I spend a lot of time showcasing real estate investment firms who have found success investing across the major food groups; multifamily, office, retail, and industrial. The entrepreneur’s career paths are in no way linear, but they often work with a best-in-class institutional real estate firm prior to venturing off on their own. Their investment strategy and execution is sound, but often not innovative.
However, that’s not the only path to entrepreneurial success. Real estate is a business that rewards creativity, and professionals who come from more forward-thinking fields, and enter the real estate business can find a lot of success. A few months back I met Chris Beldsoe co-founder of Stage 3 Properties at their Midtown office. Chris worked with Lehman Brothers, researching consumer product companies, prior to founding Stage 3 with his brother, Andrew. They’ve applied what they learned in their prior jobs to the real estate space to create an innovative firm, Stage 3 Properties.
Stage 3 partners with developers to provide “all-inclusive living experiences” through their brand Ollie, combining thoughtfully appointed furnished micro-studios and co-living suites with extraordinary lifestyle-relevant services, abundant amenities, and unique community engagement activities. Ollie combines everything millennials want in an apartment and living experience, in a thoughtful way.
I invited Chris to share his story, his impression of the real estate business, and what he’s learned about the demands of millennial renters.
Chris, you and your brother Andrew come from outside the real estate space – what inspired you to team up and form Stage 3 Properties?
Stage 3 Properties’ founders, my brother Andrew and I, created the company on the belief that virtually every aspect of the housing process in New York City – from the initial search to the lease signing to the move-in and eventually the living experience itself – needed to be reimagined.
In mid-2006, when Andrew moved to NYC as a young analyst working at Bear Stearns, landlords were seeking $2,800/mo for a 1-bedroom apartment in the financial district. In order to qualify for an apartment at this price, landlords were requiring earnings of $112,000 or more – based on a longstanding industry-standard income-to-rent ratio of 40x. Despite working in finance, as a 24 year old entry-level employee, Andrew fell well short of this income requirement. It took two additional guarantors – both our mother and myself – to sign the lease. When Andrew decided to create an additional bedroom in the unit, he went on to Craigslist to seek a roommate.
Not only was he dumbfounded by the volume of responses he received from people interested in his spare bedroom, but he was shocked by the substandard quality of the other spaces he saw listed on Craigslist’s “Rooms & Shares” section. Around the same time, I was researching consumer product companies for my employer, Lehman Brothers, where I gained a deep appreciation for the importance of innovation. The failure of a brand to adapt its products to changing consumer tastes typically guaranteed its demise. Thinking of housing as a consumer product, not an asset class, I observed that all of the innovation in housing was happening at the ultra-high end of the market, in multi-million dollar condo buildings. Yet, in the world of rentals for the everyday New Yorker, the modern housing stock looked a lot like it did in 1970 – despite massive demographic shifts that had taken place since then.
The single most significant shift was that the average age of marriage had been pushed back from 22 years old in 1970 to 28 years old currently – and even later in cities like New York. Sociologists had observed this shift and declared the existence of an entirely new life stage — coined “emerging adulthood”. It was now considered the third life stage – hence Stage 3 Properties was born.
This group has a different way of living – nothing like the 20-somethings of earlier generations – which presented a multitude of challenges to the housing market. Thus, Andrew and I committed ourselves to a mission: holistically re-engineering housing by focusing on seven key attributes that altogether define the living experience: affordability, convenience, safety, comfort, compatibility (with roommates), cleanliness/health/hygiene and community.
What are some of the challenges and surprises you’ve discovered about the real estate space?
When asked about our biggest challenge, many people anticipate that we would point to excessive regulations, restrictive building codes or rigid zoning rules. We invested a lot of time into understanding zoning requirements, building codes, and the general history of housing in NYC, which gave us a more complete appreciation for the spirit and the intent of the various regulations. With this appreciation, we were able to do our homework and craft a fully code compliant micro-housing and co-living solution that was in keeping with both the spirit and the letter of the law. It was particularly important for us to do things the right way given the hundreds of millions of dollars required to develop a large scale rental tower in NYC.
This is not to say we were without challenges. Interestingly enough, we faced two very big challenges – and the surprise for us was that both of them were market-based challenges. Perhaps the biggest challenge was the industry’s resistance to innovation. In the world of consumer products, innovation is a company’s lifeblood. Without it, a company becomes irrelevant, its financials stagnate and eventually it dies. However, innovation requires change, and change presents its own set of risks. Within real estate, which has long been treated as an asset class rather than a consumer product category, investors are typically seeking safety if they are investing in Class A rental housing in the markets where we are launching Ollie – i.e. prime neighborhoods of Tier 1 cities. The question these investors ask is not, “am I going to hit a home run”, but rather, “how many basis points of yield will I achieve above the almost-riskless 10-year Treasury”. Compounding the matter, institutional real estate investors tend to be well paid relative to other fields, so the everyday struggles of making ends meet are inherently not as acute for this cohort. As a result, we discovered that the concept of micro-housing and co-living was surprisingly foreign to the US real estate investors we met – even though New Yorkers have been living in super small spaces and/or living with roommates for decades.
