CrowdStreet's Brent Hieggelke is joined by Steve Cook, Managing Partner at HP Ventures Group, LLC and Peter Cook, Director of Capital Markets at HP Ventures Group, to discuss their firm's investment thesis, how the Chicago market is faring, and how they see opportunities for multifamily units despite the disruption of COVID.
Brent Hieggelke, Chief Marketing Officer
CrowdStreet
CrowdStreet
Brent is a high-growth tech marketing executive focused on start-up and early category innovators and disrupters. He is a seasoned evangelist, and public speaker across a wide-range of topics.
He is a former CMO of several leading SaaS companies such as Urban Airship (mobile), Brandlive (video), Webtrends (data and analytics) and Touch Clarity (AI, machine learning), which sold to Omniture. In 2009, Brent co-founded a real estate start-up, Second Porch, which built the first sharing vacation rental site and ultimately exited to HomeAway, now Expedia. Brent has keynoted and led panels at global events like SXSW, Mobile World Congress, Cannes Lions, Advertising Week, Adtech, and hundreds of other conferences. Brent has been featured or quoted in The Wall Street Journal, Forbes, Advertising Age, and hundreds of other publications.
Brent holds a BA in Economics with honors from the University of Chicago.
00:00:04 Hello, and welcome back to another edition of StreetBeats, the CrowdStreet effort to bring our community together and hear what's happening across the country in different markets with different types of sponsors and investors. Today I'm really excited, uh, to welcome Peter and Steve Cook. They're with a Chicago based sponsor, HP Ventures that specializes in multi-family, and they have some really interesting things to share with us. Uh, so I'd love to just kick it off, hear a little bit about how you guys get into this, how HP Ventures came about. Uh, so Steve, you wanna give us a little bit of your backstory?
00:00:41 Yeah, great. I, I came to, uh, real estate, uh, a little bit later maybe than most. Uh, I was in my mid forties when we founded HP Ventures Group. Um, I was, uh, at the time looking at some of the emerging distress coming out of the, uh, financial, uh, problems associated with, uh, the financial crisis in 2008, right in my own backyard. There were a couple of large multi-family projects that were struggling. I started digging in on that, figuring out who loaned them and, you know, how they were, uh, how they got to where they were and how they might get worked out. About that time I met John Common through a common friend John Commons, one of the founding partners with HP Ventures Group. The core thesis with HP Ventures Group is a focus on risk management. When we came together with that kind of a more conservative approach and a, a commitment to risk management, it was, first of all, which real estate sector did we wanna operate in? And we, we, we discussed that and realized that, uh, you know, multi-family being a basic need for housing, you know, would be something that, uh, would be less volatile with respect to cash flows and valuations.
00:01:54 Really interesting, Steve. Thanks for that. And Peter, how did you get involved in multi-family real estate and also HP Ventures?
00:02:02 Well, my, most of my career has been spent in the portfolio management function, uh, analyzing stocks and bonds. And, um, you don't do that unless you're a bit of a data junkie where you like to, you know, dive into the data and figure out, uh, exactly what's driving things. Um, and 2020 is, uh, 2020. The year has given us certainly plenty of that, um, in my role as a business development, uh, uh, person here at HP to help grow the business. I'm trying to use the, I'm talking to investors, trying to deepen the capital base, uh, and also use the, the very interesting statistics that we see in 2020 as a way to help people understand what the risk and reward is in our projects.
00:02:43 Thanks, Peter. Now let's talk about Chicago. You know, Chicago is a city I grew up in, near and dear to my heart. Uh, I think it's a vibrant, exciting city. Uh, you guys play, uh, you know, in an interesting segment of the market. So let's talk about, you know, how's Chicago doing? We hear a lot about it. Um, where do you guys fit in? What's your thesis all about with the city?
00:03:08 Well, I think first of all, it might be helpful for the listeners to kind of understand where we fit into the Chicago market. The Chicago market is, the MSA is something like 9 million people. So it's, it's, it's a, it's a huge market, uh, for what we do. And, uh, from the beginning, you know, we chose the, uh, uh, the outlying areas of the Chicago, the neighborhoods, if you will. And, uh, and, and we, and we now have, uh, you know, some projects in, in the suburbs. And so just to kind of give people calibrate, calibrated, we, we've focused on the middle market, which for us means the 10 to 30 million project size. Um, you know, we've, we've chosen some from the beginning to be in, uh, to select on, on projects which have, uh, larger unit sizes that have, uh, you know, nice amenities. And that goes back to the, the origin story, if you will.
