work where they want. Look at what Francis Suarez, the mayor of Miami has been able to do, recruiting a class of the VC Elite from the Bay area to Miami, despite not really having a lot of power to do anything other than just show welcomeness. Show that they're open to these people, bringing business, bringing innovation to the city of Miami. So I do think they're winning the marketing war, that's for sure.

- Well, I don't know that, there was a McKinsey study that came out a week ago that looked at zip code changes, and ranked winners and losers. Meanwhile I'm sitting in San Francisco did horribly, and New York did horribly, so that gave it credibility that it was picking that up. But I gotta say Miami didn't show up as a winner in that particular list. I think people can tend to confuse high-profile people with the economy. So it happened the number one city in terms of beneficiaries of the last year was a city I lived there for many years, Madison, Wisconsin

- Madison, Wisconsin, yeah. I read that.

- And Sacramento, I think was number five. And then I may have that, it may be six or four, but it was well within the top 10. And Miami, I looked up and down the list because people have been telling you to buy it. I mean, I actually just didn't see it anywhere.

- I think it's interesting. I mean, you're seeing a lot of weird effects right now and I think it's going to take a year or so for the, for things to kind of shake out and become more clear. I mean, there was a report that came out a month ago that looked at the cities with the highest rent growth since March. And number one on the list was Newark, New Jersey. And it just took me aback for a second that was and look all these were were cities, so they weren't counting suburban areas and resort areas and things like that. But you know, there's a lot of kooky information out there right now. And I think it will take a while to shake out, but certainly you're looking at Madison and it ranks very highly on every list of quality of life.

- Yeah, there are two bad things about Madison and only two, and one is obvious. The weather really is bad. And now having been away from it for 18 years, I have no desire to ever live in that kind of weather again. The other is it's not a very diverse place. And I think that makes it a much less interesting place to live than a lot of places are. But otherwise there's just nothing to say against the city, but it is sort of interesting. I mean, it's a university town, which helps a lot. But there are a lot of great Midwestern university towns Bloomington, Indiana, and Iowa City, Iowa, Ann Arbor, Michigan, and they haven't done, you haven't seen this kind of surge that you've been seeing in Madison, so I find it kind of interesting. But also just sort of interesting that Sacramento, again I don't think would show up on a list of usual suspects when you would think of, oh my God, here's a place that's really poised to benefit from the next wave and it seems to be doing so.

- Right it's, you know, it's interesting. I'd love to know how much of that is due to Bay area exodus. I mean, Sacramento is three hours by Amtrak from the Oakland station. So ostensibly, I mean, I've done a day commute from Sacramento to San Francisco in the past, it's doable. So I wonder if that kind of fits in that like affordability, but high density, walkable, like there is a real downtown core emerging in Sacramento as well. So whether that kind of fits into that Beacon and Santa Cruz thesis.

- So we have a question from Amalia who, and by the way thanks to our Amalia for obtaining Brad for this hour today who is on our board, asking what way, so this was a little bit of a plant question, what are the ways that Common is innovating in terms of new uses of existing spaces?

- Yeah, absolutely. So one of the questions that I was always asked prior to COVID is, you know, we're known for co-living, and so, hey, when is common getting into coworking? And I always made a big stink about like, hey we're focused on residential and the residential experience, we're not getting into office. And you know, then COVID happened. And everyone who is in the multi-family space is now in the office space, whether they like it or not, because everybody who lives in our building is working in our building. So one of the big areas we've been innovating and pushing is just how do we create more working space, space that our tenants can work from home, particularly if they're in studios, micros, or co-living where there not be good space in their unit to work. So the great part is that can also be a revenue generator for the building, for the owner. Convert the game room convert the lounge, convert the leasing office, which you don't need, to working space. So we've been pushing a lot of those innovative uses of space, particularly to just free up working space for our tenants. You know, we may push it so far as like, you know, can you use a vacant unit for two weeks, frictional vacancy as office space is something we're looking into actively right now. So really trying to push the boundary on how do you use that marginal bit of space to improve the tenant experience and generate incremental revenue for the building.

