Clay Grubb, CEO of Grubb Properties, joined us to discuss Link Apartments, Opportunity Zones, and why he’s bullish on Los Angeles, San Francisco, and New York City.
Daily Beat: Can you please share the history of Grubb Properties and your Link Apartments development arm?
Clay Grubb: Our original background was building single-family homes in redline neighborhoods in North Carolina. My Dad helped people that were cut out of the system get into home ownership in the 1960s.
Over the years, we started acquiring multi-family properties and successfully chased yield. Coming out of the global financial crisis, we realized that there was going to be a huge need in urban markets for value-based housing, especially for millennials. As Marian Wright Edelman, the Founder of the Children’s Defense Fund, wisely said, “If you focus on where there’s a need, you always have a job.”
We decided that’s where we wanted to focus and developed our first prototype for that model in Charlotte in 2010. Our team learned from the experience and then built our first Link Apartments-branded community two years later in Richmond, Virginia. We’re now on the fourth iteration of it.
Daily Beat: Grubb recently launched an Opportunity Zone REIT. Why were you drawn to creating such a vehicle?
Clay Grubb: When we learned about opportunity zones, it was a perfect fit for us because 40% of our development projects were in those locations anyway. I’m not sure we could have designed a program more tailor made if we had written it ourselves.
All the experience and existing pipeline in these areas allowed us to launch seamlessly. We were very fortunate and hired Clark Spencer, who had been a SEC attorney at Clifford Chance. His depth of the legal knowledge that has been critical in our success.
Daily Beat: What are your thoughts on the political environment vis-à-vis opportunity zone sites?
Clay Grubb: It’s just mind-boggling right now how to wrap your head around what’s going to happen in the political sphere. We spend more time in our strategic meetings talking about political risk today than almost any other risk outside of maybe climate. Political risk is a real issue in America.
Daily Beat: What made you interested in the FiDi site at 8 Carlisle Street (AKA 111 Washington)? I know you also have a Long Island City project and one out in Hempstead.
Clay Grubb: We first got there through a good friend of mine, Rashid Walker who is our partner on all of our New York deals. Our overall strategy is to focus on anchoring off of large hospital systems and research universities.
We identify locations where there’s the greatest bifurcation between salaries and the cost of housing, which led us to Los Angeles, San Francisco, and New York City. Prior to the pandemic, if you made the median wage in LA and you wanted to buy the median home in LA, you’d have to wait 47 years just to save up for the deposit! New York and San Francisco were slightly behind at 43 years.
These markets really needed our product and we are very bullish on them long-term. Our philosophy has never been to build and flip –– we build for the long haul and have never sold one of our Link Apartments. We were able to find some really wonderful sites since March 2020 on a land basis we could have never achieved in the best of times.
Daily Beat: I gather it will be a rental and not condos.
Clay Grubb: Yes. We’ve sold about 4,000 condos in our history, but prefer building rental projects nowadays. Condos is a ridiculously tough business. You’re dealing with someone on the other side of the table who will never do business with you again. This is typically one of the biggest investments they’ll ever make in their entire life and their whole modus operandi is to get everything out of this transaction –- that philosophy never goes away. It can be very lucrative, but it’s clearly a boom or bust business.
Back in the day, we used to chase yield, but now we chase the need. If we can deliver a product at a good basis where people want to live and where there’s job opportunities, we have a really resilient investment. Locations where there’s a huge bifurcation between income and the cost of living is where we really focus.
When the pandemic hit, we didn’t have a single apartment community across from a mall. Around 20 years ago, our number one objective would have been to own there, but we pivoted 10 years ago when we realized malls aren’t as resilient as they used to be. Our focus on large hospital systems and research universities as anchors really paid dividends in 2020 and collections never dropped below 98% in any single month.
Daily Beat: Once an asset is stabilized, investors obviously run calculations to see if it’s better to do a cash-out Refi or sell. I know that you sold some older buildings in the past few years. What’s the process of making that decision?
Clay Grubb: If a property wasn’t part of our Link Apartments portfolio and it was a South East multi-family product, we sold it last year. We had an older brand under the Sterling Apartment label and we sold all those properties over the last year at a mind blowing premium folks were willing to pay.
I think some of the new buyers in the market might not appreciate the CapEx needed for these older properties. We were getting low three caps on 70s vintage product.
Our rule of thumb is that you never make an investment that you don’t want to be in at least 10 years. When one buys to flip, they often wake up 10 years later and still own it. If you focus on the long term and something good happens along the way and you get out early, that’s great, but it shouldn’t be part of the business plan.
Daily Beat: So it sounds like you prefer New York over Florida and Texas?
Clay Grubb: Yes. Lauren Cahill recently joined our team in New York from Avalon Bay. She was with the firm for 10 years and said they wanted her to solely focus on Florida. The reality is that you can build at the same cap rate in New York that you can in Florida and when looking 10 years out, I would rather be in New York.
Daily Beat: Should investors be concerned with over-supply the Southeast?
Clay Grubb: We love the Southeast, but at the same time, it doesn’t have the barrier to entry that you have in these gateway markets. There’s no question that many of these Southeast markets will get overbuilt.
Daily Beat: Will the rental growth be there with the rise in interest rates for the deals to work out?
Clay Grubb: I think the rental growth will be there because the reality is we just have a massive shortage of housing in every market in America. There’s a reason why homelessness is the worst it’s ever been because there’s no place for people to live.
Being invested in multi-family is probably the safest it has ever been. From that standpoint, if you’re comparing cap rates to a treasury, 3.5% seems fine, but I think there might be unseen issues on the capital side. Owning real estate is expensive, so although I think everyone is going to be okay, we prefer investing in new products with a lower basis and a higher cap rate.
Daily Beat: Where should investors focus the most when trying to reduce expenses on a multi-family property?
Clay Grubb: Our biggest expertise has always been on the utility line item, which has been a real differentiator since 1994. We probably have one of the highest ESG ratings of anybody in the multi-family space and got an 81 on the GRESB last year.
We rarely buy based on a situation where we can fix the expense side equation because so many folks in our business are bottom line focused. Owners typically do a great job of managing the expense side. We’re always focused on how to drive the top line. That’s an easy thing to find when there’s a lot of pain in the market, but in the current environment, it’s been harder to find.
Daily Beat: More specifically, where are you able to save on utilities?
Clay Grubb: Investing in top notch equipment and preventative maintenance. Tracking it and having everybody on the team appreciate it is key. All of our Link Apartments are not only LEDs in the common areas, but also inside the residents apartment, even though we don’t pay that bill. Ultimately, tenants are stretched on how much they can pay for housing and it’s either going to the utility or to us, so we really focus on keeping that utility bill as low as possible.
Daily Beat: Have you gotten involved in the SFR or BTR space at all?
Clay Grubb: No. We’re laser focused on Link Apartments. Bruce Lee wisely said, “You don’t fear the person that’s practiced 10,000 kicks. You fear the ones that have practiced the same kick 10,000 times.”
*The interview has been edited and condensed for clarity.