"The importance of frontline staff — the grocery store guy, the superintendent, the leasing agent — frontline staff is critical. They need to be valued, trained, paid, and motivated. We can all improve, I think, on that." — Derek Lobo
Apartments are going to be very successful in the future for 4 reasons:
- Investor demand for a stable asset grows during uncertainty.
- Apartments are scalable.
- Interest rates are at historic lows.
- Land costs are getting cheaper.
It's the perfect storm to build.
That's our topic for this episode of Sync or Swim.
Derek Lobo, CEO and broker of record at SVN Rock Advisors Inc. Derek is a thought leader in the apartment and student housing industries, specializing in new apartment construction, asset management, leasing, and multi-family brokerage.
What we talked about:
- If it's the perfect storm to build, then what should you build?
- What COVID is forcing developers to do that we should have been doing all along
- 3 things to tell a client about leasing
[00:46] Mitch Fanning: Welcome back to Sync or Swim with Rentsync, formerly LWS. And joining me today is Derek Lobo, CEO and broker of record of SVN Rock Advisors, a real estate brokerage who specializes in the apartment and purpose built rentals industry. Derek, how are you doing today?
[01:04] Derek Lobo: Mitch, fantastic to be here, I'm wound up and ready to go, man.
[01:08] Mitch Fanning: Awesome, awesome stuff. So why don't we start off by you just telling us a little bit more about yourself and expanding on that intro and maybe how you got into the industry...
[01:19] Derek Lobo: My modus operandi for 35 years has sort of been the same. Okay, I find a topic that not a lot of people are talking about, okay, then I write a book on it, then I do seminars on it. Then I do webinars on it, then I start consulting in it, and then I do brokerage in it. As a model, I followed... And it actually started in 1986 when I wrote a book titled How to take a building to rent review, and it was a self help guide for landlords. So I produced the book, then I started doing seminars on the topic, then I started doing consulting on the topic... Fair enough. So then fast forward another number of years, all of a sudden it was 1990, we elected the NDP, there was a recession, and vacancy started going up, so I did the same thing. I wrote a book on the topic called, "How to rent apartments fast." Okay, and then I did some seminars on it across Canada, I did dozens, this was before the internet. You know what I mean? That you had to go out and talk to people. Yeah, yeah, and then I started doing consulting in it and then performance, then we started leasing up apartment buildings, and after that, you know, we saw a new apartment construction needed to happen in Canada for many, many reasons, right? Beyond the scope of today...
[02:34] Derek Lobo: So I'm currently writing 12 books on the topic, a new apartment construction will be a series of books like a box set, and I've done webinars which... And seminars across Canada, and we do an annual conference every year, in fact, we used to do the conferences with Rentsync together back in the day, right? We would do them back to back. You guys were on the first day, we were on the second day and we'd share the cost of the stage, you know what I mean?
[2:56] Mitch Fanning: Back with it was good to do those kind of things.
[3:00] Derek Lobo: Yeah, I mean, we'll see a... Jason Leonard did a real flair for setting up the stage, setting up the room, so it was a great collaboration, I wish you still did it, but anyway, so it's always been kind of writing a book of seminars, consulting, and ultimately brokerages. So, today, most of my time goes tp new apartment construction where we do feasibility studies, we do consulting, and then we do the brokerage, and we sold... Oh gosh, I think we saw more than 20, out of the 40 most expensive sales in Canada, I think we've done 11.
[03:34] Derek Lobo: But everything starts with the consulting, the book and speaking for us. That's my MO. So whatever I do in the future, there'll be a book, there'll be a seminar, and then there be some activity around that...
[03:46] Mitch Fanning: Okay, note to self. Now, you mentioned 1986, you mentioned a lot of changes in the apartment industry... Now, there's no question, over the last five to 10 years, there's been a lot of change in the industry. And I'm speaking specifically around the adoption of technology, just to name one... Just to name one thing, and that's only really accelerated with the emergence of covid, now you've been in the industry for 30 plus years. So in your view, you mentioned a couple of changes in your intro, but in your view, what's been the biggest change...
