Navigating the Highs and Lows of Real Estate Development: A 2024 Perspective with Sam Hudd

Hello and welcome to the CreativeViz Podcast, where we talk about topics in architecture, development, and visual design. Today, I have the pleasure of speaking with Sam Hud. He wears two hats over at Atlas Management. He's a development manager and also an asset manager for their properties.

Welcome, Sam. Great to have you on.

Thank you. Thank you for having me. Happy to be here and discussing all this crazy changing industry with you.

Well, first off, tell me, how is 2024 going so far? What are you seeing?

You know, it's a mixed bag. There's some good, some bad, but that definitely comes with the territory. Whenever there are challenges, there are also opportunities to pivot and make the most of it. We're experiencing a lot of the same challenges that everybody else in the industry is too, but trying to remain optimistic about what those challenges will end up being ultimately and how we can pivot and adjust accordingly.

Absolutely. I know interest rates are top of mind for a lot of us. Can you tell us a little bit about how the changes in interest rates are affecting you guys? Not just high, but they're also unpredictable.

Well, fortunately, they have gained a little bit more predictability as far as where things are headed. A lot of people are expecting the Fed to make rate cuts here soon. Sounds like there's some potential that that'll be held off on, which really no one in the industry is very excited about. At least from here, it seems that there'll be stable and/or going down, hopefully in the near future. It seems like a lot of the rate increases have stopped for the time being, which it's nice to feel like we've hit a ceiling there, knock on wood. It's definitely posed some challenges over the last 12 months or so since they started going up, especially in the development world where you're more prone to construction loans that have floating interest rates. With those going up, it definitely makes it hard to maintain that high level of interest, especially when they're long-term construction projects.

Exactly. So the rates then they can be variable over the life of the loan. Is that right?

Yeah, especially on the construction side of things. Part of the goal with it is to get construction done and a property leased up and stabilized as soon as possible so that you can get to a more permanent loan where it's at a five or 6 percent interest rate. And you're just steady Eddie with making the interest payments. But until you get there, that's definitely when things are more volatile and everybody's a little more stressed. The changing interest rates are making a bigger difference for everybody involved.

Sure. Have the rise in rates, as you mentioned, over the 12 months, has that affected the feasibility of any new projects? Is that put things on hold or canceled projects potentially?

It has definitely caused some delays in the current projects, just with trying to get financing in order. With the high interest rates, you're definitely burning through your interest reserves with loans a lot faster. So having to backfill that capital to pay that definitely has caused some delays in construction. We are pretty focused on the projects that we already have and are undergoing. So haven't as much seen it impact new work just because with the current market, we've sort of hunkered down and want to focus on our big ones that we're already undergoing. I will say we've definitely seen it impact the capital markets, refinance side of things. It's really limited loan dollars you can get on any sort of new loan or refinance you're working on. So that's definitely been a bit of a wake-up call. It's not so easy to get money now that the interest rates are 6 percent when two years ago they were in the twos, which is crazy. There's a lot of money out there, but it's a lot harder to get it just because of the new underwriting standards.

That's interesting. I understand Atlas Management projects are residential and for the most part are rentals. That's a strategic decision on your part. Can you tell us a little bit of the thinking behind that?

Yeah, on the development side of things, the goal is always to be long-term holders of the property. Our developer feels that you really get the most benefit out of it when you're putting all the time and money in on the front end to develop it, if you can hold the project after and the cash flow, get the long-term appreciation of it.

We have a unique system in that we both work for a third-party developer who has a relationship with Atlas and long term, we're going to be the property manager of those properties we're helping develop. So kind of keeping everything in the same flywheel as far as we're providing insights on the development side of, "Hey, this is really going to help you long term." Both from our perspective, if we're actually going to be managing the property, we know this will make things way more efficient, but also it'll help you save on operational costs or increased revenue potential, all that good stuff. Keeping everything in-house and keeping properties long term is the ultimate goal, just because we really think it helps you maximize efficiency as far as individual properties go.

That's interesting. Do you think the buildings are built differently if your intent is to hold onto them long term versus to hand them off very quickly? Would you build them potentially to a different, not necessarily the standard, but also different configurations?

I think there is. You run into a point where if you're a merchant builder, you're somewhat incentivized to do so a little more cost-effective and maybe not use as high of quality as products. Not to say you're cheaping out or building something of poor value or quality. But if you're not really stuck with the full cost of construction all the way through, if you're using lesser materials that are going to break down quicker, but you're going to sell the building after you're completed, you're not stuck with having to repair those costs or the maintenance or you're just less concerned with that because you're going to be out of the deal by the time those maintenance issues start to come up.

It is definitely something that we take into account. Our goal is to manage that property for the next 10 years. So we need to use high-quality appliances that aren't going to break down. We want to use high-quality finishes that the resident both appreciates, but we know isn't going to fall into our lap as, "Hey, all of this needs to be fixed right after construction is completed."

