Perfecting Your Strategy, Process, & Product With Scott Choppin | S3SP2
In this special episode of the A.CRE Audio Series, we feature Scott Choppin, the CEO and founder of the Urban Pacific group of companies, a real estate development company based in Southern California. In this conversation, Spencer and Sam consult Scott for his insights into his firm’s real estate strategy and unique projects on the development side, which include their Urban Town House initiative, pairing capital with multi-generational rental housing.
As we’ve emphasized in this season, both strategy and action are required for successful commercial real estate deals. This special episode with Scott highlights how he and his firm have navigated the last two plus decades and successfully honed their strategy, process and product to carve out a successful niche in a complicated workforce housing sector in Southern California. Watch below to hear advice from seasoned CRE professionals on commercial real estate strategy and execution in an interesting part of the industry.
Perfecting Your Strategy, Process, & Product
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Episode Transcript
Announcer (00:01):
Welcome to the adventures in CRE audio series. Join Michael Belasco and Spencer Burton as they pull back the curtain on everything commercial real estate, and introduce you to some of the top minds in the industry. If you want to take your skills to the next level and be part of a growing community of CRE professionals across the world, this is for you.
Sam Carlson (00:24):
All right, welcome back. We are still in season three, we’ve got some really interesting content here for you today. But I want to say just on the heels of season three, we’ve been really focusing a lot on the deal-making and the deal doing as you know. We thought it would be fun as we create additional episodes and podcasts in this season in particular, to start teaming up and getting the input and opinions and ideas of people in those particular phases. Today, we’ve got a special guest, Scott Choppin from Erwin Pacific, and we’re going to be talking, we’re not entirely sure what the topic is, and we like that. If I could be completely honest with you.
Sam Carlson (01:09):
In fact, the discussion leading into this podcast today was extremely interesting. I don’t know where it’s going, but I do know that you’re going to get insights into the development side, as well as other things happening from an actual deal-doer and maker in the business. Scott without any, again, this is a conversation I’d love to hear more about you. Our audience would love to get to know you, so why don’t you go ahead and let’s start by an introduction of you and your company to the adventures in Siri audience.
Scott Choppin (01:43):
Sure. I appreciate that, and great to be here, guys. Thank you for the invite. Just a little bit of background. I’m Scott Choppin, founder and CEO of the Urban Pacific group of companies. We’re real estate development company based in Southern California. My background and the businesses I’ve been doing this my, almost my entire adult life, started my family was in the development business, so I started working on job sites when I was 16, picking up trash and doing the stuff that teenagers do and not liking it by the way, rebellious teenager. Then fast forward to when I was about 18 or 19, I finally, that all came together for me where I decided that with the background, I knew about real estate development. I wasn’t real estate developer.
Scott Choppin (02:30):
I was too young at that point and the idea of being an entrepreneur and working for myself and those merged together to give me the plan I needed to execute in order to become hopefully successful in the future when I did that, which meant go to college, get a degree in finance, which I did. Then I spent several years as we were talking about earlier, working for some very large development companies. One was called Coffin and Brode, another one called KB Home, which is a home building company, but I worked for a division of theirs that built apartment buildings on behalf of the corporation, so this wasn’t a retail offer. This was a corporate investment structure, and I spent several years there and then worked for a couple of other companies.
Scott Choppin (03:17):
Then in 2000, the year 2000, I left to form Urban Pacific. We celebrate our 21st year of operations as our own development company with me as the lead strategist, CEO, and founder, and then fast forward to recently, we focused on urban infill that entire 21 years, and then the last five has just been all on workforce housing, our specific creation of a specific product type. Then just a little bit about me, family background together and married to my wife Becky for 28 years. Then we have three kids, 20 years old college sophomore, actually junior this year, and then my younger son is a senior in high school and my daughter’s a freshman. Actually, they’re both in high school together this year. That’s in a nutshell about me.
