MHN Interview: Focusing on Urban Infills
Mill Valley, Calif.—Bruce Fairty was recently named partner of TDP | Bay Area Partners Inc., a new division of Thompson | Dorfman Partners LLC, which is based in Mill Valley, Calif. MHN speaks to Fairty about his new position and why he is focusing on urban infills.
MHN: What are your priorities in your new role?
Fairty: My primary role is to identify new development and investment opportunities for the company, and I also take the lead in arranging capital for the company’s projects.
As such, and given the currently robust level of development activity in the Bay Area, I am focusing on unique situations where we can reduce the land basis in our vertical development projects. Examples would be situations where we’ve identified greater density possibilities in either the entitlement process or in the design phase. Other situations might be where our company is able to take down a larger parcel of land and sell sub-parcels to some of the more active homebuilders in our market.
And, in terms of arranging capital for our projects, we are fortunate to have some long-time institutional and family office investors who we’ve done multiple successful projects with and who we continue to work with on new projects. That said, our business is ever evolving, as are the businesses of our financial partners, so we are always active in the capital markets.
MHN: Describe TDP | Bay Area Partners, Inc. What’s the new focus of this division?
Fairty: TDP has historically been, and remains, strategically focused on urban infill multifamily projects primarily in the San Francisco Bay Area. Also, we are active on an opportunistic basis in other core West Coast markets.
Urban infill development is our core competency and the principals of the company have cumulatively developed nearly 40,000 multifamily units. Our projects range from 55 units per acre wood frame with wrap or podium parking to mid-rise and high-rise towers. In terms of project size, we currently have an 81-unit project underway in Lower Pacific Heights in San Francisco, and at the other end of the spectrum we’ve taken on projects of 998 units and 1,600 units in San Jose.
As a company, TDP is probably more horizontally organized than most development companies. There are only two layers of management for each of our projects. At least one, if not two of the company’s senior partners are directly and day-to-day involved with each TDP project, along with a project partner and/or project manager as the case may be. High density, multifamily development is a complex proposition in the San Francisco Bay Area and we counter that via the involvement of very senior, highly experienced folks involved in every detail. I might contrast this by some of the more vertically organized, hierarchical institutional development companies where senior executives are running several divisions with large numbers of people, rather than running projects, to the point where when you get to the person on the ground they often times have limited experience.
MHN: Why focus on urban infills?
Fairty: With a combined 100 plus years of development experience, the principals of the company have clearly observed over our careers that the greatest value creation and value preservation lies with developing projects in supply constrained, high wage, strong barrier to entry locations. Outside of Manhattan, no other area in the country is more compatible with this strategy than is the San Francisco Bay Area. More specifically in the Bay Area, we focus on the highest quality sub-markets such as the City of San Francisco, the Peninsula, Silicon Valley and a handful of East Bay cities where these characteristics are most evident.
MHN: What puts TDP | Bay Area Partners at an advantage to accomplish these goals?
Fairty: Our long-term presence in the market place is probably the main thing that gives TDP our advantage in the San Francisco market. We’re one of the oldest multifamily development companies active in the Bay Area market and, as a result, we’re a known brand to the market, which includes land sellers, city planning departments, lenders, etc. Also, having been involved with dozens of projects in our collective careers, there’s very little we haven’t seen or done. In contrast, the industry has seen little apartment development activity in the San Francisco market during the past several decades, first due to the dot com bust, followed by a period when multifamily was primarily developed as for-sale product, and finally the recession. As a result, a lot of competition is comprised of well-capitalized institutional developers, but with folks executing the business who might only have a few projects of experience under their belt. In a market where development issues are as complex as they are in the Bay Area, that’s not adequate and it can negatively impact the outcome of the project.
MHN: What are some challenges you foresee?
Fairty: The greatest exogenous challenge we face clearly lies with the entitlement side of the business. The current burst of activity occurring in San Francisco is an historic anomaly, resulting from land entitled prior to the recession but put on the shelf for five years, and sites that were entitled during the recession when local cities were more open to new projects owing to overriding economic reasons, all now being developed at once.
However, prior to the recession the City of San Francisco was entitling 100 rental apartment units per year, and multifamily of all types were entitled at a rate of 1,000 units a year. That’s not very much for a city of its size. And other high quality San Francisco Bay Area sub-markets were every bit as difficult an entitlement environment. We’re quickly returning to that climate. Having personal, long-time entitlement experience in the area, I’d say that most high quality sub-markets are even more difficult today than was the case prior to the recession. The bottom line is that entitlements in the Bay Area, an already difficult proposition, are becoming even more difficult. There are certainly other challenges, no different than exists for developers across the country, but the anti-entitlement climate is our most unique challenge in San Francisco.
MHN: Is there anything you’d like to add?
Fairty: We currently have more than 1,200 units in our pipeline and we are working on a few new projects that should add to this total. Our goal is to identify three to four opportunities each year totaling approximately $250-$350 million of activity per year.