[04:25] Derek Lobo: Well you know, when I first started in the business, I was, I don't know, I was 28 years old, I had a full head of hair. You know what I mean? And I used to go to these apartment meetings where the people smoke, you actually smoke in the meeting, that's how long ago it was, and it was generally older guys, it was the apartment owner himself or his staff that came there... Nobody ever changed companies, it kinda wound up working for one guy, you went through the grind of things... You know what I mean? But I think the thing... So there's been a lot of change, but what I have noticed the most is when I go to industry association meetings now, right, you go to a GTA meeting or a FRPO meeting, some of them... I think it's the number of people I see there that I don't recognize. And the's young people there, there's middle aged people, there's older people there, there's the thing I love about this businesses that it was kind of a mom and pop business when I started in the mid 80s, now it's a sophisticated industry where people get career paths.
[05:22] Derek Lobo: So you can join, we've had a number of leasing agents who work for our company, who are now vice presidents of companies, so I think that's what I think is the most fascinating that this industry that was backwards then is now we've got a way to go still but it now has become a professional path to be on and to be in a professional in the apartment business, you can move around from company to company, the pension funds are now in the business, so I think it... Even before, and I do a proposal, my proposals, a one page thing I sent to the guy all of a sudden, I remember a guy came to me and said "Derek, you can't send me a one page proposal. We're a pension fund." So what's happened is, as the industry has matured, it's dragged everybody with it, right? So when guys come in from other asset classes, they have certain expectations of the performance of their consultants, the brokers, their suppliers, right, the things that we are. And I think that we've all had to step up our game, and that's a good thing,
[6:18] Mitch Fanning: Not to foreshadow, but I do have a question around the evolution of the career paths in my queue here of questions, but just changing gears just for a second, we obviously can get out of this conversation without talking about COVID, and in one of your recent videos, you mentioned it's the perfect storm to build apartments. And that really intrigued me. So my question to you is, why do you think that?
[06:54] Derek Lobo: When you think about all the asset classes, right, you've got retail, you've got hotels, office apartments, industrial, right. Three of those are facing significant headwinds, industrial is doing pretty well, that apartment is the big scalable one, so I think four reasons the apartments are going to be very successful in the future, so it's existing apartments plus new apartment construction. Number one is investor demand, what investors crave today is stability. Well, what's more stable than an apartment building, right? So apartments are stable, that's why the cap rates are so low, right? So number one, investor demand is, I think is gonna get stronger in a more uncertain world, and no one's making a prediction on the future and nobody knows what's gonna happen, nobody knows, but apartments are the most stable asset class, are also scalable. Everybody understood. I've never rented industrial space, you probably have an ether, but we've all lived in an apartment, so my point, it's an understandable business. It's not a complicated business, the financing is good at it, and so on. So number one, investor demand is there, number two is renter demand is there. In Ontario, in Quebec, you've got rent controls for 30, 40 years, that has stymied the supply, so when you're building apartment, you're not building for future growth...You build a office and hotel, we're building for existing massive pent up demand, so the renter is coming, and other than the downtown cores which are suffering now because the office towers are shut down... The rest of the business is doing great. Okay, it really is. So if you think about the suburbs, the secondary, tertiary markets, even the major cities, as long as you're not in that downtown office core, the CBD, you're doing... Now you're doing very well. So the investors there, the renters there. The single largest cost for apartment is cost of capital, and interest rates are at historical lows. And I think the one thing we can all agree on is that interest rates probably have to stay low for the foreseeable future, so that means your biggest cost is on sale, cost of capital, and so investors are there renters are there, money's there, and I think I'm gonna guess that if this problem we have now continue land costs are gonna get cheaper, and that's one of your larger cost construction costs right now are way up because of demand, but that... Who knows what that's gonna do, but...So those four factors, I think, right? Are what is gonna drive new apartment demand, it's also gonna drive demand for existing apartments, but there are only so many apartments, so what I say to people is if there's a fixed pool of assets, why don't you just make the pool bigger?
[09:35] Derek Lobo: Instead of keep paying and paying for the same fixed pool, help make it bigger, and that's really what our mission is, our mandate is to help developers transition from their existing development of their hotel and office to reach a good... Whatever, they've got 90% of the skills that they need to start developing apartments, we will teach them that last 10%. That's what our job is. And then so we'll do the feasibility, the consulting, the brokerage, the lease up, and things like that.