Spencer Burton (04:13):
Good. Scott, first off, thank you for joining us. You’re a true seasoned developer, all the bruises and cuts that go along with it. I spent the first decade of my career in development. I intentionally transitioned into an investment role because I don’t have the will that a true developer takes to do it, so I’m really excited to have you on. Let me ask you to kick off the discussion. You described 21 years as a developer Urban Pacific, and then you said the last five or six years, you transitioned to exclusively targeting the workforce housing space. Why, why that transition? What was it about workforce housing in particular that interested you?
Scott Choppin (05:04):
No, I appreciate that question. Part of my background working at Kaufman or bro or KB Mates as we called it, multi-housing group was the name of that. We developed affordable housing project, so rental housing that uses government programs to subsidize the rents. What I always identified in that was in the family, a product that we did, family housing, there was just a vast need of housing, never enough. That’s one of the flaws in the government-subsidized programs. They’re very beneficial when they’re built, but they’re incredibly expensive to build, and there’s always a finite amount of subsidy. The government can only fund so much subsidy before it runs out. There’s never enough and never will be enough. It’s always finite. I don’t say that’s a bad thing.
Scott Choppin (05:54):
That’s just the reality of that. Through that 21 years, we focused on urban infill. We did market-rate rental. We did condo product. We did some affordable housing and I really always enjoyed doing the rental housing. That was like, when I look at our track record, we’ve done most rental housing. That’s what I’ve always gravitated to. About five years ago, we were finishing a series of projects. This would be 2016, 2017 era. We had mostly recovered from the recession. The recession officially ended in 2010, 2011 from the 2008 recession. We’ve got, bought a bunch of distressed asset, bought land deals and half-built buildings, completed those, did really well, but in 2016, 2017, there was a weird little flat spot in the market where investors and lenders had pulled back.
Scott Choppin (06:48):
They started to perceive that a lot of product was starting to come online in that era right now that we’d fully recover from the recession and people were gearing back up. All the big boys were starting to gear up and do a lot more stuff, so the lenders and investors had learned their lesson from 2008, so they were really wary. They were really hair-trigger to pull back. Not a bad thing. I don’t say that’s a bad thing. We were that way too. That this flat spot in that era that really prompted us with, we’d sold a bunch of stuff, we did really well, but it just, how to be in a moment of pause and go, “Well, okay. So what is out there? What should we be thinking about? What can the future look like? And particularly how do we differentiate?”
Scott Choppin (07:30):
Because one of the things with all this product coming online, it was true. It was, it was all these big Trammell Crow and JPI and all the big development guys in the apartment sector. I basically made the determination that we didn’t want electric. We wouldn’t, and I didn’t want to choose to compete head to head with those companies. They would kill us on capital costs on the ability to execute. Particularly what I was thinking about in that era was, what happens when a recession comes. We had been whatever, five or six years out of the 2008 recession by that point and going, okay, we got another five years plus or minus till the next one come, we’re very vigilant as the termites.
Scott Choppin (08:14):
I just started to look for a product category that was going to be recession resilient, which is that term I created several years after we started to look for it, but I wanted a product type that would be defensive and a downturn that had some good social impact feel to it. It wasn’t just we’re there to make money, and by the way, we do orient around being profitable. We need to take care of our families, take care of our investors, produce yield, get projects. We landed on this because of my background in family housing, we started thinking about, is there a housing type we could serve a moderate-income family? You got luxury with high-income families or individuals. You got affordable where you’ve got lower-income families.
Scott Choppin (08:57):
What about those people in the middle? They’re working class, with a middle-class and they make good money, but they don’t make enough money to necessarily afford the brand new product. More importantly, there’s nobody really in the development marketplace, that’s serving them. They’re building one-bedroom apartments in downtown Los Angeles, your family of four or six or eight, we have families that are that big in our housing, that housing doesn’t make sense to them. We ultimately within a couple of years of starting that, I had developed what we now call the urban townhouse model. That’s our name for it, which is as we described earlier, is a five-bedroom, four-bath, three-story townhouse product, attach, row home style, two-car garage, nice finishes, basically market rates standard, but we’re basically because of the five-bedroom four-bath serving these, what ultimately are multi-generational, multi earner, middle-income families.
