WS379: Market Analysis and Development Consulting with Pete DiSalvo

Our guest today is Pete DiSalvo, founder of DiSalvo Development Advisors. Pete is a market analyst and development consultant, and in our conversation today, Pete gives us some clear ideas of what that means, as well as how helpful his service is. Essentially, Pete and his teams research the relationships between rentable properties and their surrounding markets.

[INTRODUCTION]

[00:00:00] ANNOUNCER: Welcome to The Real Estate Syndication Show. Whether you are a seasoned investor or building a new real estate business, this is the show for you. Whitney Sewell talks to top experts in the business. Our goal is to help you master real estate syndication.

And now your host, Whitney Sewell.

[INTERVIEW]

[0:00:24.1] WS: This is your daily Real Estate Syndication show. I’m your host Whitney Sewell. Today, our guest is Pete DiSalvo, thanks for being on the show Pete.

[0:00:32.9] PD: Thank you Whitney, I appreciate the opportunity.

[0:00:35.3] WS: Yeah, I’m looking forward to getting into your specialty here and why it’s important in our business. But first, I want to remind the listeners to go to The Real Estate Syndication show Facebook group and get connected there and we can learn from experts like Pete and ask questions, and connect with other people in our markets and in other markets. Then also, go to Life Bridge Capital where you can connect with me as well personally.

A little about Pete. He’s the founder and president of DiSalvo development advisors, also known as DDA. More than 20 years of experience in market feasibility analysis, he’s consulted on more than 1,000 multifamily projects throughout 46 states. Pete, I’m looking forward to getting into this conversation. We haven’t talked about this, I don’t know, probably not more than one other time on the show.

You know, talking about this analysis and feasibility study, what that is exactly. I’m sure those listeners are saying, “What is that?” We need to know what that is and why it’s important but I’d love for you to back up and tell me, you know, what you do and how you got into this type of business?

[0:01:35.6] PD: Sure. I am considered a market analyst and development consultant. I cut my teeth in the mid-90s with national syndicators with the low income housing tax credit program. Since then, I’ve moved on to work for a lot of market rate developers and investors, apartments, medical, some student. Our primary product is a market feasibility study or report that says, if you build this, this is how the market will respond. Whether it’s an absorption rate or types of rents you can get or the amenities you need to have to achieve these types of rents, and long term viability of the project.

We do a lot of that. We do a lot of upfront work for big groups looking at markets that they should be focusing on. Either investing, acquiring buildings, and we have a lot of different key market indicators that we look at and say, “Hey, you should focus on these areas and lessen in other areas.” That generally is, in a nutshell, our market scope.

[0:02:40.4] WS: Nice. When does someone, you know, contact somebody like yourself to get this kind of information?

[0:02:46.3] PD: Ideally, the market analysis portion happens in advance of acquisition or development but we find too often that we’re coming in after the fact. Developers saying, “Well, this is the rent I need because this is what I paid for it,” and sometimes we’re the bad guy saying, “Well, we understand that but the market reality is, this is what is attainable and you should have come to us early on at least to give you some sense of it, whether it makes sense or not.”

[0:03:14.6] WS: Instead of having you there in the beginning to prove what they think, they’re bringing you in after the fact to really bolster what they’ve already projected or hope to project?

[0:03:23.9] PD: Yeah, unfortunately that happens a good amount of times too.

[0:03:28.1] WS: Yeah. You know, I’d like for you to go in to what is a feasibility study? And you know, kind of go into some of the parts of that study and why it’s important?

[0:03:37.6] PD: Sure, the core of any feasibility study, no matter what type of real estate product that you have, it comes down to supply/demand analysis. In the case of apartments, for example, it’s looking at the housing stock that’s there, and the competitive nature of that stock and then those market conditions you know – What is the occupancy level? Where are some of the weaknesses, strengths of that housing stock? And then comparing it with the demand side that’s generally the demographics, the economics of the area. Is there more demand happening than the supply that you have in a market.

That’s the ideal situation, and is that demand enough to cater to your particular project, can you get a fair slice of the pie from that demand or do you have competitive advantage or you can get more of that demand than other developers?

