A Big Vision For Silicon Valley Real Estate, With Erik Hayden

If you’re thinking “doom and gloom” when you think of California real estate, think again: Silicon Valley appears poised to ride a wave of growth for decades to come.

Erik Hayden, founder of Urban Catalyst (plus one of Silicon Valley’s 100 most powerful people) joins the show to discuss how Silicon Valley can create generational wealth for long term real estate investors.

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Episode Highlights

  • The story of Erik’s career, and how he got the idea to found Urban Catalyst and invest in Silicon Valley.
  • Why founders and investors should focus on big projects and big goals, rather than small projects and small goals.
  • Eye-popping statistics on the underlying fundamentals of Silicon Valley real estate (plus why the “death of office” has been wildly over-exaggerated).
  • How Silicon Valley’s economy (including its labor economy) has outperformed the economy in other areas of the country, and remains incredibly resilient.
  • Details on Urban Catalyst’s new DST, and why Erik believes that an attractive DST should have conservative underwriting while leaving room for significant upside.

Today’s Guest: Erik Hayden, Urban Catalyst

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to “The Alternative Investment Podcast.” I’m your host, Andy Hagans, and today we’re talking about one of the most dynamic places on planet Earth, economically speaking that is. That is Silicon Valley, which is arguably the epicenter of the global economy, at least the tech sector of the global economy. So, I’m very excited that joining me is Erik Hayden, founder of Urban Catalyst, and also recently named one of Silicon Valley’s 100 most powerful people. Erik, welcome to the show.

Erik: Andy, so glad to be here.

Andy: So, we have a lot to dive into. We’re talking about California, always a great subject. A lot of passionate opinions when we talk about California, but before we even get to Silicon Valley, DSTs, Opportunity Zones, all that stuff, could you give our audience a brief introduction to Urban Catalyst?

Erik: Sure. Urban Catalyst, we’re a real estate equity fund, and we’re also real estate experts, which means we buy existing assets, own, and manage them. We also do a lot of ground-up development projects and rehabilitations of existing buildings.

Andy: So, you know, we’ve kind of covered the Opportunity Zones beat, Jimmy, my business partner and I have. We’ve covered that. And Urban Catalyst, frankly, for those of you listening who aren’t already aware, they’re one of the most well-known, kind of, brand names in that Opportunity Zone space. And, you know, Erik, frankly, I think a lot of people in that space look up to you kind of as a unofficial leader, not an elected leader, but, you know, there’s a couple funds, and Urban Catalyst is definitely one of those, that are just very, very well-known, you know, big, bold projects that kind of capture the imagination. So, what I’m wondering, you founded this company. How does that even happen? You’re a pretty young guy. Like, how were you able to found Urban Catalyst? Where did that start?

Erik: You know, it was interesting, right? I’ve been doing ground-up development for my entire career. I’ve done a lot of it in Silicon Valley, and even specifically in San Jose, but I’ve done projects all over the San Francisco Bay area. When I started Urban Catalyst, I was the president of a development company doing a big project up in Oakland. I also, on the side, had my own business doing some consulting work with other development companies, and decided that I wanted to do more. Ground-up development, you know, with the type of returns that are associated with it, and really the real estate market in Silicon Valley, has always made a lot of sense to me. And about the time, 2018, when we formed Urban Catalyst, what we saw was really just the light switch turning on in downtown San Jose, from a ground-up development perspective.

And that was mainly because of the overall tech migration trends throughout Silicon Valley. You know, if Palo Alto, Menlo Park, and Mountain View are kind of the center of the tech universe, they’re not really very big cities. So we’ve seen a lot of expansion. Of course, these, you know, companies, Google, Apple, Meta, they’re expanding all over the country, all over the world, but in the Valley, we’ve seen the slow migration southward from that center of Silicon Valley, towards San Jose. In between the city of Sunnyvale, development went gangbusters, for years, in Sunnyvale. Now the city’s almost completely built out. And when we saw that happen, it was, well, where’s the next logical place that these companies will continue to expand? And obviously, it’s downtown San Jose. Now, looking back five years ago, it was a good thought because now we can say that most of those companies have purchased land, opened offices, or have big plans to do a lot of expansion here in San Jose.