00:04:02 When at the time that we formed, there were a lot of failed condo projects in the city. So we started buying, uh, condo, condo buildings that hadn't crossed the castle. If you'll, and, uh, you know, we were buying, like the building I'm sitting in right now, you know, the typical two bedroom is, you know, 1300 square feet. You know, it's an elevator building, underground heated parking balconies. So those attributes that were available to us when we, when, when we started, um, has have been kind of the core of the attributes that we're still selecting on, because we feel that that's, uh, an excellent, uh, asset to have in the Chicago marketplace.
00:04:41 So one of the things that struck me as we were getting acquainted a few weeks ago was sort of the, the neighborhoods you guys select, uh, your properties in, have, uh, typically strong economic, uh, undercurrents, you know, stable, uh, areas with professional and, and sort of stable workforces. So talk a little bit about, you know, what you look for in these neighborhoods and how kind of those fundamentals played a role in your thesis?
00:05:11 Well, first of all, in the neighborhoods of Chicago, the, you know, outside of the central business district, you know, there's a lot of older housing stock. So when you have a newer, nicer building, you know, you're, you're in a pretty strong competitive position vis-a-vis, you know, your competitors. And so that's served us well. Um, the other thing is, it's not easy to add inventory in those neighborhoods because you, you have an existing housing stock. It's, uh, you know, it's not easy to find a large enough infill lot to, to build new inventory that would then be competing with us. So that's an aspect of, we believe to be our success, is having the newer, nicer properties in the neighborhoods of Chicago where there's less competition for the features that our buildings typically have.
00:06:01 And within the neighborhoods that your buildings are located, I mean, you're picking, uh, you know, kind of the, the demographics of the tenants probably tend to be professional with, uh, sort of stable positions. And so that means they have like a certain range of affordability and budget. Uh, they're looking for a certain set of amenities, uh, proximity to retail, diverse retail restaurants, public transportation, sort of those things that, uh, create, uh, an area that's always in high demand. Would that be correct?
00:06:38 That is correct. And, and so what we see is, we see it kind of a trade up, trade down, uh, dynamic where for people who might be in the central business district spending, you know, three to $4 a square foot for a small unit who are, you know, transitioning or getting married or thinking about having kids, you know, first of all, our units are larger, and so people can, you know, see themselves, uh, you know, expanding into the larger space and being comfortable. Um, the other aspect of it is, is that for people in the proximity who are already in the neighborhoods in which we operate, you know, they might be in a hundred year old walkup, uh, building a three-story walkup building. If somebody gets a promotion or, you know, some, two, two, uh, individuals come together and now they have a higher household income.
00:07:26 You know, the first thing that they want to do is be in an elevator building with a balcony, you know, and, uh, you know, secure parking in-unit laundry, all the things that, uh, typically, uh, put us in good standing competitively against, uh, others. Mm-hmm. <affirmative> and Brett, maybe I could add a few numbers onto that. Um, HP's portfolio, 92% of it is two and three bedroom apartments in Chicago. The market, only 40% of it overall is two and three bedroom apartments. And the other 60, of course is studio and one bedroom apartments. We only have, we don't have any studios and only 8% of our units are one bedroom apartments. And so, uh, the, I just wanna give a sense for how differentiated what we're offering, not only as Steve says in which neighborhoods, but sort of in general what the living space is. And all of our buildings have balconies of which of course now is, is, is more important than it was before and in-unit laundry facilities, which is more important than it was before. And so what's happened is we've stayed the same with our strategy, but the market sort of has moved toward us. And now it's just a question of if that's gonna persist.
00:08:35 Well, I'm sure if you, uh, rebound 10 years ago, you probably didn't have a global pandemic as part of your thesis, but, uh, certainly yeah, the units you guys have being more spacious, having those amenities, uh, you know, whether somebody's sheltering in place or working from home or working from home in, in the future, if a hybrid work from home, you know, visit the office a few times a week, uh, certainly boats, well for, uh, those attributes of your thesis and, uh, could likely, you know, be bright for, uh, in indefinite future.
00:09:12 And well let, let's hope. So we, we are always, uh, uh, you know, trying to make sure that we're testing all of our theories. But, but in general, yes. And so, you know, why are people preferring? And we see this in the data now. It's not only our gut reaction about what people want, it's in the rental year over year growth data and in the vacancy data. And what you see is that people are moving from the central business district out into the suburbs where rent growth is good and not so much in the denser area. And you also see that, uh, for example, two and three bedroom apartments have actually been able to slightly raise or main at least maintain their rent growth, uh, versus studios and ones where, uh, the, the situation just isn't as good. Um, now why is that? You touched on it.