Spencer Burton (09:53):
Interesting.
Scott Choppin (09:53):
That was a lot.
Spencer Burton (09:58):
First off, the pivot makes a lot of sense, if you can even call it pivot. You’d had extensive experience in the multi-family development space, but pivoting now to call it a niche within that space, made a lot of sense. Especially the previous cycle. I think we’re in a new cycle post-COVID, but in the previous cycle, it seems like everyone is doing luxury apartments. In fact, everything is branded as a luxury apartment, whether it’s luxury or not. Carving out a niche and call it workforce housing makes a lot of sense. Many of the listeners know I spent six, almost seven years building what’s essentially workforce housing in central America.
Spencer Burton (10:37):
One of the biggest challenges we had was the razor-thin margins of that business. Is that a challenge that you experienced? And if so, how are you handling that? How are you able to earn a profit for yourself and your investor partners while also delivering a product that’s relatively affordable?
Scott Choppin (10:56):
Yeah. It’s the age-old question. How do you have the rents be affordable, and we’re in California so that we have the highest cost structures in the United States like statewide. For sure, we’ve been dealing with that for a long time. Really for the UTH program, the answer is there are several different parts of the model or the design, or the type, topology of the unit that fulfill this dual role or dual mandate of keeping the units affordable and in comparison to the market while making a profit. That’s the challenge. Really where we see the real center of that capability to do both of those, is in this five-bedroom unit. Why that is important is because we don’t [inaudible 00:11:53] or restrict our units.
Scott Choppin (11:55):
If you do government-subsidized housing, they give you extra money. They government subsidy and they buy down the rent, basically. You just charge less rent, and probably for your product in central America, it just got the rents down. But what is left out of that model, and it’s no criticism, it’s highly needed. It’s great product. It’s the most amazing, valuable product. Government-subsidized, [inaudible 00:12:20] as they call it. But it’s not enough to meet the larger needs of the marketplace and it’s not meeting these middle-income families. When we started to really, where this came out of, is we developed one. When we started to explore ideas in this flat spot, in this 2016 era, we were looking at various different things.
Scott Choppin (12:40):
What we knew is we didn’t want to do the podium mid-density in urban product, one-bedroom studios that everybody was doing, all that supply that’s coming online. We started just explore different projects, different land sites, what could we do there? And we landed on one specific project that had an interesting dichotomy. One was, we had a specific unit count that we could develop on the site, but we weren’t limited on the size of the unit. I go, “Okay, this is interesting. I hadn’t seen this before.” We bought the land really well. We bought it inexpensively, so gives a lot of latitude to experiment. We weren’t going to mess it up too badly if the experiment didn’t turn it out.
Scott Choppin (13:25):
In that project, we said, “Okay, we can make the units bigger.” I go, “Okay, I’ve never had this problem before,” so I said, “The Arctic, how many bedrooms can we fit?” I go, “Okay, if we’re going to be limited on units, but can do a big, let’s make them big.” We ended up developing a two-story, four-bedroom, three-bath townhouse product with a garage. That was what fit on the site, and it worked. In fact, we had to rent at the time, the rents were 26.50. When we finished that and sold it in that early phase, we sold a lot of these projects. Now, we’re holding everything. We sold it to a buyer who didn’t want us to rent it. They wanted it empty. They wanted it to occupy with their own tenants.
Scott Choppin (14:04):
They manage it themselves. They turned around and they put it out on the market, 32.50. I remember calling my partner in the deal, he’s investor and partner in the deal, and I was like, “Do you think he could get these rents? What did we miss? We missed something here.” I call her immediately. He was like, “I don’t know. I don’t know if they’re going to get them.” They ended up getting them, that rent. I think there were like 2950 to 3250, but way above 2650 was the bottom line. That was really the seed of the UTH model. Basically what we found was we’re able to generate a high whole dollar rent, relative to the cost of the unit. Development is always, what do you generate in income as a function of the costs that you expanded to develop that income-producing unit.