We were not the only folks that saw San Jose. A lot of other developers have come into downtown San Jose in the last five years. But we did achieve what we were trying to do, and that is we build relationships with property owners. A lot of them we already had. We were able to acquire properties and really get in on the ground floor before this wave of development hit. Now, it’s always interesting, you know, we have had a lot of success in the Opportunity Zone space, especially in our fundraising, you know. We’re on a lot of those lists of most funds raised or percentage of market share raised. We do have really great projects here in downtown, a variety of asset classes, but we’re developers, first and foremost. And when we saw downtown San Jose, it wasn’t because it was an Opportunity Zone. It was because it was the right place to build buildings, to get returns, and to improve a city. It’s a great city.

Just so happens that everywhere we wanted to do business was in an Opportunity Zone. And I thought, well, if we’re gonna be raising a real estate equity fund to fund these projects, might as well give our investors these additional tax benefits. And so that’s really how we started. We wanted to be in San Jose, and San Jose was also an Opportunity Zone, and we became an Opportunity Zone fund, and it’s been working out pretty great for us.

Andy: Yeah, we can go into this a little bit. I know a lot of our audience is already aware of Opportunity Zones. Probably not everyone, but it’s a real estate investment program that gives a lot of tax benefits. But your point is, it wasn’t the tail wagging the dog. Like, you knew you wanted to do an OZ fund, so you looked for a place. You knew you wanted to be in Silicon Valley because of the opportunity there. My question is, as an entrepreneur, you know, people ask me this sometimes. They’re like, “It’s so risky. How do you take that risk? How do you put out your own shingle? How do you start your own business?” And I’m like, no, you’re looking at it wrong. It’s actually really safe to be an entrepreneur. You get to be your own boss. And honestly, I usually try and, like, before I start a company or whatever, try and tee things up so it’s actually not so risky. I try and reduce that risk. So my question is, did you have projects, property lined up before founding the company? Or how did you approach that risky startup phase?

Erik: So, land acquisition is something I’ve done a lot. I’ve had the title of vice president land acquisition, director of land acquisition. So I know how to acquire projects. And it’s a little harder than it sounds, right? You think, oh, you’ve gotta make an offer and close escrow. There’s no real trick to that. It’s understanding what the city’s gonna allow you to build, how much it costs, building out your financial models, and doing a sensitivity analysis, so that you can back into how much you can pay for it. And then doing all of the negotiation. So…

Andy: But doesn’t, Erik, even that sounds expensive as heck. So it’s like, before I even know that this project is viable, you’re already investing in a lot of capital, just into doing that, right?

Erik: Yeah. When we first started Urban Catalyst at our sponsor level, we raised around $4.5 million dollars. That was just to start us up, get the lights on and get everything going.

Andy: Wow.

Erik: And that was mainly friends and family money for me. We didn’t use any, you know, venture money or large equity groups. It was friends and family money. Folks that believed in me, knew my track record, knew I was gonna put everything I had into it. And they believed in me, and we’ve already paid them back plus profits, so they’re pretty pleased with us. But that’s how we initially got going. And it was expensive. I mean, just negotiating a contractor, you’re talking about, you know, $20,000 to $30,000 in attorney’s fees, creating a private place memorandum for an Opportunity Zone fund, our first one was, like, $300,000. You know, we had to lease an office space, had to sign a five-year lease. All these things were, like you said, a little bit scary, but…

Andy: And probably also, like, double the price in California. Because I’m thinking, like, Holland, Michigan prices. I’m like, yeah, it’s really expensive. And then I’m like, oh man, imagine what that costs when you live in California.

Erik: Oh, it’s ridiculous. But California, you know, the economy has been strong, and what you find is you can do business even with these more expensive prices. But to your point about, you know, is there a lot of risk when you go out and start your own company? The answer is there is, because, you know, by percentage, a lot of companies that start fail. However, what’s the difference between being an employee and being the owner of a business? You think there’s less risk? There isn’t. The person that you work for as an employee, their business can go out of business and then you’re fired. And then what? You’re gonna go find another job. As long as you start your own business, at least you get to make the choices. At least you’re the one that gets to steer the ship. And if you have faith in yourself that you can do that, you can be successful at it.

