The Economics of Real Estate
The real estate market is a complicated and dynamic entity. The factors that influence its movement are internal, like supply and demand, and external, like the broader economic climate. In this episode, we discuss the economic model in real estate.
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The Economics of Real Estate
There's a balance to strike between functionality and aesthetics, for sure, and I appreciate that. I think the examples you gave of how architecture has been quite different in a linear fashion when you look at location to location. This comes down to the design of a city and urban planning. We are living in very different times where the sewer systems, the proximity to natural resources, whether you are close to an ocean or a big flat piece of land that all impacts the way you design cities for sure.
You look at Europe and you look at London, for example. The road system is very confusing to navigate. It's twisty and turny. Talk about Florence. You've got the most beautiful little streets and across there too, it's like this too. What we have to remember is at the time, the context when cities were designed like this, cities perhaps designed around defense. You literally had the threat of armies coming in and invading and a city would be enveloped by a fortress or a castle.
We go to these places because A) People live there, and it's amazing how they have adapted. B) It's so different than what some of us might think. I'm not sure readers from these places. It’s very different when you are living in a sky-high rise apartment. You are living on farmland in a flood area. You go to these historic places to see how people live and people have made it work. On the other extreme too, unfortunately, wherever you go in the world, there are tents and homeless people. There are slums. I have been to slums in India and the Philippines, and it is heartbreaking to see.
Don't forget San Francisco.
The largest part of the population too. You are right. You are a large part of the global population. It doesn't have the space that many of our readers would probably take for granted. It's not about the size of the space you are living in. It's about the quality. I have been to places where there are dumpsites. There's so much pollution and danger, with children playing around next to these dumpsites. They can easily cut themselves and injure themselves and catch diseases.
We are innovating and trying all these new things in major tier-one cities, but it isn't yet reaching. It's not reaching the global that needs it. My theory for this is it's the result of a capitalist movement when you have a capitalist system. I'm a VC. I'm a venture capitalist. I invest in many of these startups. They have to find a way to go to market.
Even things like prefab modular homes starting at a minimum of $50,000. That sounds very affordable when you consider the construction costs, but $50,000 for a very small tiny studio. I'm giving you an average figure. The actual manufacturing price could be a lot less, maybe $30,000 that these companies need to have a margin.
I'm throwing $50,000 out there because that's the number I hear most often, and I have talked to maybe twenty different companies that are in this space. That price is a function of A) Cost-plus approach where you have a gross margin. B) There's a market here in corporate America. There's a market here for institutional hedge funds and private equity funds to take this five-plus of land and dump them ever and sell them to the Department of Defense and sell them to cities.
Homeless people didn't plan to be homeless.
It's a blessing because if you live in the West, you can take advantage of these, but I don't see how these solutions can be scaled in other regions. You are also limited and I gave a $50,000 number. You've got to remember, these are massive pieces of hardware or materials that you need to take from a factory and transport. That transportation is a big deal because sometimes you need permits. You might even have to close highways down or roads down. There's a real significant cost to delivery and installation. These are some of the economics. We are talking about prefab and modular.
That was a big area of specialty and most of my clients for a few years were modular construction companies.
Here we are and we have got a wave of these companies. I'm an investor in one of these companies. That sounds fantastic as an investor. One of the best investments I have ever made, but there is a real crisis in terms of how to scale this. All of these companies need factories to produce. There are sold out. There is demand, but the economics are difficult to scale beyond a certain amount of production for some reason. You can only produce so many a day and you need massive factories.
You've said a lot that there needs to be local solutions. In architecture, they call it vernacular architecture. The architecture in Morocco looks extremely different than Paris. As the plane flies, they are not that far away. Each one of those grew up around a whole bunch of different circumstances. It's been ridiculous so ship some modular unit. I forget what the correct term is but the developing countries, it's not the right word, but like most countries at the bottom of the capitalist system, they are in warm climates.
I was going to say it. They don't need heavy construction. A lot of times, the vernacular architecture might be in a nice shed. That's the way they built for 1,000 years and they need to go back for like that's the ideal and there's some hybrid. The point is it's different everywhere. It relates to my earlier point, which is the towers in Boston Seaport. They don't look that much different than New York, and they don't look that much different than San Francisco, and they don't look that much different than Seattle or LA.
All these glass towers, I could pick them apart, why they are crap designed. In terms of performance and this relates to some of the PropTech stuff, you are having building efficiency add-on tech layers for inherently inefficient design. If you started with a good design, you wouldn't need the fix. Starting with that platonic housing unit. That's going to be different. The difference is generally why capital markets don't invest in anything innovative.
I know you've had some co-living people and I was deeply involved with the co-living world. Co-living, some people say it didn't work and I'm going to say it didn't work because it was a hedge. It was like we were going to adapt this unused inventory and rely on technology to change the structural problems with this building instead of starting from scratch. Making good integrative design part of the plan instead of throwing this somewhat superficial and debt late. More importantly, a layer on top of a building. It’s still old school by design.
We make the mistake of looking at co-living as trying to replace it with single-family offers or multifamily offers. I offer a new way to think about this, that when you look at the life stage of human beings, there's a time and a place when you are young, where co-living is a phase of your life that is perhaps something you should experience.