- Were you doing any sort of, and by the way, again let me just remind the audience that you're welcome to either type questions into the chat box or just to raise your hand and I'll recognize you. So surely you've had people leave. You were talking about how in March and April, your renewals were low. Are you surveying people and asking them about, will they come back or they expect to stay, where they're going when they leave you? What do you, well, first of all, you're doing that kind of surveying, I have with suspect you would be. And what are you finding out from that?

- Yeah, so we do. We do exit surveys for everyone who leaves Common, tenant wise. Often people don't know. I mean, particularly over the last year, people who, you know, a huge flood of people, certainly anyone who is here on a visa, anyone who considers home to be somewhere else, left. They left in March, they left in April, they left in May. So that's point one, they don't know when they're coming back. Many of them aspirationally want to come back, but you know, they lost their job in the restaurant industry. You know, they lost their internship or their job. They aspirationally want to come back, but they have no idea when they're coming back. That's an economic question. You also had a huge number of people moving back in with their parents, which overlaps with the previous group, but it's not perfectly. If you chart the percent of 18 to 29 year olds in the US who live with mom and dad, it's just astronomical hockey stick up into the ruck. Like if mom and dad's house were a startup, it would be going public for a couple of billion right now. That has been really the story in the multi-family housing market over the last couple of years, is just the massive, massive number of people moving back in with mom and dad.

- But after the great financial crisis, you had some attenuation of that, right? And we were getting down to more normal levels, and then a big return up. And I mean, if somebody's going to, I mean, anecdotes are anecdotes, but my daughter teaches at the University of Illinois, Chicago and her lease in Chicago expired and she was teaching online. She said, do you mind if I come home and live in California and not pay rent until they come back to class? And I mean, she went, when they're back live in class again, she's going back to Chicago, but it just, it was like, sure, of course it made all the sense in the world. So that's why I was thinking, there must be a good number of people who are in those circumstances where they know their job will require them to go back to work where they were at work, and then they got to go back to the city where they were in the first place.

- Right, yeah, I'm long-term bullish on cities and people returning to the hubs. They just may not be quite the same hubs as before, and some percentage of them will be permanently remote, you know, we'll be a little bit more flexible. So I think it will impact in subtle ways that we don't entirely know yet today.

- So let me, you mentioned the issue of people who were waiters leaving because there's no jobs in restaurants right now. I mean, is that your typical tenant? What is the profile of your tenants?

- Yeah, so I assume you mean in the co-living suites.

- Exactly, yes, sorry.

- Conventional, it's pretty typical and dependent on the area. But in the co-living suites, it's not that fundamentally different than the people in the studio and one bedroom apartments, just maybe a little bit further in their career. So, you know, we don't look at co-living, and there there are other people who run co-living and design co-living who think about it as an extension of the student housing experience. That's not how we view it, because really what we see in the deeper part of the market are, you know, it's not the 22 year old who misses dorm. It's 29 year old who wants to live in a highly amenitized building in a nice neighborhood, but can't quite afford it yet. So they move into a co-living room, and then they get a significant other, they get a pet, they get a promotion and they upgrade to a studio or a one. So we actually look at co-living in these hybrid buildings as lead generation for your larger units as well, people upgrading in place. So it's a wide swath. We have a lot of essential workers, a lot of teachers, a lot of nurses. We have a lot of, I would say, junior white collar workers, people working in media, in finance, in technology, it's a more junior version of your typical kind of class A building audience.

- So do you underwrite these kinds pretty much the same way you would underwrite a non-color living tenant?

- Absolutely. We don't say any, if we look at our bad debt through the pandemic it's stayed between one and a half and two and a half percent, which is on par with conventional class A multi-family in the cities. Our in our workforce housing portfolio has had substantially higher bad debt rates, more in the in the 10 to 15%, more in line with the NMHC numbers you see.

- So let tell us a little bit about what is it that characterizes that workforce housing, and can you even do it in the high price cities or is that more reserved to cities that are more affordable to begin with?