Scott Choppin (14:51):
In fact, we call it NOI to costs, which is Net Operating Income that you generate relative to the dollar that you spend to do that. These high hold dollar rents, while they’re higher rents, what’s really the secret about it is that these five-bedroom units are shared by family groups that are predominantly multi-earner, multi-gen families. I think a Hispanic family that lives in Southern California, and they have let’s say eight people in the family, or six or four. We have all kinds of different family sizes. But the key is that they’ll have usually three to five income earners in the family, and that’s the real secret to this because most people, they rent to one income, or at least statistically you see in the media, they go, “Oh, you need to make $47 an hour to afford the average two-bedroom unit.”
Scott Choppin (15:38):
I’m making the stats up. You guys get the point. What’s not talked about is what if you have two earners or three earners or four owners, and all of a sudden it throws them into a much different category of income relative to the rent. While the rent may be 3,500 a month, that’s 35 to 37 a month, as a percentage of the family’s income, it starts to be at, or below 30%, which you guys know is the magic rule of thumb for how much rent should a family pay, where they can have good leftover discretionary income and 30% of income is the magic number. I would say, that’s the right or wrong number. That’s just the standard. The affordability is naturally occurring. It’s produced because the number of incomers in the unit, because of the large bedroom count and the family structure of these economic sharing lifestyle families, affords it more naturally and easily.
Scott Choppin (16:31):
In fact, the rates of poverty among multi-generational families is incredibly low. When families combined together from an economic sharing lifestyle, which by the way, most of these families from, if they’ve immigrated or they’re from a culture that lives multi-generational, it’s their natural way of having their family live together. They wouldn’t even think to have their grandparent live separate, that would be foreign to them, or even your adult kids. I don’t know about you guys, but when I was 17 and a half, it was pretty clear with my dad and I, it was time to get out. I don’t fault him, but for me now with my family, I go, “Well, stay.”
Scott Choppin (17:17):
We got to live together appropriately. My oldest is at college and he, I don’t know if he’ll move back, but orientation was like, “Hey, like stay, if you want. Don’t feel forced to go out and get a job that you got to then pay rent, and that money goes down the rabbit hole.” I think the idea of economic sharing and multi-generational living is starting to become more accepted in the American culture, and that’s partly to do for economics. Economics are requiring families to live together, to produce the incomes that make them have a good life, or culturally, this is how the families approach it. They may be practicing economic sharing in two-bedroom units side by side. The market hasn’t given them a unit where they can practice their multi-gen lifestyle. That’s what our unit does.
Spencer Burton (18:05):
Here’s a question that hopefully dovetails into that last statement you made. In fact, I was thinking this, as you tailed off, I was like, “Oh, well, this is perfect.” You have this moment where somebody buys your unit, they rent it out. You guys have maybe this epiphany of, “Hey, well, what if we’re missing?” We started out maybe more broad in this sector, and now we’re even going more narrow. Did you change your product as far as the design of the product to accommodate this specific behavior?
Scott Choppin (18:35):
We did. Yeah. You’re the first person that asked that question to watch that transition. When we saw the success of the four-bedroom, I called the architect and I go, “Okay, so this four-bedroom were great, what do we do to enhance that, to amplify that? I go, “Five bedrooms, six bedrooms?” So we batted it around a little bit, and we landed on probably six seemed too extreme, although five is pretty darn extreme itself. But what we did is we went to a five-bedroom model because we did some math though. We think this whole dollar rank can grow even more, enable the capability to economic share even further. But we did. One key thing is we tightened up the footprint. We went to three story model with the garage, ground floor garage, but we shrunk the footprint just to be enough to do the garage and one bedroom and bathroom that’s on the ground floor, to accommodate somebody who’s got mobility issues like a grandparent or an older in-law.
Scott Choppin (19:38):
In fact, that’s a standard in all of our units to have that ground floor, bedroom, bathroom, but we shrunk the footprint to as tight as we could, in order to put more units on the ground. Increasing density is always the move that developers are looking to do. I got to get more units appropriate for your product and your strategy of your business plan. That actually was a key move for us because when we look back on our earlier projects, we could have gotten more units in each project, but that’s fine. It was the experiment and approved, the things that we need to prove, and now we’ve standardized to that five-bedroom, four-bath, three short townhouse. That’s in fact, we really do every project that’s the predominant product type.
