Devoted to Urban Core Infill

Clyde Holland is chairman and CEO of Holland Partners, a developer of multifamily properties in some of the more desirable areas in the western states. During a 20-year career that includes tenure as West Coast group managing partner for Trammell Crow Residential, Holland has been in the vanguard as a developer of pedestrian-friendly, transit-oriented and town center-focused communities. Today, with gas prices climbing faster than the mercury in a desert thermometer, his seven-year-old firm is more committed than ever to developing in urban cores—and placing residents nearer their jobs. Here, Holland shares his views on the current state of the multifamily housing industry with MHN Contributing Editor Jeff Steele.MHN: What are the pros and cons of diversification?Holland: In the industry today, everyone is searching for the highest risk-adjusted returns to deliver. Part of the way you deliver returns is by understanding how markets correlate, and where you are in each of the market cycles.For instance, if I were to buy properties in Santa Clara, Calif., Chandler, Ariz., the west side of Portland, the east side of Seattle and the Denver Tech Center, I would have excellent geographic diversification. However, we would have zero employment-based diversification, because the locations I mentioned are all heavily tech weighted. Our goal is both geographic- and employment-based diversification.So we look at the various market cycles. Denver is surprising to the upside, Phoenix surprising to the downside. So we will overweight Denver early, and there we like the Fitzsimmons area, where there are expected to be 25,000 new jobs coming online in the next five years at the medical center that is currently under development. We are bullish on this exposure to healthcare and also like the tech center/downtown and locations next to transit stops. We’ll underweight Phoenix early, and watch as it cycles. When it reaches bottom, we’ll begin allocated investments.We like urban cores. Seattle’s has exposure to a financial center filled with attorneys and accountants, but it’s also the biotech hub of the world and, in addition, has the Fred Hutchinson Cancer Institute and three regional hospitals located on First Hill. That market has great diversification and employment drivers, including Boeing, which is now on a business upswing and hiring new employees. MHN: Do you think the Fed is at fault for our problems?Holland: The Bush presidency overemphasized ownership of housing. The Fed was overly accommodative coming out of Y2K and the tech bust.The real issue with housing was lenders became too lax, and rates were simply too low, which allowed people, benefiting from all this introductory financing, to own homes who should never have owned homes. Bernanke is doing a masterful job of cleaning up Greenspan’s irrational exuberance. So the problem is not the Fed. It’s the previous Fed chairman—as well as allowing Wall Street to create derivative products—that inaccurately priced risk. What Bernanke’s doing is ensuring there’s a supply of capital so the market doesn’t freeze up. He’s ensuring an appropriate level of market liquidity. People may not like the price, but there is liquidity and a price where financial instruments can change hands.MHN: What are you focusing on, now that it’s harder to do deals?Holland: We are developing core urban infill. All the action is moving housing closer to jobs. With $5 gas and commutes getting longer, people are saying, “We want to live closer to our jobs. We want to spend our time with our families and enjoy life, not sit in a car in a line of traffic.” Today, the sole focus of our development company is on core urban infill. We like Seattle, Portland, Los Angeles and Denver. We will buy existing projects opportunistically in Phoenix, but we will not build there.MHN: How have the markets changed since last year?Holland: People are actually starting to price risk again. A year ago, cap rates in second- and third-tier markets were nearly as low as core markets. Today, cap rates in those same second- and third-tier markets will trade at a significant discount to the best markets. Class A product will trade at a low cap rate, but B and C product will trade at a discount.I had a major REIT CIO tell me last year that he was selling Class B and Class C products in second- and third-tier markets and buying Class A products in top-tier markets for a 49 basis point spread. That spread should have been at least 150 basis points. Today, the same spread is 250.As cycles emerge, people tend to move farther out the risk spectrum to capture either volume or profits. And in reality, when the market turns, the returns on weak projects in the weakest markets tend to collapse. So investors would have been better off staying focused on absolutely fantastic projects in core locations and forgetting the rest. MHN: Why the newly emerging importance of partnering regionally?Holland: Our company is a regional market expert. Our focus is solely multifamily, and solely in the western United States. We have eight markets, and we focus on those eight markets. Within each one of those markets, we track the most attractive projects and submarkets, focus exclusively there, and that’s all we do.The local guys know what they’re doing. It’s the out-of-town developers and investors who—when the cycle turns— always seem to wind up holding the bag.From an investor standpoint, they would have been far better off investing with local market experts, who understand what works in the down market, and can properly determine investments to be sold as the cycles mature in each of those markets.We spend an incredible amount of time tracking where each individual market is in its investment cycle. You’d rather sell an investment a year early than a day late.MHN: Any closing remarks?Holland: As I look at the financial landscape today, most participants are in a wait-and-see mode. What they don’t realize is the undersupply of new units in the best markets and fantastic acquisition opportunities. Gen Y is here, and investments in the right product and markets today will produce the best risk-adjusted returns available during the entire next cycle. Send your comments on this article to dmosher@multi-housingnews.com