[10:02] Mitch Fanning: So let's talk about making... that pie bigger and get a little bit more into the process of building and leasing up these projects. Now, when a developer hires your firm, typically they start with doing a feasibility study, what questions are you trying to answer when you go into each one of these studies?
[10:26] Derek Lobo: So we're usually the first call a developer makes, okay, or we should be... Don't start spending a lot of money till we've had a discussion. So what our feasibility study... And it's a report, it's a detailed report, it's about an inch thick and, it's written for you, and then you give it to your lender, but I'm not writing for your lender, I'm writing it for a developer to make more money, then we'll give it to a lender. Once you've cleared up the vision, a little bit together, financing. So we answer five questions, should you build... And you know, look, we've done so many, probably 70800 studies across Canada, we can tell you, we can give you a red light into that, project's not gonna pencil right after that, they'll just talk you do on the phone, it's a free quick... No, if your project isn't gonna pencil out, okay, we just... We've got a good sense as to what works, okay, and anyone who's been doing something for a long time, can often... A guy buying cattle can look at a can go, that's a good cattle, or whatever the analogy is, we've just done enough of this to kind of know...
[11:25] Derek Lobo: So if the answer is yes, you should build, then we go ahead and do a feasibility study and define that... Okay, so number one, should you build... The second one is, What should you build? What's the unit mix? What's the unit size? And what are the amenities? Fair enough. Okay, next, what's the depth of the market? So, can I build 50 of these, 100 of these or 500 of these? And in how long... So should you build... What should you build...and How much can you charge before it is... How much can you charge... That's the number one thing you need to know, because 100 more in rent times 12 at a five cap, remember that X 100 all goes to your bottom line, ages times for the five cap $24000. So if we can help you predict the rent, that's the most important number that goes into our formula into your pro forma document of should you build... What should you build...How much can you charge... What's the depth of the mark and the fifth part is, we do a pro forma for and what the building is gonna be worth when it's finished, the proposed building that we suggest.
[12:28] Derek Lobo: Fair enough. So typically, a client comes to us for the piece of Gard and says like acting out the 100000 square feet of apartment ship where I'm gonna tell him whether he builds 200/500 square foot apartments or the is 50/2000 square forearm ENTS, they both come down to 1000 or 11000 core departments, and that is all data driven by who we think is gonna rent their age, their income, their habits and things like that. So we design the apartments based on the demographics of the area, or the demographics that area is moving toward sometimes... Right. But the most important thing is rent.
[13:04] Mitch Fanning: That's a great overview. And obviously, based on the last question I had in terms of it being the perfect storm to build, should you build and maybe what to build, obviously that kind of covered off, but given the current environment and market conditions were in... Specifically when it comes to COVID, when it comes to new construction or purpose-built rentals, and that design stage, how should developers approach determining unit mixes and sizes given this current environment?
[13:44] Derek Lobo: Sure, that's a tough question to answer, right? Yeah, the very first question we ask a developer is, are you building the keep or are you building to sell... So if you're building to keep a building, you're gonna build one kind of building, you're not probably if you're building to keep you midterm and for the future, but if you're building to sell, you may not recoup your money fast enough to put into thermal... Right, if you're building to keep... You've got a 20 year or 10 year long-term horizon, right, but if you're going to sell, you don't have that time, the building's gonna go up in value 5, 10, 15 years down the road. So if you're building a in terms of size is... Let's just look at two extremes, you're building in downtown Toronto, I'm gonna build more one bedrooms and more smaller units, if I'm building in Oakville, one of the richer cities in Canada, I'm gonna build larger units and more or two bedrooms and some two bedrooms, and dens... 'cause then I'm going after the empty nester homeowner, and downtown Toronto, I'm going after the young person working downtown with high income, and then they want the lifestyle and so on.
[14:51] Derek Lobo: So it's very much driven by the demographics of your unit mix and your unit size, but younger people want more one bedrooms, smaller units, older people, larger units, more... Two bedrooms in a nutshell.
[15:05] Derek Lobo: So do you think, because of COVID and let's just talk the top of the market, like Class As, do you feel like developers who are thinking about building a Class A or thinking about changing up that unit, unit mix a little differently than they did, maybe say a year ago, yeah.