[0:04:31.6] WS: What’s going to be the best use of this type of study, you know? Is it going to be the person that’s doing the ground up development or am I going to use this this same type of study if I’m doing value add, 80s model apartment buildings?

[0:04:44.5] PD: Sure, it depends on the person. There’s value from this product at each level, and we cater the type of report we do depending on what your needs are. Certainly, when you’re getting into an area, you need some initial feedback to let you know, “Yeah, makes sense to continue.”

The data, those market indicators warrant further investigation. Most of our reports are making their way to investors. When they want to invest in a project, they want to see the underlying market data to say, “Yeah, this is a strong project.” If it’s a long term haul. Did the market dynamic exist for something like that?

Especially in those value added projects and a lot of those older projects that you can come in and buy and fix up a little bit to get more rent, there are a lot of other key factors that you want to look at too say, “Yeah, it makes sense to purchase this.” It’s got great access to job centers, shopping, but really looking also at the product type. Are the floor plans compartmentalized? Do people feel like they’re coming into a spacious apartment? Are the bedrooms large enough? There’s a lot of small things from a product standpoint that you need to look at as well.

I would say, at every level. And then eventually the bank is going to want to see that report as well. There is value at every point. The biggest value to me is the very first assessment of saying, “What markets – Or is your market worth looking at?” There’s a time savings, there’s financial savings and then as things go along, there’s not going to be big surprises usually.

[0:06:19.7] WS: Okay, where does this – the data come from?

[0:06:23.3] PD: There’s a wide variety of data sources. I will say that what makes us a lot different from other groups is that we don’t rely solely on secondary market data like ACS, American Community Survey data. We go out into the market, we talk to people and we see things that either validate some of those secondary data points or they are opposite and we need to dig deeper. We use a demographer, Esri. A lot of other folks use maybe Claritas.

There’s many city – There’s a lot of sources that the city and county reach in the markets, so we get into – And then, as it relates to apartment surveys, we actually have staff that will go to each apartment because we’ve found that those big secondary apartment surveys that people subscribe to, they’re great for macro, but when we’ve gone in to the market, we found that the data is not the detail level that you feel comfortable with it.

Many times, they use averages or the information will just be off. But we’ll actually visit the property and we can identify other things besides what a national database calls.

[0:07:33.0] WS: Okay, so you all are actually traveling to the market, or you have staff that are actually going to the apartment building or the location and other probably locations around the area as well. I mean, that’s pretty detailed, or that’s some work.

[0:07:45.8] PD: It is. It’s what separates us from some other groups that rely solely on secondary data and some of that. We’re considered a boutique firm. Most of the stuff I have my hands all over, most of the stuff. But some of the larger firms are having kids coming out of college that are jumping in there. They may not know the questions to ask and the analyst may not even be in that market.

We take pride in saying, “Hey, I’m at your market. I know the types of questions to ask. I’ve seen so many different things that I’m going to bring that to bear on your study.”

[0:08:17.4] WS: What’s a typical cost of a report like this?

[0:08:20.5] PD: It can range. If you’re talking preliminary type of assessment, it can just be a few thousand dollars. I would say probably nationally, the average is around five to 6,500. 5,000 To 6,500 for a full study. Again, we customize ours to the client so there’s times when you just don’t need all the fluff and we want to get to the core issue and it will cost you less.

[0:08:47.2] WS: Yeah, I mean, when you’re considering, especially a big development deal,

and, you know, you’re investing 100 million dollars, five grand to have this type of detailed study is a shot in the bucket. I mean, it’s great information that you probably wouldn’t know otherwise. I love having outside eyes on details like that, you know. Whether it’s the underwriting or whether it’s the market information, you know. Somebody that’s a third party like yourself that’s not biased, you know? Or swayed maybe one way or the other.

[0:09:14.7] PD: Sure, I’d like to think on many of the studies that I do, that I bring the value in terms of actual rent revenue well exceeds the 5,000. Whereas identifying, “Hey, you know, if you added this amenity, you’re going to be able to get $20 more in your rent or whatever the case may be or, hey, we’re underpriced.” You may have bought a value added asset but the reality is, today, without making any improvements, you could jump your rent. In many cases, we’re more than paying for that just from that revenue.