Scott Choppin (20:23):
In fact, in many projects, that’s the exclusive design, which also gives us some capabilities and just doing production-oriented housing. When we build, we’re just doing the same unit over and over again, so the subs know it, our designers know it, we’ve got the same specs. Then just recently in the last probably year, we’ve started to experiment a little bit with a two-bedroom, three-story townhouse with a garage on the ground floor, and that accommodates some additional, let’s say you’d had a density that you could get 55 and a half units on a site. We would normally round down to 55, but now we’re going, “Hey, can that two-bedroom fit and get that half a unit more of density.” It only fits in certain places, but we’re just at the edges of the design of the core of the five-bedroom design doing two bedrooms.
Scott Choppin (21:13):
Then more recently we’re looking at doing what’s called an accessory dwelling unit. You guys may have talked about that [inaudible 00:21:19], and we’ll actually garage convert one of our new garages into this studio unit. We have literally one project in one garage that we’re looking to convert because we want to see the experiment again prove itself out. We’re really big into testing new things on a basis where if it doesn’t work, we’re not killed from an economic standpoint. And if it doesn’t go as well as we thought, “Well, okay, fine. That experiment didn’t work.” But we’ll start to add on the margins of this core design. We know the five-bedroom works, that solid, that’s proven over several projects, and now we just start to enhance them with these new designs.
Spencer Burton (22:01):
This is really interesting, Sam. Season three, it’s all about deal-making. When we say making, it’s very much developing strategies, identifying assets, and then the deal doing is actually executing on the plan. What you’ve described first is this process through which you developed a strategy, and it just fell in your lap. You were at the right place at the right time, and then you were developing, you were in the business, and all of a sudden, you developed this unit that was larger than the norm, larger than everyone else does, and it turns out there’s a demand, and it sounds like a fairly large demand for multi-generational housing. Then you talk through some of the aspects of the development portion, the doing. In an acquisition context, that would be the managing and you’re in the context of development, the actual entitlement, construction phase of the doing.
Spencer Burton (22:55):
Let’s talk a little bit about capital. I found when you’re in the box, it’s easier to raise capital than when you’re outside the box. At the same time, you need to be a little outside the box in order to carve out a niche in order to compete. Describe for us your capital strategy, both debt and equity, to the degree that you can share details. Great. But are you raising institutional equity, are you raising friends and family money, or syndicating? How does that work and what’s your reasoning for your capital strategy?
Scott Choppin (23:35):
The capital strategies evolved over time. Historically we were institutionally sourcing equity in debt, big institutional grade projects, larger 100 plus unit apartment projects. That was our historical background, and then the companies I worked for even previously to that Copper Brode and another company, were both institutionally sourced capital. But as we got into the initial phase of the UTH model, we very specifically did small projects because again, this experimental phase, I didn’t want to take on really, I didn’t want to do 100 units of five-bedroom when no one has ever done that. I’ve done that, I’ve been partners with people who are like, “Hey, let’s go big soon.”
Scott Choppin (24:23):
A couple of cases took some bats and work against us. We weren’t prepared, and having gone through a process of testing to know all the variables that we needed to pay attention to, of course in development as you know Spencer, there’s certain variables, costs and rents, and [inaudible 00:24:42] expenses that you know, but you can’t really know when you create a brand new product type, how that really performs. We started small what I call the demonstration phase, and that was all basically smaller investors. High net worth, small family office, not even friends and family. It was really just like I had a cadre of people that I knew who would invest at the size of equity that we had at the time. And that wouldn’t be stuck on this, such an extreme end of the spectrum of the product type.
