NAHB Power Hitters with Tom Skaar

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Yield PRO TV presents NAHB Power Hitters. Host Linda Hoffman talks with Tom Skaar, Owner of Pacific Western Homes.


Transcript: NAHB Power Hitters interview. Linda Hoffman with Tom Skaar, recorded May 19, 2022

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Linda Hoffman: It’s good to be in the apartment business. The market clamors for inventory and rents continue to rise. Whales like Blackstone have been on an investing tear with a strong housing theme and apartment assets are trading almost daily. Case in point: Chicago-based Redwood Capital announced the sale of its 30-property portfolio to a private equity firm in Europe just this week for $1.7 billion.

Times are unprecedented. The economy is fraught with risk and inflation has everyone on edge. Even now as the world shudders, certain truths prevail. Scarcity drives up prices, in this case rents, and housing is primary to a functioning society.

Balancing an asset portfolio is an obvious and known hedge to economic risk. Developers understand this and many are moving their single family and other skills to the multifamily space.

As populations continue to relocate in unprecedented numbers to manage their own financial risk in inflationary times, developers and builders are pivoting to create the housing needed in these new and growing geographic markets.

Today’s guest knows a lot about such things, Tom Skaar of Pacific Western Homes, is an industry veteran. Spending the lion’s share of his career in Portland, Oregon, he’s certainly seen his share of economies and cycles. Tom, welcome to show.

Tom Skaar: Thank you, Linda.

Linda Hoffman: Give us an overview. What do we need to know about you and Pacific Western Homes?

Tom Skaar: Well, Pacific Western Home started in the very early days of the 90s, initially without me. I was involved in the initial start-up and then went on to pursue other interests for a few years, during which time a business partner carried the mantra, so to speak, and built some single-family homes and did some developing. And then he and I joined up again in 1997 and have been together continuously ever since.

And during the late 90s, we had the opportunity, when financing was readily available, non-owner occupied financing I should clarify. We had the opportunity to build our first rental community on a little subdivision plat that provided for, I believe it was 32 lots, with a mix of duplexes, triplexes and four-plexes in Northeast Portland. And so we built that and held it. And financed the whole thing via non-owner-occupied construction permanent loans with a local bank. And, that really started our multifamily career, so to speak, and during that time we were also developing and building single-family homes.

And so, we fairly early on learned that it was possible to build multifamily that way. And in many cases do so without having to have a lot of front equity capital involved because the builder profit, if you will, or the general contracting profit from having built the apartments, in most cases, provided all or most of the equity required to actually hold the property and keep it.

And so over the course of the next 10 years we built probably 6, 700 units of apartments, I guess. A few of which we sold along the way in order to raise capital for bigger land deals that we were doing in late 2004, 5 or 6, when everybody else was also trying to do big deals. It was about that time, also that we discovered that there was really more money in developing and selling finished lots than there was in building houses. And so we, like a lot of people, transitioned away from vertical construction and just did horizontal. And then the market got so crazy, of course, as we all remember. Those years that there was almost as much money just in buying raw land and entitling it and then selling it; letting somebody else take all of both horizontal and vertical risk. So we did some of that as well.

And then in 2008, rather fortuitously, we decided to call it a day and we kind of quasi retired, quit building much of anything for some number of years. We were left with a few pieces of land here and there that we chose just to sit on for close to a decade. And then in 2016-ish we built another 140 units of apartments in Bend and we did another 55 units in Portland. And the last of that was finished just before COVID in late 2019. And since that time, we just manage our investments and have decided to exit active building, or development for that matter. And now we participate just by virtue of lending to and mentoring other younger builders and developers.

Linda Hoffman: So it sounds like financing is what converted you from single-family to multifamily. Anything else?

Tom Skaar: Well, yes, yes, the wisdom and rather sage advice of a long time Portland apartment owner many, many, many years ago, who suggested to us that as a merchant builder you would do well in good times and starve in bad ones. And that the way to wealth was to build and hold, not to build and sell. And that’s true for a variety of reasons, but not the least of which, of course, is that if you don’t sell you don’t generate profit and if you don’t generate a profit, you don’t pay taxes. And so it affords you the opportunity to hold on to what you’ve created, let the appreciation gain come into play, and generate wealth.