00:09:56 Uh, Brent, the, the, the work from home issue is a big one. Uh, 30 to 40% of the people can of, of jobs are able to be worked from home. And, um, it appears that that is a new trend that's here with us to stay. Um, and you could think of it that if office demand is gonna go down somewhat, um, that's because, uh, office demand inside your home is going up. Um, a couple of other things that are playing into this is, as I mentioned, the social, uh, the, the, the social distancing norms where people want a balcony and they don't wanna do their laundry in a laundry room or in a laundry room. And then, as I mentioned, um, you know, the, from a bigger picture, the, the, the millennial generation is pushing from a mo from a household formation to a family formation, uh, situation that's happening a little bit each day. That's the way demographic shifts happen. They happen slowly, um, but um, in a world where their balance sheets might be constrained by student loans or affordability or whatever, uh, we definitely see this and 80% of our tenants or families.
00:10:55 Peter. Steve, thanks for taking time to give us the update on HP Ventures and what's happening in Chicago. As always, give the city my best. And for the audience, if you haven't subscribed to StreetBeats, please give us your email and we'll send you notification whenever we have a new segment. And we hope everybody is staying, uh, happy and healthy through this time. So we'll
00:11:20 Talk to you soon.
00:00:41 Yeah, great. I, I came to, uh, real estate, uh, a little bit later maybe than most. Uh, I was in my mid forties when we founded HP Ventures Group. Um, I was, uh, at the time looking at some of the emerging distress coming out of the, uh, financial, uh, problems associated with, uh, the financial crisis in 2008, right in my own backyard. There were a couple of large multi-family projects that were struggling. I started digging in on that, figuring out who loaned them and, you know, how they were, uh, how they got to where they were and how they might get worked out. About that time I met John Common through a common friend John Commons, one of the founding partners with HP Ventures Group. The core thesis with HP Ventures Group is a focus on risk management. When we came together with that kind of a more conservative approach and a, a commitment to risk management, it was, first of all, which real estate sector did we wanna operate in? And we, we, we discussed that and realized that, uh, you know, multi-family being a basic need for housing, you know, would be something that, uh, would be less volatile with respect to cash flows and valuations.
00:01:54 Really interesting, Steve. Thanks for that. And Peter, how did you get involved in multi-family real estate and also HP Ventures?
00:02:02 Well, my, most of my career has been spent in the portfolio management function, uh, analyzing stocks and bonds. And, um, you don't do that unless you're a bit of a data junkie where you like to, you know, dive into the data and figure out, uh, exactly what's driving things. Um, and 2020 is, uh, 2020. The year has given us certainly plenty of that, um, in my role as a business development, uh, uh, person here at HP to help grow the business. I'm trying to use the, I'm talking to investors, trying to deepen the capital base, uh, and also use the, the very interesting statistics that we see in 2020 as a way to help people understand what the risk and reward is in our projects.
00:02:43 Thanks, Peter. Now let's talk about Chicago. You know, Chicago is a city I grew up in, near and dear to my heart. Uh, I think it's a vibrant, exciting city. Uh, you guys play, uh, you know, in an interesting segment of the market. So let's talk about, you know, how's Chicago doing? We hear a lot about it. Um, where do you guys fit in? What's your thesis all about with the city?
00:03:08 Well, I think first of all, it might be helpful for the listeners to kind of understand where we fit into the Chicago market. The Chicago market is, the MSA is something like 9 million people. So it's, it's, it's a, it's a huge market, uh, for what we do. And, uh, from the beginning, you know, we chose the, uh, uh, the outlying areas of the Chicago, the neighborhoods, if you will. And, uh, and, and we, and we now have, uh, you know, some projects in, in the suburbs. And so just to kind of give people calibrate, calibrated, we, we've focused on the middle market, which for us means the 10 to 30 million project size. Um, you know, we've, we've chosen some from the beginning to be in, uh, to select on, on projects which have, uh, larger unit sizes that have, uh, you know, nice amenities. And that goes back to the, the origin story, if you will.
00:04:02 When at the time that we formed, there were a lot of failed condo projects in the city. So we started buying, uh, condo, condo buildings that hadn't crossed the castle. If you'll, and, uh, you know, we were buying, like the building I'm sitting in right now, you know, the typical two bedroom is, you know, 1300 square feet. You know, it's an elevator building, underground heated parking balconies. So those attributes that were available to us when we, when, when we started, um, has have been kind of the core of the attributes that we're still selecting on, because we feel that that's, uh, an excellent, uh, asset to have in the Chicago marketplace.
00:04:41 So one of the things that struck me as we were getting acquainted a few weeks ago was sort of the, the neighborhoods you guys select, uh, your properties in, have, uh, typically strong economic, uh, undercurrents, you know, stable, uh, areas with professional and, and sort of stable workforces. So talk a little bit about, you know, what you look for in these neighborhoods and how kind of those fundamentals played a role in your thesis?