Andy: I love that. One other question, just about the origins of Urban Catalyst, and, you know, that startup phase, what I think is interesting about you, Erik, is that a lot of entrepreneurs, myself included, are, like, serial entrepreneurs, where, you know, you might start one business, and sell that, and then start another one and exit that, start a third. Maybe each one gets a little bigger or whatever. But it sounds like, you know, you had a consulting company, but you were working for another firm, and then when you founded Urban Catalyst, right away, it’s like this huge, big, bold vision. So, like, right from the get-go, you’re not thinking small, and, like, let’s go hit a single and then go for a home run. Like, right from the get-go, I have this feeling that you had this big vision, and you’re just like, “I just gotta do this.”

Erik: And it’s kind of true. You know, some folks, when they go out, they start small. And I know a lot of examples of this, especially in our space, where there are other fund managers that raise money similar to the way that we do, that are involved in alternative assets like real estate, where, you know, they started out buying one building with a syndicate of five people, with a TIC. And after they did that 10 times and were successful at it, they went a little bit bigger. And over a 20-year period, they built that up. Or, you can look at, you know, one of the largest funds in the world, Blackstone, their first fund was an $800 million fund, and that’s how they started, and now they’re almost a trillion under management.

So, this is very similar when you think of ground-up development. Throughout my career, I’ve built these really big buildings, you know. Maybe my average building size has been about $100 million. A lot of folks out there in the world are like, oh, yeah. No, my friend, he flips houses. Buys houses, fixes ’em up and sells ’em, or he or she. The amount of work to build a hundred-million-dollar building or to flip a house is about the same amount of work. There’s just some extra zeros attached to the bigger buildings. And it’s similar at the fund level. Raising a $20 million fund and successfully deploying it or raising a $200 million fund, or even a $2 billion fund, it’s the same amount of work, and it’s just more zeros attached to it.

Andy: Yeah, that, wow. That hit me like a truck. Even personally speaking, as an entrepreneur, I know that’s true. And a lot of times, it’s like, you have to think big and ask, and it might surprise you, right? And sometimes folks almost take you more seriously with that big, bold vision because they’re like, wow, you have the confidence that you’d wanna go out and do something big. They’re like, well, I know you must know what you’re doing to even have that confidence to think that big.

Erik: I will tell you, though, you know, the way that we started, especially with our fundraising, was a little bit different than a lot of folks. You know, most of the people that raise money the way that we do… And we’re in the retail fundraising space, especially for Opportunity Zone funds, this is very typical, where you raise money from individual investors, and that space is dominated by broker-dealers and registered investment advisors. A lot of people call them wealth managers. It is a huge space, very dynamic. Lots of folks out there that raise money through that channel. It’s hard to break into that channel. So, here we are, Urban Catalyst, you know, day one, we open up shop, we put out our shingle. We called a bunch of those folks and they all said, “Oh, yeah. Too much risk. First-time fund, you know. We’re not gonna talk with you.”

And we thought to ourselves, well, we never even really knew what that space was. We’re just gonna go raise money, you know, from individuals the way that we always have. And we went out with the new 506(c) rules, under SEC regulations. They’re about 10 years old now. And we raised money directly from investors. And raising money directly from investors, in our first year, we raised $50 million, and we did it through a way that a lot of folks had never tried, which, of course, is digital marketing, using Google, LinkedIn, Facebook, all that stuff, to drive investors to our website, investors form fill, and then our investor relations team will call them and talk to them about their situations. So, that was a real game-changer. We saw a lot of folks after we did that kind of follow our example, and really come in hard to our space.