And that proved to be, I guess, it is proven to be successful beyond my wildest dreams, to be honest. It has allowed us the opportunity to do many, many things. Both of us, and by that I mean both myself and my business partner, that we otherwise never could have done if we had just been single-family builders. And I think the proof of that, probably was really shown in 2008, 9, 10, 11, where many of our contemporaries in Portland who had remained just single family builders all went broke because they didn’t have the income from the multifamily to fall back on.

Linda Hoffman: Well said. How did the skills needed to succeed in single-family development translate to multifamily?

Tom Skaar: Well, in terms of the actual building, as long as you stay with simple, and by that I mean low rise stuff, two, three-story walkups, flats, things of that nature. There isn’t a whole lot of difference in terms of the construction, or at least there wasn’t. It’s gotten more complicated, of course, as time goes on. Midway through our construction career in multifamily, of course, we started having to sprinkle and do additional fireproofing and soundproofing, I mean, suddenly the codes got more intense as the 2000s wore on. Early on it was really almost no different, particularly when we were just building duplexes, triplexes and four-plexes. That was just a very natural transition for us and we did a lot of that, actually. We’d take over failed projects and communities from other developers who got in trouble.

We did one of those right post 9/11 that we built out a whole additional subdivision full of duplexes. And we turned some of it into single-family and built it, sold it. But when that was all done, we ended up with, I think, about 75 or 80 units of townhomes and duplexes, which we then sold off little by little over, well in fact I just got rid of the last of mine just last year. So, you know that provided additional income stream over quite a number of years, and then they appreciate. They about doubled or, in some cases, tripled in value, by the time we sold them. And so that worked out pretty well, as well. And that’s, that was just a natural transition.

So my advice for anybody who’s single-family, who wants to get involved in this, is start with the simple stuff, duplexes… and it’s getting easier. Many jurisdictions, Portland among them, are now making it possible to build up to a four-plex on lots that not very long ago you could build nothing more than a single-family home on. And so it’s getting fairly simple to do that. Small town home projects are simple to do.

We never did much in the way condominiums. There’s an awful lot of liability associated with that that we always wanted to stay away from, thankfully. Never got sued on any townhome or condominium project we ever built. Only on the apartments that we sold before the 10-year statute run out. But, you know, that’s life.

Linda Hoffman: So you’ve touched on this. Maybe give us an overview. How does working both in single-family and multifamily allow you to avoid the down-cycles in what are both very cyclical industries?

Tom Skaar: Well it’s been my experience that to some degree when one goes down, the other one doesn’t necessarily fall quite as far. And the bottom line is that people still need a place to live just about no matter what. And so, in tougher times, perhaps like those that we’re maybe coming into here before long, while rents may not accelerate anymore, and in fact in the old days they actually might decline. I’m not sure you’re going to see that this time because we have this fundamental housing shortage that you touched on earlier, but, and which I agree with 100 percent by the way. But, I, the bottom line is that it provides cash flow during tougher times when perhaps it’s not possible to build and sell a house at a profit. And so it allowed us to have a shock absorber, I guess if you will, or a cushion for the entirety of the decade that we continued to build in the 2000s. Well, you know, although to be fair we didn’t have much in the way of a recession during those years either.

The recession that followed 9/11 turned out to be almost a nonevent for housing and it was very short. And so we were lucky. And most of, you know the hard times in my career were the easiest ones when I first started when Oregon was in the dump for the entire decade of the 80s, and then took all of the 90s for them to crawl out.

But to answer your question specifically, I think I would key on the fact that you just, if you’re building both multifamily and single-family there may be opportunities in multifamily that exist even after the single-family markets gone away. It also affords you the opportunity maybe to keep some of your staff actively employed and engaged and building multifamily even when single-family’s not possible.

We are in a tremendous housing shortage. I don’t see that there’s any way we get out of that, to be honest. I can’t imagine how we can build our way out, not with things where they are now anyway.

Linda Hoffman: You worked in the Portland area, Tom, for much of your career. What was the environment like there for a multifamily builder?

Tom Skaar: Well, like most anywhere, the NIMBYs were very much in evidence. In Portland, even going back into the 80s. But that began to accelerate. Portland as you perhaps are familiar with was the first major metropolitan area in the country to start to experiment with growth control, and, in fact, passed landmark statewide legislation in the 70s, which provided for an artificial concentric ring around the Portland Metropolitan Area called urban growth boundary. And that didn’t really come home to roost until the 90s when, because, again as I mentioned earlier, the entire decade of the 80s we are mired in recession for most part and we were building relatively little product.