[0:09:48.4] WS: That brings up a good question. This report’s going to tell us what amenities to even add or how it’s going to increase the value if we do, or if it’s even needed. Can you elaborate on that a little bit? What else and how detailed is that? I mean that is an amazing information for us to have.

[0:10:03.4] PD: Sure, so by us physically going into each of the markets, we understand what amenities are attached to each of the apartments that allowed them to get to those rent levels. So if a developer wants to get to a certain rent level and we see the majority of the projects that are achieving this, here is the type of amenity that they offer, we need to take a hard look as to why we wouldn’t be offering that, but there are some amenities that are kind of the rent up amenity.

You know when you get larger projects and you have to put a pool in there, a lot of developers will say, “Nobody ever uses the pool.” Which is often the case but the reality is, it’s a rent up amenity, and if people are looking at several apartments and you’re the one without a pool or a fitness center – Even I would like to think that I would be working out all the time with a membership, but the reality is people don’t do it a lot. But it is to have that there. The rent up amenity is really important.

So we’ll look through all of those, not only project amenities but unit amenities, or unit market where all the appliances are stainless steel, the countertops are cord, you know, whatever the case may be and what do we need to have to get to these rent levels that you are asking.

[0:11:19.5] WS: That is a good point that you brought up too, like project amenities versus the unit amenities. So you are all going to help us to think through should we go the extra – Put in the extra investment, put in granite as opposed to a cheaper type of countertop. Is it going to get us the extra rent to make that justifiable. Is that correct?

[0:11:38.0] PD: Yeah and a lot of it is going to have to do with the size of your project. If all developers have a different number, maybe it’s 70 units, maybe it is a 100 units, where they say, “Here is where I can start to pay for amenities, project amenities.” If you have 40 units for example, it is not realistic to think you could put project amenities into the property. So we want to make sure that you are also not adding amenities that aren’t going to see a revenue benefit you know just to add them.

[0:12:06.1] WS: And how long does a report like this normally take?

[0:12:10.2] PD: It is usually a four to six-week process. We have some developers that run to us really quickly. If you need something sooner, we may be able to do preliminary, but sometimes we’ll pass them along to some of those larger groups that are pushing studies. They are the Walmart of market studies that are pushing them through. So usually a four-week is pretty much the minimum standard.

[0:12:34.0] WS: And anything else like good or bad or anything else that this report is going to tell us that we need to be familiar with?

[0:12:40.6] PD: Sure, so some of the indicators that we want to really take a good look at – Some of the key market dynamics that we want to make sure exists is, what is the market exposure of your property? Are you getting enough traffic that is driving by the property? If you are not, that has shown to be a big issue in markets where if you have let’s say less than 10,000 cars a day that can see your property, that means that you are going to have to put more money into marketing.

You are going to have to have leasing agents maybe running out every morning to try to put a sign to attract but that is one of them because you want to have as many people know about that. You never know how they’re going to – It may refer somebody. “Hey, I saw this apartment as I was driving by.” That is really important.

And the surrounding land uses. They’re not thought of a lot of times and if the uses are not complimentary to residential living, if it is light industrial or mini-storage, or other types of uses that aren’t great and really compatible, that is something you want to take a strong look at. I guess the other thing that we talked about a little bit is digging into your product, your floor plans and looking at your unit mix. Are you really heavy in one unit size and how does that relate to the demand.

And sometimes there are areas where people just don’t want to live. They are living there because the market is really strong. And that is happening across the country. So you have folks acquiring properties that are 95% or higher occupied and they think they are getting a great value or maybe they’re overpaying for that but if there is a hiccup in the market, sometimes that is the first one to get hit and we need to make sure that there is some – Those strong fundamentals are there so that you get through that time.

[0:14:26.5] WS: Awesome, that is some great information. Make sure strong fundamentals are there, digging in the floor plans, unit mix, and you brought up the surrounding land uses, and I don’t hear people talk about that but it can be so important. Knowing like you said if it is industrial or storage or something that is not complimentary to a residential space. If we are developing a multifamily apartment building.