[15:27] Derek Lobo: You know, I think of COVID is almost being in a fog, we just can't see ahead of us. And so during COVID, when this thing first started, like I said to myself. "Look, I don't know if I can make any long-term plans." When it first started in March, I was literally taking day by day, I had no idea what was gonna happen. And then I kinda went, went week by week, and now I'm kinda going maybe month by month, so I'm thinking that sometimes the plan is to continue on with the plan up until the clear advice comes in far enough. We can't see through COVID right now. We don't know what's happening on the other side... Okay, so I would say that I would still ask the question, Are you a seller or are your long-term keeper? That's what's gonna guide most of my discussion. Okay, now... Or you could ask the question, should I build this as an affordable project? Okay, and we've got a group of people here that just study affordable housing, we do webinars, so everything we did before we've done, I didn't write the book yet, but we'll do the seminars of consulting and then help developers go through the process.
[16:37] Derek Lobo: So the one thing I would say they might look at a differently is look at affordable now, but quite frankly, make... You should be looking at it before anyways, it just becomes more flavour of the month... Exactly. To look at affordable right now, if that makes sense.
[16:54] Mitch Fanning: Yeah, sometimes I say, all COVID really did is forced us to do the things that we should have been doing all along.
[17:15] Derek Lobo: This situation has forced us to do what was inevitable and it's accelerated it, so I don't see a whole lot of good coming out of this, but that's one of them that... Well, it's forced me to use Zoom... We were not in the online training business we used to do this annual conference, we have now done... So we are at eight months into this, we have done probably 46 webinars, 35 and then paid webinars, it's a whole business for us that got created it, so yeah, it's been an adjustment, man, for sure.
[17:48] Mitch Fanning: Yeah, definitely, that's been a pivot of a lot of people I've talked to that do, do some type of training that was done previous to this physically, but I have now needed to switch to virtual,
[18:05] Derek Lobo: And it's probably 75%, 80% is effective. Without all that massive effort of travel, setting up hotels, all of that stuff, right.
[18:13] Mitch Fanning: Yeah, absolutely. So switching gears again, and going down that list of kind of the pricing side of things, again, given the current situation and looking at it through that lens, when it comes to the lease outside of things, what's the best approach in your mind or what you're telling clients when it comes to leasing up a new project, specifically on the pricing...
[18:42] Derek Lobo: Yeah, yeah, I would think about three things philosophically, number one, start early. Too many guys. Does anyone set up a webpage? So start early. Number two, embrace technology, you have to embrace technology, all your apartments, the majority are gonna lease off the internet, and there's so many cool things you can do. Again, you could do a whole show on this, and you guys know that business at Rentsync better than we do by far, so I would say start really embrace technology, so that means bringing in new people, 'cause developers typically are...They're probably in their 50s, the majority of them. Right? So, you need to have enough money earned to become a developer. And then the third, and the one that I think people need to pay attention to is: Pay attention to your front line staff, they are the revenue generators, that person gets you 100 more rent because they're a sophisticated sales person, that's $24000 you've made in that unit, they do that 100 times, you've added $2.4 million to your bottom line, because you have a highly trained, motivated, well-dressed frontline closer. And so we opened up apartment leasing university this year, we put a couple hundred people through it, and all we're doing is teaching, front line, foundational sales techniques, but with an apartment flavour to it.
[20:08] Derek Lobo: But what's really cool? Let's talk about technology. One of the main things we do in training was roleplaying, well, now in zoom, you can go to break out rooms and roll play, so it's amazing what we've been able to accomplish using technology, and I'd say personally, I'm probably a late adopter, I'm not an early adopter for sure. But you've gotta embrace. You've gotta embrace technology. And I think the one thing we've also learned during this time is the importance of front line staff, the grocery store guy, the superintendent, a leasing agent. Right. Front line staff is critical, they need to be valued, trained, paid, and motivated. We could all improve, I think on that.
[20:49] Mitch Fanning: That's great advice. Yeah, absolutely. Now, that's coming back to the career side of things and the apartment as a profession, I promised I'd come back to that. And you kind of reminded me when you talked about the front line staff, and this could be controversial, we talked about this during our prep call, we talked about this, but you had mentioned that the apartment profession or the apartment professional hasn't always been as sophisticated as say, other professionals in the real estate industry. And one of the reasons, and I thought it was a great insight was that the owner or owners are evolving and becoming more demanding, so... Why do you think that is? In general, why do you think that they weren't sophisticated and now you're becoming more sophisticated.