In the 90s that began to change. Land began to get used up, especially the land that was easy to use. And almost overnight in the early 90s land prices doubled, and then doubled again, and then doubled again. And we went from a situation where in the 80s we could buy finished building lots of 7 to 10,000 sq. ft. for $10 to $15,000, to all of a sudden, now they’re $35 to $50,000. This is in the early 90s and then by the 2000s they were $75 to $125,000. And today they’re $200 to $250,000, and, oh by the way, the lots are 4,000 feet instead of 7 to 10. And throughout that time, Oregon and Portland and there’s a metropolitan government association in, kind of, sort of in charge of land use in Portland, and has been for decades now, that steadfastly refuse to acknowledge that more land, or at least a lot more land is needed. They’ve done incremental expansions to the north boundary over the years, but then when they do one, it can take as long as 10 years for the lands brought in to be planned and zoned and then have infrastructure provided with which it can then be built up.

I saw it happen over and over and over again, so, yeah I guess the short answer is that Portland was always a very, very difficult environment to build in, whether it be single-family or multifamily to be honest. And I had all manner of difficulty in getting multifamily products approved, or even single-family because inevitably the neighborhoods who surrounded a vacant 10 or 15 or 20 acre piece of property perceived that property as their personal park, or worse yet, a place to dump their lawn clippings on. And they didn’t want to see it developed.

And I had neighbors do everything possible to prevent me…like one of the apartment communities are still on today, they actually went so far as to plant Indian artifacts on the site and then call the state of Oregon to come in and investigate it. Thankfully the state of Oregon investigator who came out understood that this is likely not really an Indian artifacts, at least not native to this site. And he didn’t pay much attention to it, but that’s the kind of thing that neighborhood associations and disgruntled neighbors would do in Portland this is like 2002 or 3 this happened, so a long time ago.

But it’s always been difficult. And that’s true today, as well. I mean that’s… we talked about a housing shortage little while ago, at least if you consider why Portland, Oregon, and the surrounding area of Portland has a housing shortage today, the blame can be laid right squarely at the feet of local government. And there’s 27 or 28 of them in the Portland area and they’re all equally to blame.

Linda Hoffman: Well, the high cost of housing is a problem everywhere. What would you change about the development process to bring down the cost?

Tom Skaar: I think to meaningfully change the cost, we have to make, if a piece of property is zoned for X use, that needs to be an outright approval. There can be no process allowed to be included in issuing permits for that particular project, and that particular use. It has to be—you turn in a set of plans, they meet the zoning setback requirements or they don’t. If they don’t then you change it or apply for a variance or whatever. And that’s a little bit different ballgame. But if they do meet these requirements, you need to be allowed just have a permit, and there needs to be no local neighborhood involvement in that process. But good luck trying to get local elected officials to agree to that kind of philosophy. And add the other piece that is—and—assistance development charges didn’t start in Oregon by any means.

That whole game, like many bad ideas, had its genesis in California. But they quickly, and I mean part of the reason Portland is so messed up today is because so many people from California moved up there to escape what was going on in California and then brought their ideas with them. And slowly, and little by little, increment by increment, they have turned Portland into California North, I guess. And, and so, you know I can remember hearing stories in the 80s, and early 90s about it costing $20,000 to get a building permit in California. Some were largely due to SEC charges and just being appalled. And then, lo and behold by early 2000s, well guess what? It costs that in Portland. And now I’m involved in the financing of a couple of single-family residences that I just closed the loans for last week and I saw the permit fee sheets for those two homes and they’re about $45,000 a piece just in permits for a single-family home.

And so when you take $45,000 for a permit and another $200 to $250,000 for a lot and you’re at $300,000 before you’ve ever turned a spade of earth or bought a 2×4 yet, it’s not too hard to figure out why we can’t build affordable housing. And the elected officials know this, but they don’t seem compelled to want to try to do anything about it.

Linda Hoffman: So it’s not the greedy developers.

Tom Skaar: Oh heavens no, heavens no. No I mean it. No, I won’t not lie. We’ve, during good times developers and builders are able to make good money. But we take a lot of risk, too. And times aren’t always good. So you know the bottom line is that appreciation of housing benefits everybody, as they say, I forget this particular phrase but rising boats lift all, uh, rising tides lift all boats or something like that. I mean that’s absolutely true but no, the rising costs cannot be laid at the foot of builders and developers.