So earlier you mentioned the absorption rate and other key market indicators. Would you just explain what that is a little bit for somebody that hasn’t heard those terms before?

[0:14:57.1] PD: Sure, so absorption rate or rent up as it is often referred to – If you are opening a new project or you’re gutting another one and reopening it, how many units can you expect to rent every month until you reach a stabilized occupancy? So if you have a 100 apartments, how long is it going to take you to get to rent 95 of those apartments, and we will come in and say that’s X number of units and average X number of units a month and that we would expect you get in to stabilized occupancy by a certain time.

Now there is some importance to the timeline because once you get past the year, you start to incur some turnover, and if you’re looking a year, sometimes two years for a rent-up, banks will frown upon that. They don’t want to see a project on a really long term rent-ups. So that is another important factor.

[0:15:49.2] WS: So what is the hardest part, Pete, of getting a study done like this? Maybe as the operator or the developer, what’s the biggest issue we are going to have?

[0:15:56.6] PD: That’s a good question. It is and I hate to say it, that it is unique to – It just depends on the market and the product type. Certainly as it relates to new construction, we keep finding that the developer will come back and say, “If the construction was more than we expected we need to get much higher rents,” and they come back to us saying, “Please look at this again and tell us why this $1,200 rent can’t be $1,400 a month?” That is probably our biggest challenge.

And developers’ biggest challenge is you get construction estimates and then by the time it’s built, it is a whole other number.

[0:16:32.9] WS: Wow, so what is a way, Pete, that you have improved your business recently that we could apply to ours?

[0:16:38.6] PD: Well we have incorporated GIS. A real heavy mix of GIS with our market data so that a syndicator or an investment group could come to us and say, “Hey, we’re looking at this metro area or tell us where to look,” and we can provide maps that highlight those strong markets. Some of those key things that – Sometimes we lose sight of some of the easiest measures of a market.

So we will look at building activity in the market, the actual permits that are occurring, and the renter/household growth, and some of the markets, we see that the building permit activity or five year periods that exceeded that growth, and those also happen to be some of the markets where they’re like, “Hey they are over built now. They have high vacant rates” well guess what? We can see some of that before ahead of time through looking at building activity versus what renter household growth is and employment as well.

So I would say our GIS is probably our newest tool and we can provide online maps as well. So if you are in a market you can search through and see, “Hey I am not in an area that we should be thinking about.”

[0:17:50.9] WS: What’s one thing that you would say has contributed to your success Pete?

[0:17:54.5] PD: Keeping an open mind, and really having the experience of being all across the country, and seeing mistakes made and lessons learned, and really giving that information to my new clients.

[0:18:05.7] WS: Nice, and before we have to go, tell us how you like to give back?

[0:18:08.7] PD: Well, occasionally we like to do some pro-bono work for some of the local non-profits and provide them some – if they’re looking to get a new business, and provide them some market support and say, “Here is some research that helps” to forward their mission.

[0:18:24.7] WS: Nice, tell the listeners how they can get in touch with you?

[0:18:26.8] PD: Well our website is ddadvise.com. Our contact information is on there. Thank you very much.

[0:18:39.1] WS: Awesome, thank you Pete. That’s a wrap.

[0:18:41.5] PD: Thank you, I appreciate it.

[END OF INTERVIEW]

[0:18:43.2] WS: Don’t go yet. Thank you for listening to today’s episode. I would love it if you would go to iTunes right now and leave a rating and written review. I want to hear your feedback. It makes a big difference in getting the podcast out there. You can also go to The Real Estate Syndication Show on Facebook so you can connect with me and we can also receive feedback and your questions there that you want me to answer on the show.

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[OUTRO]

[0:19:24.2] ANNOUNCER: Thank you for listening to The Real Estate Syndication Show, brought to you by Life Bridge Capital. Life Bridge Capital works with investors nationwide to invest in real estate while also donating 50% of its profits to assist parents who are committing to adoption. Life Bridge Capital, making a difference one investor and one child at a time. Connect online at www.LifeBridgeCapital.com for free material and videos to further your success.

[END]