Scott Choppin (25:14):
It’s like five bedrooms. Even now we talk to lenders and they’re like, “Wow, five bedrooms, is really like nuts. I’ve never heard of that.” I’m used to that, I’m prepared now, as I talk to new people, that we’re going to get that reaction. The demonstration phase was to do exactly that. Was to raise capital on a smaller basis with more entrepreneurial, high net worth, and family offices that knew us and knew our capabilities, and trusted us that we could go down the path of this. We did that. We actually did a four project series in the demonstration phase to prove the model. Did really well. I think our average IRR on capital was 23.06. I got a little bit updating to do, but we’re very healthy. No problem, demand was there.
Scott Choppin (25:59):
The rents continued to go up. That turned out to be really well. Then as we finished that, we moved into now the product, what we’re in is the production phase, I call it. Which is just basically bigger projects, more projects, more into the standard development model that we’ve practiced historically. Then that moves us now in the institutional capital domain. In fact, right now we’re in the process of raising a fairly large private equity fund that will be purely focused on developing several of these UTH projects throughout Southern California, just as a scaling solution to try to do multiple projects. But it’s really, you guys will recognize this, but I can’t tell you. We did the demonstration phase because I wanted to prove to myself that the product would work.
Scott Choppin (26:46):
I go, “I think this works.” We saw that first project but I needed to prove it to myself over and over, but we learned so many lessons in the operation production phase of right subs and right specs and we’ve got the right HVC equipment, and how’s the trust manufacturer working with this and networks of trade partners? I can’t tell you, and we’re still continuing to learn, but that demonstration phase was so valuable. Now, as we’re into raising the fund, it is the most valuable thing, because the question becomes, how do you know this is going to work? But what I’m experiencing with investors, they go, “Yeah, we have other people that are innovating new housing types.” But they’ve never done it, so they’re coming to raise capital and they’ve never done it. Not only have you done it, but you actually have a pipeline of deals, so our fund won’t be a blind pool. It will have not the entirety of the fund will is identified, but we actually have a series of projects. I would love to say we knew all this upfront.
Scott Choppin (27:55):
What I did do though fundamentally, was to be prudent is the word I use, where you go take some risks, but do it in a way that you won’t be destroyed if it goes against you. You proved it, so do it again, maybe build a little bit bigger project, maybe different location. Then you do that in several steps. And look, I’ve worked with people in the velvet business that were like, “Dude what are you doing? You’re doing a seven-unit project, a 15-year project.” I’ve never done that small in my life guys, really, but I was really encouraged to watch the process fulfill, and it fulfilled positively, I’m glad to say. But we didn’t know that at the time. We got kicked in the teeth. I don’t know if that answers the question exactly.
Spencer Burton (28:42):
Yes, it does.
Scott Choppin (28:43):
But it’s been evolving, we’re testing as we go along while we do it, and then you get to a place where you go, I feel very comfortable in all my variables and I can sit in front of an investor and go, “Yes, we’ve done it. Here’s our returns. Here’s our costs. Here’s our team. Here’s our trade. Here’s our land, all the things that go into the development model. And we’ve tested those at several occasions.”
Sam Carlson (29:07):
I want to just jump. I’m having so many just thoughts. Even from just a business perspective, but if I reflect back on some of the topics and things we were talking about in season three, we definitely miss things because Michael Spencer and I have a dynamic when we’re talking about deal-making and deal doing, but the nuance that you’re talking about, would definitely go back to a couple of things that are, I think really layer in very valuable insight into doing this. Here’s what I mean. Strategy. We talked about creating a strategy. One of the things that you need to create, first of all, your first idea, usually isn’t the last and actionable idea you come up with. You come up with some hypotheses. Maybe you test it out a little bit, and you find inefficiencies.
Sam Carlson (30:01):
Your ability to adapt is the, so first, there’s two things. One, identify the inefficiencies and two, adapt as quickly as possible. I think when I absolutely love, this is a case study in the entire, what was that episode three, I think maybe, or four, when we talked about strategy, this is a case study-
Spencer Burton (30:26):
It really is.