And further, real estate in NYC tends to be dominated by high net worth multi-generational families. History has shown that there is a certain complacency that comes with inherited wealth. With billions of dollars in the bank, the goal tends to shift to wealth preservation, not wealth creation.
So here we were, despite seismic demographic shifts, observing an industry that was pumping out newly built rental housing that looked an awful lot like it did in the 1970s when the nuclear family was the norm and young people were marrying at the age of 22 years old. Not surprisingly, this product was antiquated the minute it came to market. So, as quickly as it could be built, renters were finding ways to bend it to meet their needs – illegally erecting pressurized walls, sharing space among three, four or even more roommates – all while hoping the landlords would turn a blind eye.
The other major obstacle is that New York City has become a playground for the ultra-wealthy – or at least a place to park money. This, in turn, has fueled both hotel rates and condo pricing to sky high, record-breaking levels, making multifamily development a less compelling, lower yielding alternative relative to hotel or condo development. Because most commercially zoned sites afford landowners the flexibility to develop their land with either residential or commercial uses, and because residential uses allow both rental and condo, it has driven up land values to levels that make rentals less likely to be built unless there is some other mitigating circumstance at work – like a long-term ground lease, capital gains tax considerations, or a “hairy” site that is less desirable for luxury condos or hotels.
And lastly, the economics of multi-family development in NYC rarely make sense without the 421-a tax abatement. With the 421-a program in a state of flux, the uncertainty in Albany has elevated the risk profile of investing in rental projects. Unless and until the condo and hotel boom ease, and developers gain clarity around the new 421-a program, the market will likely have to rely on NYC’s outer boroughs and innovative housing solutions like Ollie to source the majority of the supply of rental apartments it needs to keep pace with new demand.
Your new brand, Ollie, is being launched within NYC’s first micro-apartments – can you tell us the story behind the brand?
For us, the name Ollie is a phonetic wordplay on “All Inclusive” and it is intended as a friendly personification of the brand. Inclusiveness is a key attribute. Ollie curates a living experience that is “inclusive” in four important ways: 1) thoughtfully-appointed furnished units, 2) lifestyle-relevant services, 3) abundant amenities, and 4) a diverse community.
- Furnished: Thoughtfully designed micro-units offering efficient studio or co-living layouts and options for multi-functional furniture including pieces by Resource Furniture.
- Serviced: Lifestyle-relevant, hotel inspired services including housekeeping, WiFi, and weekly visits from a Hello Alfred home manager. Specifically, through a multi-year partnership agreement, Hello Alfred and Ollie are paired together as exclusive partners in the micro-housing category, which mean Ollie residents come home to a freshly made bed, crisp linens, a fully stocked fridge, a regularly replenished pantry and unexpected conveniences that make the living experience as seamless as possible – even pick-up and drop-off laundry, dry-cleaning and prescriptions.
- Amenities: An all access pass to “live-work-play” amenities at future Ollie properties.
- Community: A sense of community, fostered in collaboration with social concierge Magnises with opportunities for engagement and networking ranging from monthly mixers, volunteer activities, lectures, weekend getaways, travel options and even seven members-only spaces, to name a few.
What have been the biggest challenges with getting Ollie off-the-ground?
The hardest part to getting Ollie off the ground was identifying the investor/developer groups that had the resources and the shared vision to innovate rental housing. We took some 400+ meetings over the last 4 years. We are so grateful to Monadnock and Simon Baron for sharing in our vision and for their willingness to be pioneers in crafting a new way of living. We recognize that they are putting both their trust in our ability to execute, as well as their capital. Likewise, we are also evaluating over a dozen projects with several other large developers. We are highly motivated to demonstrate to them and to our existing partners that their trust in us is warranted .
What has this process taught you about what’s important to millennial renters and what advice would you give to developers targeting the millennial demographic?
Andrew and I are essentially right at the front-edge of the millennial cohort. I was born in 1981 and Andrew in 1982. As a result, we feel like we’ve got one foot that is Generation X and the other that is Gen Y / millennial. We believe this helps us bridge the divide. One very clear trait for millennials is that their quality of life is defined more by the richness of their experiences than by either the size of their bank accounts or the quantity of “stuff” they own. The leaders of the “sharing economy” have figured this out. For instance, driving rates are at record lows among millennials. They rely more heavily on public or shared transportation than previous generations. As a result, money that would have been spent on a car payment can instead be spent backpacking through Europe and staying in a Generator hostel or an AirBnB treehouse. Corroborating this, one of the more amazing pieces of research we’ve come across is the dichotomy of inflation data over the past five years between inflation rates of goods versus inflation rates of services. Whereas prices for services have been inflating at a low to mid-single digit clip, prices for goods have actually been flat to down.