The incentives need to be aligned with what you're doing there. If you're a merchant builder, you don't want to build to a lower quality if you're just trying to get in there and build and get out. You do want to be extremely cost-effective and deploy your money quickly elsewhere. So you want it to be able to sell at a profitable price. There's definitely some things that change based on the strategy with regards to hold time for properties.

That's interesting. The incentives are different.

Certainly.

Something that's come up in conversations with other developers, particularly in the Seattle area, is it's very difficult to develop for sale properties because of the litigation exposure for new developments. Has that influenced decision making at all for your projects, particularly up in Washington?

No, and part of that is a lot of our development is in Oregon. What we do at Atlas in Washington, both Seattle and in Southwest Washington, Vancouver, is mostly third-party management. So we haven't really seen that much up there. And that's really not a development in Washington is not yet really a part of our business model to date.

Okay. So then just to be clear, in Washington, you're mostly acquiring existing properties for management.

Either on the property management side of things, yes, doing third-party management. We're not necessarily the owners of it, but we're taking it over both in property and asset management. A lot of our Washington business has been third-party property and asset management.

It sounds like the kind of geographic area you are looking at is Oregon, Willamette Valley, I suppose as far down as Salem but then you mentioned you do have quite a bit in Washington. So you're primarily developing in Oregon but managing in both states.

Is that right?

That's correct.

We have a pretty broad mix of what we work on property type-wise. We manage a single-family portfolio on the property management side of things.

We manage duplexes, but we also manage and have managed six-story mid-rises, luxury assets in downtown. We get to see a pretty broad spectrum of both development types and asset classes, both in construction and property management. It's been a great learning opportunity for both me personally and I think Atlas as a company. We're a young growing company. We've been around for eight or nine years. It's allowed us and our owners and everybody involved to see a lot of different things and grow pretty quickly from doing all that.

That's great. You touched on single-family rentals. Is that something that you are doing? I know that's an emerging market.

We have a portion of our portfolio. I think we're about 2,500 to 2,600 units managed at Atlas. I want to say 250 to 300 of those are single-family units. It's about 10 percent of what we're doing and is a big part of the growth for us too.

That was my next question. Is that something you're looking to expand on?

Yeah, we're targeting 3,000 units under management by the end of the year. A lot of that scalability does come from larger multifamily projects, but we do have single-family in mind and do you think it's a lucrative place to be? It's part of the growth strategy as well.

What's the size of a typical project? Sounds like you've got a pretty big range. So maybe there isn't such a thing as a typical. What types of unit numbers are you looking at?

As far as the development side of things go, it's about 100 to 200 units for the new construction that can be phased out primarily I have worked on the development side of four main projects; they have been a little over 200 units, just under 200 units. We have one that's just over a hundred.

Then there's a larger project down in the Woodburn area that once it's fully completed will be 586 units. So much bigger. It's being phased out in a way that the first phase is 179 units and then spread out after the fact. So it has fallen to where the projects are anywhere from 100 to 200 units and that's intentional. We feel that that's about the area where you can get quite a bit of economies of scale operating-wise down the line and start to limit your construction costs per door because it's spread out over a larger project.

Okay. That's interesting. So, because you're looking for long-term ownership here, that you don't want to build so many so quickly that you then have a huge backlog that you're having to manage all of a sudden.

Absolutely. Some of our projects are in more tertiary markets; we're not right in downtown Portland. So we are relying on some growth in those markets. If you build 800 units all at once, you're really banking on, "Hey, these are going to hit the market really well."

So by phasing it out, it does allow you to be a little more strategic and cautious as far as making sure the units get absorbed into the area and that they're being well received by the community and potential residents.

Yeah, that's great. This is a huge issue for a lot of architects, developers. Do you run into a lot of community opposition? Does that affect site selection sometimes?

A lot of that type of work, especially at Atlas, was done before I joined. I've been with the company about four years. So I really jumped on after a lot of that had been already discussed and finalized. I do now, especially with the city of Woodburn. There are a lot of off-site improvements that we've had to do as part of conditions of approval for the projects which is a bit of a hurdle on the development side of things.

That's a lot of costs you have to take into account in your construction budget. That's not directly related to the property itself, but ultimately, if we're going to manage these long term and own them long term, the community needs to be successful and beneficial long term. I do think these off-site improvements help to achieve that.

They are extra costs that can be a burden, but overall, they are benefits to the community, which should in turn benefit the property as well.

The long-term aspect of it. Absolutely. That's great. Related to that, I'm curious what your strategies are for property marketing. What's working right now? Give me a success story if you have one.

Certainly. One of the ones is one you're actually familiar with. Apex did a rendering for our Pacific Valley project. Before the property even opened, we were just starting to lease, you completed a rendering for it, which did such a good job, it's still on our website as far as the overall aerial photo.

For development projects, getting those types of renderings and being able to show potential residents what the property is going to look like, we think has been very beneficial, especially with all the competition out there. There's new apartments going up everywhere and people have lots of places to live.

So any edge you can get and drawing their interest early on in construction, we think is really beneficial to aid that lease up process, which is always paramount to the success of the property, because that whole time you have tons and tons of vacancy loss. So whatever you can do to mitigate that and get people in early is extremely helpful.

