Real Estate Is Product Design
Welcome to the Real Estate Espresso Podcast, your morning shot on what’s new in the world of real estate investing. I’m your host, Victor Menasce. This is the Weekend Edition. We’ve got a very special show for you today. Today’s show is a recording from a talk that I gave in New York City earlier this year. On today’s show, we’re talking about real estate development through the lens of a product designer. Let’s enjoy today’s talk from New York.
At Y Street Capital, we’re five partners. We’re split between the US and Canada. I live in Ottawa, Canada. 90% of what we do is in the US. We’re in nine states. We build multifamily apartments, senior housing, storage, multi-tenant industrial, and we also do a fair bit of land development.
Projects
In terms of our largest project, Matt, I think you’re in this as well. This is in Colorado Springs, covering 1,783 acres. The perimeter of the property spans seven miles. We completed the planning commission proceedings last month, and we’ll be in front of the City Council Tuesday night as part of the annexation.
Master Planning Community
Our project is essentially a large master-planned community with a variety of products. The title of today’s talk is “Using Market Segmentation to Define a Product”. As someone with a background in the tech industry, I use a product developer’s mindset, always focusing on developing a product for a specific customer.
Our immediate neighbor to this property is Shriver Air Force Base, a US base command. This unique opportunity allows us to create something that is in support of that critical national asset. President Trump has talked about moving space command to Huntsville, Alabama. I can assure you this base is not going anywhere. This infrastructure is fixed to the ground.
City Expansion
We have discussed a potential expansion of the City of Colorado Springs with the leadership at Shriver. The expansion plan includes roughly 8,400 rooftops, four different densities of residential, retail, commercial, schools, fire stations, electric substations, and about 67,000 linear feet of roadways.
Due Diligence
When evaluating any project, you should look at three things: the team, the specific sub-market, and the details of the deal. Breaking down the market and understanding your position is essential.
Lessons from Mistakes
Now, what I’m going to share with you today is a scenario we reconceived into a successful project, from the ashes of a previous misstep. This started out as a market rate apartment complex in Spokane, Washington. However, the numbers didn’t work out. So we said, alright, let’s see what we can do to fix it.
Adjusting the Plans
To fix the issue, we decided to completely build a 259 unit, five storey building, which got the numbers to work. Yet, with today’s capital environment, a good project is not enough. What we needed was a great project.
Controlling Variables
In every project, you have three variables: rents, cost to capital, and the cost of construction. You cannot control constructions costs or set interest rates. The trick is to look at the income side. If the value is unclear, the discussion always degenerates to price. We often get into conversations about price, which is really about misunderstanding the value.
The Opportunity
From our analysis, a monthly rent of $1,300 to 1,900 is typical for a market rate apartment in a brand-new building. Comparatively, independent living costs about $4,500 a month. Despite the extra services provided in independent living, we wondered if there was an opportunity to fill the gap between these two prices.
Active Adult Living
The conclusion we arrived at was active adult living. It’s not independent living. It doesn’t offers meals or transportation services like independent living, but it does offer community, which is particularly important as people age and become more disconnected.
Community Focused
For active adult living, the focus is all on community. A lot of social activity, friendships, and connections are the main selling points. These communities also have age restrictions.
The Market for Active Adult Living
There are only 73,000 units of active adult living spaces in the entire country, which is a drop in the bucket compared to the population. Despite being spread across 45 states, there isn’t a lot of active adult living in the immediate area.
Amenity-Rich
We realized active adult living focuses on amenities. We can have a mixture of dedicated and multipurpose amenities. For example, you have to build an indoor resort-style pool, but a quilting room can share space with other activities.
Analysis
When we started comparing our rent to our competitors, we realized we matched them dollar for dollar. However, we figured that with the addition of a few services and without a major redesign of the building, we could get much more rent.
Operator
We worked with Greystar, the number one operator of active adult and apartments in the nation. Greystar allowed us to independently verify our analysis and made the process of explaining our operation to lenders easier.
Stay Connected
Stay connected and discover more about my work in real estate and by visiting and following me on various platforms:
Real Estate Espresso Podcast:
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Y Street Capital:
- 🌐 Website: www.ystreetcapital.com
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- 📸 Instagram: @ystreetcapital