[21:47] Derek Lobo: Really the answer is rents, rent controls are a blythe on the industry. Regulation is a problem for any industry, right. So, the apartment industry is highly regulated, so when you have no new construction, growing population, your rents are capped, well, your customers are lined up for you, You don't need to have good customer service, you don't need to have good reporting, you don't need to have trained staff, you're an order, taker, it's like the passport office, what's their motivation to give you a great customer service, there's only one place to get a passport, it's a monopoly. So in a sense, rent controls created, at what politicians need to understand is true protection for the public comes from competition. What do you do force Ford to build better cars? No, Toyota will make them build better cars. This is my point. So what we've seen is a sad mistake in thinking... Rent controls protect tenants. Rent controls hurt tenants. Rich people live in apartments and don't move fair enough? Or affluent people, they rather buy a cottage and give up their rent control apartment in downtown Ottawa or downtown Toronto, something like that, right? Yes, I think that the reason is that because the culprit, you can go back to is rent controls, that created a regulated environment, regulation does not create great customer service, and it does not create competition, so it's Adam Smith 101.
[23:15] Mitch Fanning: Now, before we move into the last section, I call the quick fire round, and maybe this is kind of a dovetail off to the conversation around rent controls, but you had talked to me a little bit about, again, during our prep call, there was a great danger to our apartment industry, and I thought it was really interesting and I want it... Maybe to see if you can elaborate on that. So the question is, now what is the greatest danger to the apartment industry in your mind, moving forward?
[23:49] Derek Lobo: You know anyone who becomes an apartment developer or an apartment owner is an entrepreneur, he or she or the family is prepared to take risk... Right, so you get rewarded for your risk or you get punished for your risk, we're prepared to do that because we've chosen to go into business, you guys, your business guys, you're prepared to go into the business of serving the industry. Right? I'm prepared to do that. What I think is the greatest danger is regulation, because now you add a wild card, so you can't blame anyone for COVID, it's life, it just happens. But how you react to COVID is a big problem, so the government has spent a ton of money, some of it wasted. That's gonna cause a problem. So I'm not saying the free market always takes care of things, but you need it to help people in unemployment insurance, some amount of CERB, but every 17 year old should not have gotten CERB, it was a giant waste of money and so on. So yeah, regulation is the, I think, is the greatest danger to our industry, and because the industry is already regulated, it's easy to make a change, it's not like you're bringing a new piece of legislation, you're just adjusting existing piece...
[25:00] Derek Lobo: For example, the rent freeze that Ford has done for 2021...First of all, why would you call it so early, you called it in the middle of the summer, maybe COVID would have been solved by then... Right. And then for example, so why are you freezing the rents on people who are paying way below the market anyways in all rent controlled apartments? Like, Why are you doing that? That doesn't help anybody. So I think regulation is my biggest concern, I think for any industry, you're prepared to face what happens in the marketplace, you're prepared for whatever black swan events, whatever, that's just life. But when legislation comes down on you that's purposely designed to do something, it often does the opposite. So, rent controls create shortage.
[25:44] Mitch Fanning: Yeah, definitely. No easy answers to that one. I guess the only thing I'll say is we'll move into something a bit lighter. Like a quick fire round. So, Derek, the quick fire round. Since you're new to it, is... I'll say a statement and you'll have about 60 to 90 seconds to answer. Derek, are you ready?
[26:08] Derek Lobo: I'm ready, man.
[26:10] Mitch Fanning: Alright, here we go. So first question, what are your thoughts on virtual leasing?
[26:15] Derek Lobo: I think virtual leasing, it comes to what I said about technology, like you gotta embrace technology. Virtual leasing is, it's like when everyone's out of town... That's the way you lease. Right, so during the COVID shut down, and I said, just imagine everyone's from out of town, lease to them that way, but as things return to normal, I think virtual leasing is a new part of the rental process, people still wanna see their apartments, they still wanna come in and look at things, but I think virtual leasing is here to stay, and it's part of the process of renting apartments, and it wasn't before even when we come out of this, the shut down period.