That's one success story. Partially thanks to your team for sure. It's one of the things I've learned being in so many different markets is effective marketing varies depending on the location, the asset class, all of that. Some more urban, higher value properties, you're going to be more online, you're going to be marketing using your typical ILS searches or big marketing agencies.

But in smaller communities, like Woodburn or more far out from Portland, you do get a lot more walk-ins. So effectively marketing with physical marketing, like monument signs or A boards or we call them bandit signs. Just really knowing your audience and knowing how to market most effectively and grab their attention is something we've learned just based on the various different areas in the Portland Metro and Washington markets that we're in.

That's great to hear. Sometimes you hand off the renderings, and you don't really hear the impact that they have. So thank you for that. Really appreciate it.

Feel that having that rendering is definitely an asset to us. You are a pleasure to work with and doing it, which is obviously why we're still continuing the dialogue going forward.

Thanks again for that. As you're saying this, I've definitely had conversations with other developers, brokers housing is such a hot commodity. There's such a dire need for housing, affordable housing, particularly in our region.

It's basically you build it, they'll come. I guess what I'm hearing from you is that it is a competitive market and marketing campaigns are still important regardless.

Certainly, with it being such a cyclical industry, that may change sometimes when construction wasn't as common or widespread as far as lots of people building, it's a little different, you can build a property and there's only so limited areas to live that people are going to find you.

In certain markets, as a lot of people know with what happened during the pandemic, people started to leave the city centers and go to more suburban markets and a lot of the construction and interest in building in those areas grew, and so those are newer markets where a lot of construction has happened, and there's a lot of competition for new renters, and I think that's where the marketing comes into play, and you have to be really efficient about who you're reaching out to, what kind of concessions you're offering to get renters in the door, and stuff like that.

It's not as easy as, unfortunately, as you build it, and people will just fill it. But depending on where you're at, can be easier than other locations.

If you've done your homework, you're already in the right spot.

What's that saying? If you fail to plan, you're planning to fail. We want to avoid that as much as we can.

This is great. As we're wrapping up I'd love to hear about anything that you're seeing out there that's making you hopeful, particularly, over the next 12, 24 months or so. A lot of frustrations challenges, shall we say, in our industry what can you point us towards, Sam?

Make us feel better.

There's a couple of things, one of which I'll just start with, Portland and Oregon as a whole. There's been a lot of national media about Portland's demise and dumpster fire, all this terrible news about downtown Portland and the surrounding area.

But being someone who didn't grow up here, I think a lot of the fundamentals of Portland and Oregon as a whole are still here. It's still a place with a great quality of life. There's basically everything you could want to do from going to the coast, to the mountain, to, go hike and ski it's all there for you.

I don't see that changing anytime soon. Despite a lot of what's been happening downtown it's still going to be a great place to live for a lot of people and overall optimistic about Oregon and Portland, despite what's been put out there in the news there's a lot of headlines that make it seem a lot worse than I think it is.

And that's coming from someone who lives downtown. It's still a fun place to live.

Oh, that's great. I could certainly vouch for that myself. All of those things are still here, as much doom and gloom as is out there.

Just go to the coast on a sunny day and you'll see that it's still a lovely beautiful as ever. Absolutely.

The other thing too is just, I know it's a bit of a scary new topic, but for a lot of people, you know, AI is really impacting things. For us at Atlas, that's happening in an exciting way. We really think it's going to make not only our lives easier as a property manager, but also long-term residents as well, being able to provide more timely service to them and really allow our property managers to be more efficient in the ways they're treating residents.

Allow them to have more time to focus on resident engagement and just enjoyment with the community instead of working on leases or lease renewals or stuff like that it's obviously fundamental to property management, but it's not necessarily adding to the day-to-day enjoyment of our residents and our communities.

It's great to hear you put AI in the hopeful category. Have a lot of people put it in the doom and gloom. "Oh, it's gonna take my job." That kind of a conversation. There are tremendous positives. I agree that it can eliminate a lot of the drudgery.

Some of the automated things that we do those tasks. Free us up for more creative strategic thinking. That's certainly my position as well.

I was fortunate enough to graduate from business school in the midst of a lot of this. That was one of the big things they preached was, if you're scared of it, of course you're going to be scared of it, but if you focus on how you can kind of pivot and use it in conjunction with your job, instead of being afraid of how it's going to take your job, that's really where you're going to excel.

There's definitely some things that are scary about it, and I don't know what's going to happen with all of it, but, try and focus on the positives of it and how we can use it to benefit our business and industry instead of harping on the negatives, which everyone seems to be pretty aware.

Yeah

Anxiety is a damaging thing to live with all the time. That's for sure.

Absolutely. Thank you, Sam. Really enjoyed our conversation and thank you again for being such a wonderful client with Apex. A really good partner there. And we really enjoyed the relationship. Want to keep it going. Of course.

This was a pleasure to talk to you and pleasure to work with you. Hopeful to see what we have in the future, more projects and hopefully more renderings.

Well, we're here for you anytime.

Thank you all for listening and we will see you next time.