You look at it that way and there is a market for co-living. I invested in a couple of startups personally that are part of that trend. The big realization was that you need to be very specific with who your market is. There is a market for co-living in major urban areas, and some people would say, “It's taking a hostel and upgrading it.” That's true. Hostels make a lot of money.
The other extreme of co-living might be these cool exotic locations where people can go for a few months and retreat. There are two extreme examples where whatever they are called, whether it's called a hostel or a meditation retreat. They are all examples of places where people want to co-live and be part of a community. Back to you. I know you've got thoughts on this.
People develop relationships and community by going through experiences and hardships together.
First, I wrote a white paper that was published about bringing back the residential hotel as a way of handling San Francisco's homeless problem. This was in late-2016, early-2017. Essentially, looking at historical models that worked. Still true of most countries where you have hotels where you have both temporary guests and you also have long stay guests.
I want to say it was something like 50% of San Francisco's housing stock around the turn of the last century was these types of homes. It's a port town. You have people, they might be going there seasonally or they are passing through, and that's yes for a lot of people. A lot of people have been doing that for ten years.
If I had to do it over again, and I have tried to push this, it’s deregulating the hotels. We got hotel units for days. Call them micro-apartments, co-living whatever you want. The architecture is no different. You have a lobby for a communal space. You might have a restaurant. This is not re-inventing. Sometimes it's a matter of looking at the past or successful models. Sometimes it requires some policy change, which is something that I'm not afraid to get into and they can make a plus for shame. The implications are serious here.
People are hitting the streets. Homeless people didn't plan to be homeless. They ran out of affordable housing situations and a lot of them are made crazy by the streets. It's not fun out there. You don't even have to go far down the socioeconomic ladder to look at single people moving into town for the core of the co-living demographic that it hits.
Unfortunately, it’s because of the relatively high costs of co-living. I visited a co-living place on ministry. I won't say which one it was, but it was like $2,500. This was years ago for a converted SRO unit. You can get something very comparable at the time for $1,000 less. Once you have your bearings in a city, the co-living market tends to mature out. That's my general experience. It's mostly cost-driven. If you can integrate into the platform, like the flexibility of living and stuff like that, there's a humongous market.
We think of co-living not as an asset class but as a way of living, which is what it is. I am hoping to find startups that approach the problem more as an operating system solution. By that, you could have a homeless shelter, an orphanage or a senior care facility. You could have a drug rehabilitation center. You could have a domestic violence shelter.
All of these are examples of people co-living together. I have chosen examples to be provocative that are very easy to monetize. We are all used to hearing about the tech co-working villa and the retreat center where you can pay big bucks, thousands of dollars to have yoga, etc. Putting that aside because that's easy to relate to, we do see models of co-living nowadays, but we don't call them that. We brush them aside as a social initiative, but it's sad because a lot of PropTech solutions monetize where the money is, but there has to be a way to monetize and do good. For me personally, I'm hoping that I can find a startup that approaches that and makes that a way of being.
I got a start up. I don't want to say it's my startup. I have been working on it for years, and then basically, I started at the end of 2019. A thousand miles later and then a lot of stuff in between. I'm still pushing it. It's called Run House. I have a holding page at Run.House. I remember reading an article and this was around the time of co-living’s heyday, 2015 to 2017, something like that.
It was something to the effect of people develop relationships and community by going through experiences. Going through hardships together. You've been a startup founder, you feel a certain kinship to the guy or gal that you've stayed up, whatever. In the same way, we were bonded to family because we fight with them all the time. Our roommates are the roommates that we kept in touch with or something like that.
People that live on the submarine for years and people in the military, too, that as a by-product of their work, are together and they are in the trenches, literally.
Believe it or not, removing all pain points is a liability to forming a community. If you have it as two non-participatory, no one gives a crap.
You are saying that when we have our four rules, we don't get to know our neighbors. There's no force in function. A place where we all commune. Whether that's shared bathrooms and cafeteria, where we have to eat and mandatory places to go and visit. Is that what you are saying?
For sure. I can't find it. I claim exemption to some of these roles. That is relevant. I'm not a kid. I don't have the same expectations of housing. It was absolutely fine for me to share a bathroom for a long time. I make my own. I remember hearing an architect and he was saying something about negotiating kitchens and bathrooms.
Cleaning up the kitchen and bathroom, use of the bathroom. That's how intimacy is in relationships. I do refer to the college dorm. There so many people talk about the college dorm being the best part of their lives, but then they are like, “I couldn't live with X, Y, and Z.” I'm like, “Why don't you not live with X, Y, and Z?” A dorm does not mean you have to have a shared shower. It means that you have your friends living down the hallway. That you have like a place where you tell stories and you make stories together.
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The Different Paths for Entering the Real Estate World https://youtu.be/KEERIrcAz-E
Red Flags in Properties to Avoid https://youtu.be/w6tRNB6WoFg
How Investor Value Is Changing in Short-Term Rentalshttps://youtu.be/I-7BKI9ntro
About Zain Jaffer:
Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780M.
His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as "Forbes 30 Under 30," "Inc. Magazine's 35 Under 35," and the "SF Business Times Tech & Innovation Award." He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.
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