[26:50] Mitch Fanning: Absolutely agree. Given COVID, what have you changed your mind about lately?
[26:57] Derek Lobo: I... I always thought that all regulation was bad, but I think it should be like Texas, where you can build anything anywhere. But you know, when you look at the way Toronto has evolved into this major dynamic world class city with good transit, not great, but good transit, mixed neighbourhoods, restaurants, offices, apartment buildings, so I think I've come to just realize the value of urban planning, and it's not just about the development, cramming as much as you can on every site, there is something about placemaking, creating communities, creating 24 hour cities, and so we've all been to US cities that hollow or at night, and you go to downtown, maybe Houston or Albuquerque or wherever they just the office empties in Toronto, sometimes the traffic jam is as much in the evening as it is during the day. And so I think I've come to appreciate, to some extent, municipal politicians who have had maybe a really long vision as to how the city will evolve and that diversified neighborhoods placemaking and so on has all been... Has all worked, it's probably frustrating for developers to go through it, but I think at the end of the day, we've got some pretty good looking cities and some pretty functioning cities to make it work.
[28:17] Mitch Fanning: It's interesting, as you're saying that I'm almost envisioning that the urban planners almost have to reimagine what the cities are going to look like given the migration, and I know that's a short-term thing, but in a way, they almost have to create different appeal to the urban life, and something that it wasn't before to maybe entice some of the people who may be, for whatever reason, decided to move away... Almost entice those people in the future to stay. So it's definitely interesting. For sure.
[28:59] Derek Lobo: Yeah, you know, my gut feel is that we are creatures of habit, I want to start going to restaurants again, I wanna start visiting my clients again, I wanna start flying and I wanna start taking vacation again, I wanna see Bruce Springsteen again. You know what I mean? And so I think I am going to in all likelihood, as we get through this, I'm returning to the life I had, but with more zoom in it... Yeah.
[29:23] Mitch Fanning: Yeah, absolutely. No, absolutely. So number four, what's the most misunderstood thing about you...
[29:34] Derek Lobo: That's a great question. I think because I am the front man for our company, I think that people don't... People don't realize the 20 tons, the people behind me. Right, and I'm just the front man, so there are people that are just really great workers in the vineyard who are smart and who can make a spreadsheet, sing... You know what I mean? And I've got guys who can make GIS maps that are incredible, and they've got other people who are tenacious and see a real estate deal through, so I guess it's in the front man, and a lot of people behind me with real specialty. And that's what I think makes a team is you need a couple of generalists... I'm the generalist, right. But people with real, real skill to do some type of... How did you do that? Right, and then you take three or four of those people together, you take their unique ability and you put that together, and that's how you get a $200 million dollar deal done. One guy doesn't get at $200 million dollar deal done, a team of experts get it across the goal line. One guy is kind of the face of it. Sure, right. Because you need a face. But that's what I say is misunderstood about me. Smarter than I look... Or not as smart as I look.
[30:49] Mitch Fanning: I agree with the team dynamics, for sure. So I guess my last question would be, Derek, where can people find you on the internet?
[31:09] Derek Lobo: I think it's the number one source of traffic to our website is my name, so. People just Google me, that's... That's the number one way people ask, Well, you kind of to that front man idea... Right, but I would say that certainly. Just spin, SVN Rock, but you don't go to YouTube. I probably got, I don't know, 50 videos up on YouTube, we've got a channel there. And we are happy to... I always say to people, If you attend one of our webinars, I hope it's like drinking from the fire hose, we're just gonna give what we know, right. And that makes you a better client for us, if you're not a client for us, then... That's okay too. You learned something, right? So I think that would be the best way. Just just Google my name, go to our webpage, SVN Rock, go to YouTube and put in my name. And there'd be a lot of content.
[31:48] Mitch Fanning: Okay, we'll put those all in the show notes as well. Well, that's it for another episode. Derek, thanks so much for doing this. It's been a pleasure.
[31:59] Derek Lobo: No, the pleasure has been mine. Good luck with everything and all the best for 2021.
[32:02] Mitch Fanning: Okay, well, until next time, keep swimming.