It’s all about—and we haven’t even about building codes yet. They’ve had a tremendous impact, in particular, the energy codes have had on the cost of housing. The state of Washington imposed energy code changes in early 2022, which the Washington Home Builders Association has gone public in stating, add $22,000 to the average cost of a home. And in, these building code changes are not things that are going be necessarily able to be paid back in a reasonable period of time. You know, I know that National Association of Homebuilders generally said, and as policy that, you know, seven year or so payback, that might be reasonable. Well, they’re making us do things now that won’t be paid back in 50 years.

And, but, the never ending drive towards making us more green and making houses net zero is prompting them to decide that it, it just doesn’t matter about affordability and totally ignoring the dynamic that the low hanging fruit now is all that housing stock that’s still laying out there, that was built, let’s say 1990 or earlier, which is not very energy efficient. I’d be the first to admit it. But for the most part, the stuff that we have built from the mid-90s on is reasonably efficient and anything built after 2010 is probably ridiculously efficient.

And so if we’re ever meaningfully going to impact costs, we have to look at land supply. We have to look at permit fees and costs, and we probably have roll back some of the energy stuff. And good luck with any of that, I’m afraid.

Linda Hoffman: I believe the statistic is the 1970s. Those are the least efficient housing. So, it’s not the 90s, it’s the 70s.

Tom Skaar: Yeah, I remember—I entered the industry in 1978 and from what I remember what I built in 1978 and how it was constructed. Of course it was low end product then because that was how most builders started, but you’re simply correct. It was not very efficient. But it all went that way.

Linda Hoffman: So what advice, Tom, would give a young person entering the construction business today?

Tom Skaar: To learn as much as you can from peers and to be honest, I was taught to build by my subcontractors. They’re the ones who, because I entered this business with virtually no knowledge of, I mean the closest I had ever gotten to construction when I starting building houses was carrying plywood for a builder when I was a young teenager. And so I’m living proof that it’s possible to do it. I have no formal education. Everything that I know pretty much was self-taught and I’m talking the business, the accounting, the construction, all aspects of it. Find a couple of good mentors who can help you along the way. There are people like me that are willing to help young builders in terms of offering advice, sometimes even in terms of offering financial resources and help. I’m lucky in that the pathway to enter the housing industry was much simpler when I got in than it would be today.

The aforementioned permits, just as a for example, you know when you could in the early days I could go buy a building permit all in for $3,000. You typically don’t, yet, have a construction loan in place when you have to buy that permit. Or at least you didn’t back then and $3,000 wasn’t a terribly large sum to have to come up with cash for. $45 or $50,000 is a little bit different animal. And so it’s unquestionably much more difficult now for somebody entering the industry in terms of the capital requirements.

And I feel sorry. And that’s probably the reason probably that we have trouble recruiting younger people to the association. It’s so difficult for younger people to get involved. At least as a builder I say, I guess they start as subcontractors or working for larger builders, but virtually all aspects of this industry still provides some of the greatest avenues of self-employment and building wealth that can be found anywhere. I couldn’t tell you the number of framers that have turned builders, of the number of plumbing apprentices who have become journeyman who 5 or 6 years later own their own plumbing companies.

There’s just so much opportunity in all levels of this business and so I would encourage anybody who wants to be involved in creating the American Dream, just pick a spot that interests you get started. You know and if it requires you to work for somebody to begin with, then great. Do that. There’s all kinds of opportunity, particularly right now. There’s probably not a builder in this country that’s not trying to hire somebody for some position at the moment. And so jump in. Get your feet wet and work hard, which is what I did.

Linda Hoffman: Truly hard-earned, words of wisdom, Tom. Thanks for joining us today.

Tom Skaar: You’re welcome. It was my pleasure.

Linda Hoffman: Housing is the defining issue of our time. It’s not only fundamental to a productive society, but the nation’s economic engine. While it’s gotten little attention from Capitol Hill, the lack of housing will continue to vex us until it is resolved. Meanwhile housing providers like Tom will lead the way.

Thank you for joining us. Builders, developers, operators make this nation great. Thank you for staying in the game. Your ingenuity is getting product to market and it’s a beacon to all in dark times. Housing sets the nation’s potential for success

I’m Linda Hoffman. Look for our next exciting episode of NAHB Power Hitters.

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NAHB Power Hitters in association with NAHB, National Association of Home Builders, Building Homes, Enriching Communities, Changing Lives.

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