Sam Carlson (30:27):
…in doing that flawlessly. Sometimes like you said, and maybe I don’t like it when people say we got lucky, because honestly, luck is opportunities like a bus. There’s one coming around all the time. If you miss one, you’re good. You’re on the next one. You know what I mean? It took the experience and knowledge that you had to identify an inefficiency and opportunity. From a person listening to this, and I, Scott, this has been awesome. I’ve just been sitting here listening to all of these actual, real-life events, and I’m like, man, this guy is living it. Everything he did, he did the right thing. You got a strategy, niche down, he adapted.
Sam Carlson (31:11):
Today, we all want everything too quick. No delayed gratification. The fact that you have the wherewithal to think, listen, I’m not even going to take this to investors until I’ve proven it. That speaks to your character. That speaks to just your experience as a business person, because there are so many people who do not want to put in the initial reps and like, “Hey, this idea is good enough, buy it.”
Scott Choppin (31:49):
There’s a guy named Richard Wilson who runs a group called the family office club. He calls it pushups. He got to do pushups first. I always love that-
Spencer Burton (31:57):
I love that.
Sam Carlson (31:59):
There’s one phrase that I live by, and that is people vote with their wallets. If you don’t have a voting consensus, that means something, you don’t really have anything. Ideas are like, they’re all over the place.
Sam Carlson (32:20):
Exactly.
Scott Choppin (32:22):
Just a couple points there. A lot of this came from, you described me as seasoned and I laughed, because you guys you’ve been through it, and it wasn’t flawless. It was a lot of sleepless nights.
Spencer Burton (32:41):
Of course.
Scott Choppin (32:41):
…and no complaints about it. But it really was from those lessons in 2008, when you saw, I saw what didn’t work, or maybe the better way to say it is at the time, the way our company was structured, we did a lot of product that seemed to be the hot commodity. Condos in this particular instance, that turned out to be a total disaster. We got it. We made lemonade out of lemons at the end of the day, but it was brutal, and it really taught me that I don’t ever want to be in that position again, where I’m going to be in the middle of the pack. We’ve always been a niche player. Doing urban infill in 2000 was like, people thought we’re from Mars. You want to go into downtown LA, that place sucks. We’ve always been niche-oriented. But when I described all the big boys coming with all their product, to me, I was like, “Oh, that’s a sign. I got to be cognizant of that. I think to what your point is Sam, a lot of particular people who are new in the business, they look at the pack as the place to go.
Scott Choppin (33:51):
They actually go to the pack and might even settle right in the middle of it, and people who’ve done it a while, they go, “No, maybe I want to be on the periphery, but I don’t want to be right in the middle.” Because particularly, if the recession comes against you and you’re in the middle of the pack on rents, or product type, or location, or whatever, that all the big boys will eat your lunch all day long. In fact, the thought I always came with is if I’m going to head to head on a studio unit downtown long beach against the big boys, they will eat my lunch on rent deductions or reductions in a recession. They can drop their rents man. They got whatever billions in the bank, and I’m not being facetious here. This is literally true.
Scott Choppin (34:32):
Part of it is to be able to compete effectively in a domain that’s not overly saturated. That’s the strategic part about it. I’ll share a quick example. I had a guy call me and I think he was looking at some deals on like Chattanooga. It was a value add deal, and he just called me just as a favor to talk to him, so I gave him some advice. No, he was developing a new building in Chattanooga, and he said, I said, “What’s your mix?” He goes, “Oh, it’s all two bedrooms.” I go, “Okay, why did you choose that?” He goes, “Okay. Because that’s what everybody, that there’s most of that product in Chattanooga.” I think Chattanooga is the city. I said, “That’s exactly the place you don’t want to go.”
Scott Choppin (35:13):
You don’t want to do what everybody else is doing. Now, there’s an extreme, you can do what everybody else is doing and be in the middle of the pack, or you can be so far off the spectrum that, if I did 25 bedroom apartments, people would think I was insane. They’d be like, “Okay.” There’s somewhere in the middle where you’re going to be right at the margin where you can produce a valuable offer that’s competitive, that’s not overly saturated, so you’ve got to look for that. I sit here and probably make it sound easy. It’s not. But that was part of the reason for the experiment is, but what I did know fundamentally is I don’t want to compete in the middle of the pack. I want to have a differentiated offer.