And I know that, especially when I buy Google AdWords, it used to be, like, you know, 10 cents, or it used to be, like, yeah, 10 cents a click, and we could be the number one…you search “Opportunity Zone Fund,” we’re the number one search term, 24 hours a day. Now there’s five or six people in the space. It costs, like, 40 cents a click, because everybody caught on to that trend, but we were one of the first ones to do it. We brought in a full sales and marketing team here in Silicon Valley. Our whole team used to work at tech companies, and tech has been doing this, you know, for quite some time. So, to bring this into a real estate equity fund space was new for real estate equity, but not new for the overall market, but it was very successful for us, especially in the beginning.

Andy: You know what’s really interesting about that, Erik, is, you know, I come from a marketing background, and there’s the two ends of the spectrum. You have direct marketing and you have branding. And in the financial world, you know, the direct marketing’s very transactional. You basically, you have to have a funnel. You put a dollar in, you need to get $1.10 back, right? And you just made 10 cents profit, plus you have enough cash to reinvest, buy more traffic, put it back into the funnel. That’s how direct marketing works, right? And then there’s this whole other side, which is branding, which is, you look at the most valuable brands in the world, Coca-Cola, Louis Vuitton, you know, these big, giant companies, and their brand names are worth billions. And as a marketer, I respect both ends of those spectrum, but to me, sometimes the 506(b), transactional, broker-dealer model feels to me like direct marketing. Like, we have product, we’re gonna sell the product, there’s gonna be whatever, 6%, 8%, you know, fee that you pay, yada, yada, yada.

Whereas what you’ve done, you know, you do do the marketing, but the process of that forces you to create the brand, tell the story. And so now, regardless of your current fund, think about the equity that you’ve built just in the process of creating the brand, telling that story over and over through all these marketing channels. To me, that ends up building tremendously more value. And the sponsors that do this, and Urban Catalyst is definitely one of the top few that I even talk…like, literally, I’ve used your company as an example to others, talking about this concept. The companies that are doing this at the sponsor level, to me, are just building way more enterprise value, because they’re building that brand and that story that sits above any one product.

Erik: It does give us that advantage, you’re right. And another thing that, you know, really helps us out is ground-up development in general is a news story. Everybody likes to read about new buildings getting built. So every time one of our projects submits an application, gets an approval, gets building permits, starts, construction is halfway done, we’re getting these news articles. We’ve been in the local newspapers, and even some of the national ones, over 250 times in the last five years. There was a point in time, in 2021, when we were in the Silicon Valley Business Journal every other week for a year straight. Now, that type of branding is something you can’t buy. I mean, if I purchased advertising in the Silicon Valley Business Journal, nobody’s gonna read my advertising, but when they write articles that are legit articles, speaking about your progress and what you’re doing, people read that. And we do see that in our organic traffic that comes in through our marketing channels and eventually ends up leading us to further fundraising.

Andy: Yeah, they call that earned media, right? The PR industry calls that earned media. It’s so funny. I mean, because it even relates to this show, “The Alternative Investment Podcast,” because we’ll interview sponsors, and a lot of the folks in our industry are more B2B. Some of them, you know, only sell through broker-dealers. It can tend to be more insular, and almost a desire to, like, kind of hide from the spotlight or to wanna be under the radar, but…

Erik: Well, you know, per SEC regulations, if you’re doing business through broker-dealers and you have FINRA as your jurisdiction, there’s a very limited amount of marketing you can do.

Andy: Right, right. Which is ultimately limiting, and goes back to the brand equity and everything that you’re talking about. But I wanna shift gears. So, Urban Catalyst, you know, let’s talk about the brand. In my mind, I guess I’ll talk about your branding, how it’s had an effect on me. When I hear Urban Catalyst, when I think Silicon Valley real estate, like, it’s like tissue, Kleenex, in my mind at least, especially in the OZ world. So, when a lot of people think about California real estate though, they’re thinking doom and gloom. Like, when I’m thinking about the state of California, I’m thinking, you know, budgetary craziness, just insane political, pension crisis, budgets, all this stuff. But then at the same time, I have to admit, I’m also thinking, well, the richest, most powerful companies in the world are headquartered in Silicon Valley, and they also tend to be incubated in Silicon Valley. So, what are people’s misconceptions, I guess, about this area of the world, this region?