- Yeah, it's an interesting, it's nuanced question. So we look at workforce housing as kind of naturally occurring affordable housing. That's why our brand is Noah. And so what we really saw is that a lot of the innovation over the past 10 years that's happened in the residential world has been focused on class A. Companies adding gadgets, adding services, adding value, add amenities and all that's great, but you have 58% of multi-family housing stock in the US are what you would call a workforce, anywhere from kind of class E to class B plus, a lot of suburban assets, a lot of garden style, a lot of low rise, and there's not been a lot of innovation there. There's not been a lot of technology introduced, and I hope I'm not offending anyone by saying this, but the average capability of property managers is much lower. You have a lot of people still managing with a box of receipts in the closet. So basic technology can really level up the quality of management in many of these assets. And then introducing things like security deposit replacement, insurance alternatives, stuff like that, is just hugely value add to these workforce housing projects. We have pretty strict brand related rules and guidelines that we don't want to be coming in when the business plan is about displacement, when it's about, hey, we're gonna take this underutilized asset, get all the tenants out, put lipstick on it, turn it into class A, and rent it out to new people. We have to be pretty strict about that because we're a consumer brand. So we're primarily targeting assets in areas that are affordable just by their location. So we started doing this in Hampton Roads, Virginia, expanded to Winchester, Virginia. Just expanded to Woodbridge, Virginia, in the DC Metro area. We're going to be doing our first in the Boston Metro area starting pretty soon. So you have to kind of do this, or typically the business plans we see in areas that are kind of, you're not going to get a rent increase by gutting and renovating the unit and putting lipstick on it, so therefore the tenants don't have a target on their back. Rather good management, you can add five, 10, 15% NOI.

- So I can't help but be curious, where in the Boston area is affordable?

- No, there are certainly areas you get out into the burbs, you know, a place like Dorchester. We're doing some--

- Okay, so Dorchester is, what's striking to me, I lived in Somerville for a little while right next to Cambridge. And I lived there because it was cheap, this is when I was, my girlfriend and I were very, very young. I remember we paid 333 bucks a month for 330 square foot apartment. It's not cheap there, Somerville's ain't cheap anymore.

- Somerville's not cheap.

- So I sort of imagined that the whole area had been gentrified by now, but I guess Dorchester is an exception. Tell us a little bit about, oh before I get into my next, I want to just come back to your point about non displacement. Will you buy stuff in rent-stabilized areas or do you see that as something that discourages you? And I don't mean like Oregon or California style rent control where you can get CPI plus five or 6%. I mean, like in a place like San Francisco, though it's expensive anyway, where you can only raise rents by 60% of CPI. Do you look at that as a factor in determining where you invest or where you manage?

- Yeah, just to be totally clear, I mean, we're a management company. So it really comes down to, every deal we look at, we underwrite, we say, hey, you know, usually we work with programmatic partners, people who are doing the investment, who are buying the asset and we say, hey, this is what we can do. These are the numbers we can produce. You know, sometimes it makes sense, sometimes it doesn't. In areas with strict rent stabilization and rent control regimes, obviously you're not going to get a rent lift, but you could still get some operating income. operating efficiencies. So can we operate it with fewer leasing agents because we're moving a lot of the operations virtually? We do a lot of robotic process automation on the lease administration and ticket management side. So we often cut roles like assistant property managers, things like that. You know, you just need fewer bodies doing paperwork on site. So you are often able to get some operating efficiencies, depends so much on the site. I mean, some of these assets are run so lienly that it's tough to get anything. And in that case, it just doesn't make sense.

- You know, I'm looking at some of the people who are watching right now who are apartment owners. And one of the things, the themes I keep hearing is more and more people running apartments, sight unseen. Do you ever get to a point where like the vast majority of apartments are rented out that way? Clearly the efficiencies arising from that would be enormous.

