One of my great pleasures working for Xpera Group is being surrounded by some amazing industry thought leaders. Economist and real estate guru Alan Nevin is one of those individuals that constantly inspires as well as informs. A regular fixture in the media, Alan was asked for his take on a somewhat unorthodox move by a local builder.
Real estate, construction, and even the litigation that often follows, generally follow some fairly predictable cycles. One such cycle is the conversion by real estate developers of apartments to for-sale condominium units. Often, converters simply spruce up the finishes and appliances, create an HOA, hold a sales blitz targeted primarily at first-time buyers, and then rush to the bank to cash out the LLC before the first claim is filed.
Jonathan Horn, writing for the San Diego U-T, recently covered a curious strategy employed by Irvine-based MBK Homes. Almost exclusively a builder of for-sale residential developments, MBK is building a brand new rental community in Carmel Valley—an area that is not typically known for many rental options. But unlike typical apartment communities, MBK is going decidedly high-end and upscale with 3-story townhomes that are more spacious, have attached garages, and even offer opportunities for customization by lessees.
Why Rentals? Why Townhomes?
To help understand the value proposition that MBK is pursuing, Horn sought out Alan Nevin’s perspective:
“There are thousands of apartments in Carmel Valley, but all are traditional,” said Nevin. “The big problem is that the vacancy rate effectively is really zero on the for-sale housing that is for rent. If you go to rent a condominium, somebody’s condo, there just aren’t any.”
While the market may be there now, Nevin said the big risk for MBK Rental Living is that it can’t get as big of a return on its investment by renting units with an average 1,323 square feet. He said it’s very rare for a developer to build townhomes designed to be rented.
“It really doesn’t make a great deal of sense as a rental unless you have an endgame in mind,” Nevin said “To do townhomes as a rental is more costly. It’s just a matter of cost per square foot because when you’re building a set of stairs inside a unit, there’s a lot of wasted space. And obviously it’s a lot more complicated to build something with stairs on the interiors, then build stacked flats, where every unit is up and down.”
So what is the endgame? According to Horn:
With the units built as condos, MBK Rental Living has filed the necessary paperwork with the state to create a homeowners association should they be converted to an ownership model in the future.
MBK’s representatives state that there are no plans for selling the units. However, as Nevin pointed out, “they’ll have cash flow coming in, and then they can sell it to a converter, and basically make a killing.”
Source: U-T San Diego
Image courtesy Bing Maps