Recognizing the millennial penchant for living light, and their preference for shared experiences over personal ownership of things, Ollie represents a new way of living that, we believe, can simultaneously serve as a paradigm shift for developers seeking a sustainable approach to cracking the code on housing affordability. Specifically, we recognize what New Yorkers have known for a very long time – that space is simply one attribute that defines the overall living experience. New Yorkers have been shoe-horning themselves into small, substandard spaces, or doubling, tripling or quadrupling up. But, these spaces aren’t necessarily substandard merely because they’re small or because they’re shared. Rather, they’re substandard because developers and landlords have put no effort into making them more livable as small or shared spaces. At Ollie, we eliminate dead space and, in our co-living suites, we purpose-build for sharing, which means our units generate more rent for each square foot provided. In turn, this frees up funds that can be reinvested back into other aspects of the overall tenant experience, like housekeeping, wifi and a personal butler service – all while pricing our units below conventionally-sized units in other newly constructed buildings in the area. What’s more, because of innovations in furniture design, we can do all of this without asking the tenant to sacrifice functionality in his or her home.
All this said, while co-living suites do predominantly attract millennials – for instance, young professionals, graduate students, medical residents, airline crews — we don’t view Ollie as exclusively a millennial housing solution, particularly when it comes to the micro-studio units – which draw long-distance commuters looking for accommodations that facilitate their transient lifestyle, recent divorcees seeking an easy transition from their previous housing situation, empty nesters who desire a pied-a-terre in the city, and retirees prepared to downsize space in exchange for a more abundant set of services and amenities in a more culturally vibrant location.
As you look back, what’s one thing you wish you knew before venturing out on your own?
Ignorance is bliss. If Andrew and I knew we would have to be at this for 4 years without a salary, we may have concluded that we didn’t have the financial resources to leave our prior jobs in finance. We may have never taken this risk. Additionally, we found ourselves chasing a lot of “unicorns” along the way – amazing sites that were never realistically going to be developed as a rental property. In hindsight, we could have saved ourselves a lot of time. But, even those experiences taught us something valuable – about underwriting, modeling, investor perceptions, risk/reward expectations, etc. – so it’d probably be a mistake to wish them away.
You have another concept, Bedvetter, launching soon. Can you provide us a peek behind the curtain?
We are incredibly excited about Bedvetter, which we are launching in 2016. We are using Bedvetter for Ollie’s co-living suites and we are opening the platform to other landlords and developers who have multi-bedroom units they’d like to list. We have already begun partnering with landlords and developers, as there is a tremendous amount of interest.
Bedvetter is a household formation tool that promotes roommate-matching in the context of an available unit. In other words, Bedvetter users can either search for compatible roommates, pooling their purchasing power to expand their list of available housing options, or they can first search for a place that interests them and then find other compatible roommate candidates who have also expressed an interest in that same unit. Either way, the end result is that they pool their purchasing power to form a household that is driven by compatibility. This represents a democratization of the housing search process that is very different than the current dynamic.
Specifically, the current housing search process is closer to medieval Europe’s system of feudalism – disproportionately favoring those who are fortunate enough to control the inventory of spare bedrooms. Our own research indicates that 90% of New York City’s 20-something young professionals live with roommates. Of this, only half know their roommates ahead of time – though, for many in this group, it was an arduous task to find their roommates, often relying on Facebook blasts or other clunky measures, like spam email messages and “roommate wanted” clippings in the work pantry. And, in the end, they may only loosely “know” their roommates through a friend of a friend. Additionally, the process can be even more arduous, or even degrading, for the other half of roommaters who fail to find someone in their social network and instead end up on Craigslist’s “rooms and shares” section. On this section of Craigslist, there is a gross supply/demand imbalance. For every one listing of a spare bedroom, there are dozens or more renters seeking to fill that spare bedroom. This tips all of the cards in favor of the individuals who have spare bedrooms to list. They get to decide who is compatible for them, rather than a pairing that is based on a two-way compatibility exchange. So, a renter may be forced to accept an incompatible roommate or risk not finding a place to live. Bedvetter levels the playing field by promoting household formation based on compatibility.
What’s one piece of advice you’d give to the real estate community at large?
We certainly won’t pretend to have it all figured out. We will undoubtedly make our share of mistakes along the way. But, at the end of the day, an opportunity has been created for developers to simply observe the hardships of the people they house and to listen to their needs, not as tenants, but more importantly as human beings. Those conversations are where we believe the game-changing insights reside. If we, as an industry, fail to listen, we fail to identify the problems that need to be fixed, and therefore the opportunities to innovate the housing stock or the housing search process. In NYC, this failure to innovate has stripped millennials and other renters not just of proper housing, but ultimately it has robbed them of something much more basic than that – dignity and respect.
I want to thank Chris for being so generous with his time and knowledge. Feel free to leave any questions in the comment section.