- Absolutely, I mean, prior to COVID 24% of our leases were signed without an in-person tour. So that was through some sort of combination of virtual tour, conversation with centralized team. We're also really good, in order to do that you also have to be good at your marketing channels targeting people who are newcomers to a city, because many of them want an apartment before they show up, and they can't necessarily make it to tour. They just need a place to live. So that was a big, 24% of all of our leases came through those, didn't tour in person. Obviously when COVID hit everything moved online because nobody was touring. So then it was just almost by default it was a hundred percent. We've returned to kind of a middle ground. I think we're in 30, 40% are assigned site unseen. I think the things that are really moving the needle there are going to be, you know, also remember unstaffed tours are another thing, given some of the cloud-based lock solutions that you have it's easier to give a lead access to a vacant unit and say, hey, you know go check it out between these hours. Check in at the front desk, but you're not necessarily going to have someone touring with you. So there's hybrid solutions too that make sense for some leads that do reduce staffing need.

- So let me ask about financing. Is the co-living business model amenable to getting traditional sources of financing, or are there complications as a result of--

- Yeah, absolutely. So at the end of the day, the closer you're able as a developer, as an owner to hue to a more conventional layout, the easier it will be. The rule of thumb we've found is if no more than 30% of your units are co-living, you will get identical financing terms to a conventional multifamily building. So that's usually the rule of thumb we give. And that's why for many of our ground-up developments, we're building, our developers are building a mix of co-living studios and ones. And that's perceived by lenders as, and by certainly by LPs, as being no riskier than conventional multi-family. It also depends on the type of co-living units that you're specifically building. The least risky, obviously, is to build three and four bedroom apartments that look very traditional, very conventional, and we can operate those as co-living. You're not going to get as high of an NOI premium as, you know, some owners build five and six bedroom or even more units. So it all depends on the financing. There are some owners who say, hey, I'm not concerned about financing. I'm really just concerned about NOI, and they go and build 12 bedroom apartments, where it's legally allowed to do so. And, you know, we operate those as well. There's different, I mean, you get into like very different constraints around, you know, you're building basically an industrial kitchen at that point with multiple fridges, multiple stoves to handle that many people.

- So the thing that also goes along with this is parking. So do the properties you do ground up development for have more parking than a typical building with three and four bedroom apartments, or is that about the same? And that has a big impact on cost, of course.

- Totally, so this is, it's actually a big accelerant to us in a lot of markets. In many markets parking is tied per unit. Whereas obviously, we're occupying per bed. So often you can decrease the amount of parking you need to build, which is something that's appealing to a lot of developers and owners. There are a lot of ways, a lot of people in our renter base that live without cars. In a place like Los Angeles, we see about 60% of our tenants own cars. And, you know, we're not in Santa Monica and Venice. We're on, I would say, the near West side. Places like Koreatown, Hancock Park, West Adams, places like that. And we absolutely see people living, and successfully living without cars. Even in South Florida, we see people living without cars. So I would say that's increasingly the norm, is having less than one-to-one parking per co-living unit ratio.

- And you don't see COVID changing, I mean, one of the things we've seen as a result, some people who as a result of COVID, is actually a big increase in people acquiring cars. And of course none of us we really know if that's permanent or not, but it is sort of, after years and years and years of talking about decreasing dependence on the car, we in some ways now seem more car dependent than we've been in a long time.

- Yeah, we haven't seen that as much at Common in terms of our tenants increasing their car ownership, increasing the need for parking. It's certainly a trend that we've seen studies about. I think ultimately one of the biggest existential risks that cities face is under investment or even a death spiral of transit systems. You know, certainly this is something we're looking at in New York. You know, cuts in service plus increases in fares, decreased ridership lead to deeper cuts in service, lead to greater increase in fares, lead to deeper cuts and ridership. It's a bad spiral. And I think one of the scary things for us is, you know, will cities, will these public transit systems recover in a way that justifies investment. But I would say our tenants are finding all sorts of ways to get around, both public and private. Whether it's bikes, there's been a big investment in bike infrastructure, huge increase in bike ridership through COVID, which we've certainly seen. And then obviously ride share and mobility alternatives such as scooters. So with that we're coming up toward the top of the hour, and we like to not overtax our guests or our listeners. So Brad Hargreaves, thank you very much for spending some time with us this afternoon. Again, thank you very much for joining us this afternoon, and have a very safe remainder of your day.

- Thank you everyone.

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