00:05:11 Well, first of all, in the neighborhoods of Chicago, the, you know, outside of the central business district, you know, there's a lot of older housing stock. So when you have a newer, nicer building, you know, you're, you're in a pretty strong competitive position vis-a-vis, you know, your competitors. And so that's served us well. Um, the other thing is, it's not easy to add inventory in those neighborhoods because you, you have an existing housing stock. It's, uh, you know, it's not easy to find a large enough infill lot to, to build new inventory that would then be competing with us. So that's an aspect of, we believe to be our success, is having the newer, nicer properties in the neighborhoods of Chicago where there's less competition for the features that our buildings typically have.
00:06:01 And within the neighborhoods that your buildings are located, I mean, you're picking, uh, you know, kind of the, the demographics of the tenants probably tend to be professional with, uh, sort of stable positions. And so that means they have like a certain range of affordability and budget. Uh, they're looking for a certain set of amenities, uh, proximity to retail, diverse retail restaurants, public transportation, sort of those things that, uh, create, uh, an area that's always in high demand. Would that be correct?
00:06:38 That is correct. And, and so what we see is, we see it kind of a trade up, trade down, uh, dynamic where for people who might be in the central business district spending, you know, three to $4 a square foot for a small unit who are, you know, transitioning or getting married or thinking about having kids, you know, first of all, our units are larger, and so people can, you know, see themselves, uh, you know, expanding into the larger space and being comfortable. Um, the other aspect of it is, is that for people in the proximity who are already in the neighborhoods in which we operate, you know, they might be in a hundred year old walkup, uh, building a three-story walkup building. If somebody gets a promotion or, you know, some, two, two, uh, individuals come together and now they have a higher household income.
00:07:26 You know, the first thing that they want to do is be in an elevator building with a balcony, you know, and, uh, you know, secure parking in-unit laundry, all the things that, uh, typically, uh, put us in good standing competitively against, uh, others. Mm-hmm. <affirmative> and Brett, maybe I could add a few numbers onto that. Um, HP's portfolio, 92% of it is two and three bedroom apartments in Chicago. The market, only 40% of it overall is two and three bedroom apartments. And the other 60, of course is studio and one bedroom apartments. We only have, we don't have any studios and only 8% of our units are one bedroom apartments. And so, uh, the, I just wanna give a sense for how differentiated what we're offering, not only as Steve says in which neighborhoods, but sort of in general what the living space is. And all of our buildings have balconies of which of course now is, is, is more important than it was before and in-unit laundry facilities, which is more important than it was before. And so what's happened is we've stayed the same with our strategy, but the market sort of has moved toward us. And now it's just a question of if that's gonna persist.
00:08:35 Well, I'm sure if you, uh, rebound 10 years ago, you probably didn't have a global pandemic as part of your thesis, but, uh, certainly yeah, the units you guys have being more spacious, having those amenities, uh, you know, whether somebody's sheltering in place or working from home or working from home in, in the future, if a hybrid work from home, you know, visit the office a few times a week, uh, certainly boats, well for, uh, those attributes of your thesis and, uh, could likely, you know, be bright for, uh, in indefinite future.
00:09:12 And well let, let's hope. So we, we are always, uh, uh, you know, trying to make sure that we're testing all of our theories. But, but in general, yes. And so, you know, why are people preferring? And we see this in the data now. It's not only our gut reaction about what people want, it's in the rental year over year growth data and in the vacancy data. And what you see is that people are moving from the central business district out into the suburbs where rent growth is good and not so much in the denser area. And you also see that, uh, for example, two and three bedroom apartments have actually been able to slightly raise or main at least maintain their rent growth, uh, versus studios and ones where, uh, the, the situation just isn't as good. Um, now why is that? You touched on it.
00:09:56 Uh, Brent, the, the, the work from home issue is a big one. Uh, 30 to 40% of the people can of, of jobs are able to be worked from home. And, um, it appears that that is a new trend that's here with us to stay. Um, and you could think of it that if office demand is gonna go down somewhat, um, that's because, uh, office demand inside your home is going up. Um, a couple of other things that are playing into this is, as I mentioned, the social, uh, the, the, the social distancing norms where people want a balcony and they don't wanna do their laundry in a laundry room or in a laundry room. And then, as I mentioned, um, you know, the, from a bigger picture, the, the, the millennial generation is pushing from a mo from a household formation to a family formation, uh, situation that's happening a little bit each day. That's the way demographic shifts happen. They happen slowly, um, but um, in a world where their balance sheets might be constrained by student loans or affordability or whatever, uh, we definitely see this and 80% of our tenants or families.
00:10:55 Peter. Steve, thanks for taking time to give us the update on HP Ventures and what's happening in Chicago. As always, give the city my best. And for the audience, if you haven't subscribed to StreetBeats, please give us your email and we'll send you notification whenever we have a new segment. And we hope everybody is staying, uh, happy and healthy through this time. So we'll
00:11:20 Talk to you soon.