Scott Choppin (35:49):
I knew, but to your point, we learned a lot on execution. I’ve been a developer for a really long time and we’re always learning lessons, and the hardest part about it, just to share on all that here is, just to have the capability to admit to yourself that something didn’t go well, and maybe there’s a lesson there to learn. In fact, with my staff all the time, I learned now better, but I used to always ask, ‘Well, why did that happen? Like what happened there?” What I figured out after a couple of years, people thought I was going to punish them. I was on a witch hunt trying to find blame and I go, “Oh, I’m not here to blame you. What I’m here to do is figure out what happened, what went wrong, and let’s learn the lesson and let’s put some practice or let some system in place so that never happens again.”?
Scott Choppin (36:38):
Because we know mistakes will be made. We know it’s inherent the developed processes is incredibly complex. And our job, my job is to look to reduce complexity and those systems, that’s teams, that style of product, that’s locations, that’s financing, all those flow into that, so we’re looking to ever simplify, not, we can never make it simple. Development is complex and always will be, but you can always look to make something better. Whatever. Anything. There are thousands of those that we’ve done over time, so it’s the strategy, plus that learning.
Spencer Burton (37:17):
That iterative process.
Scott Choppin (37:19):
What Sam was saying, I’m saying in different words, but you have to have both. Because you could have a great strategy and do crap execution. You could be a great executor and be in the middle of the pack and be destroyed.
Sam Carlson (37:32):
You just summed up season three. That’s the entire thing, you guys, please listen to season three. There’s way more good stuff. But that is absolutely, if there was one thing that I came away with is, man, I tell you what, it’s one thing to get out there and have a really good idea, but the money is made and the success is had from-
Spencer Burton (37:57):
The execution.
Sam Carlson (37:57):
…beginning to end, and the execution is key.
Scott Choppin (38:02):
I would say in my observation, people that are in the development business, that may be newer, I’m more often seeing poor execution than I’m seeing poor deal-making or deal selection. Because it’s like an okay deal well executed, will make you money. But a brilliant deal, poorly executed, you’re going to lose.
Spencer Burton (38:24):
That’s why if you’re a private investor, you underwrite the deal. I’m speaking to the LPs now in our audience who are looking to place money in different places. But in the development game especially, it’s really about the sponsor, the developer, and their ability to execute, and less about the deal. Scott, thanks so much for your time. This has been great. Sam, I’ll let you wrap it up.
Sam Carlson (38:52):
Yeah. I’ve come away with, these conversations are really fun, especially again, on the heels of season three. It’s like we get to deep dive into all the cracks and crevices that we uncovered during that production window where we came up with all of those awesome topics, but Scott has added a layer of color to this that I think is very valuable. For people to learn more and connect with you Scott, what’s the best way to do that?
Scott Choppin (39:23):
People can find us at our website, it’s www.urbanpacific.com. Our contact info is on that. When people get there, there’s a red button that says, sign up. Sign up for Saturday. There’s an e-blast we put out, and what you’ll get there is basically, it’s, I read a lot economic trends, new things happen in the development business, pretty broad, but real estate focused, and we curate an email every Saturday, so that can be beneficial for folks to read.
Sam Carlson (39:56):
That’s a great resource. Thanks for being on here with us, Scott, this has been absolutely phenomenal. I’ve had a great time. I know Spencer has too, and the listeners I’m sure have loved it. Thanks for tuning in, and we’ll see you on the next episode.
Announcer (40:09):
Thanks for tuning into this episode of the adventures in CRE audio series. For show notes and additional resources, head over to www.adventuresincre.com/audio series. Would you like to learn real estate financial modeling in a matter of weeks and do it with zero guesswork? If so, the ACRE accelerator is for you. The accelerator is a step-by-step case-based program designed to teach you exactly what you need to know and in the order you need to know it. So you can gain both the knowledge and experience to take your career to the next level. To see if the accelerator is right for you, go to www.adventuresincre.com/accelerator.