Erik: Sure. And, you know, what I’m gonna talk about, I’m gonna talk about the year 2021 here in California, in Silicon Valley. So, most recently, if California was its own country, we just became the fourth-largest economy in the world. We just took over Germany. So that’s kind of the type of economic capital that we bring to the world stage. And a lot of that is Silicon Valley. Silicon Valley, in 2021, probably had its best year in history. They had more companies go public than any year, going all the way back to the dotcom craziness. They had more venture capital funding by dollar amount and by percentage versus the rest of the world than any year in history. One of my favorite stats, the city of Menlo Park, which has 45,000 people, had more venture capital funding than the entire state of Texas. So it kind of, you know, puts it in perspective. The companies here, yeah, I mean, having the headquarters of Meta, Google, and Apple, that goes a long way. Huge companies. The other thing that people think about a lot is they think about everybody’s leaving California. Haven’t you heard everybody’s moving to Texas and Montana? Well, that…

Andy: Austin and Nashville, so hot right now, right?

Erik: I know. Well, I mean, that’s not really a news story, right? I mean, that’s been going on for a long time. People have left California. Our population has gone up for over 100 years straight. We had, like, a little blip in 2020 and 2021, where we lost, like, less than half a percent of our population. And so far this year, we’re already back on track. People don’t take into account the amount of people from other countries that move to California, and that’s kind of the… You see all the people that live in California moving out because they can’t afford to live here, and you see the people from other countries that wanna live in the United States, they wanna live in California because it’s an amazing place, from the weather all the way to the economy.

Andy: Yeah. And if you’re emigrating, you know, some places in the world, if you’re like, should I immigrate to London or Vancouver or California, it’s like, oh, California’s the value play, I guess, compared to some places in the world.

Erik: Yeah. California, a lot of people like California for a lot of reasons. Sometimes politics aren’t the reasons, although some people love the politics and think it’s the greatest. Our budget, we actually have a budget surplus this year, which is nice.

Andy: See, Erik, just lemme put a pin in that. This is the thing, and it gets me. I fall into this trap. It’s like, you hear about the crazy stuff going on in California, you’re almost rooting for it to fail, but at the same time, as an investor, you don’t invest based on your politics. You invest where the best financial opportunity is, right?

Erik: That’s absolutely right. And if you look at the real estate over the last 50 years here in California, it’s been amazing for a lot of folks. You still have to do the right things, but it’s nice to have a strong history of positive market trends. The SEC also likes me to say, past performance is not an indicator of future success.

Andy: Yeah, that’s fair. You know, when talking about this high-end real…I would call it high-end, if not ultra-high-end real estate. I mean, just, you know, thinking of, like, Manhattan, London, Vancouver, Silicon Valley, San Francisco, all these places. It reminds me, trip down memory lane, back in, what, 2004, when Google did their IPO, and the pre-IPO price was, like, 85 bucks or something. And the day that it IPO-ed, I think it went up to, like, a hundred bucks a share. And at that time, I remember there being this conversation going on, like, this is way overpriced, you know, like the old school, you know, Warren Buffetts, value investors, they wouldn’t touch this with a hundred-foot pole. You’re a sucker if you buy. Look how expensive, multiple to revenue, look how expensive it is.

But it was one of those things where price is what you pay, value is what you get. It’s like, yeah, it’s expensive for a reason, because the future growth of Google, which is their business model is like an ATM machine, right? They sell clicks, for $3 a click. I mean, talk about a good business model. It ended up in hindsight being the deal of the century, being super cheap. So I think it’s one of those kind of mental things, sometimes people have trouble getting over. Something seems really expensive, but then you fast…like, think about, what was San Francisco real estate in 1995, right? Probably seemed expensive then. It probably seemed expensive…

Erik: I moved to San Francisco in 2002, from Seattle, where I went to college, and all I could hear is, “It’s the most expensive place. You can’t afford an apartment. It’s so expensive.” And looking back, it’s so cheap. It’s, like, a quarter of what it is now.

Andy: Well, I mean, that’s the principle, right? Is that price is what you pay, quality is what you get.

Erik: Interesting statistics that just came out about San Jose. I mean, obviously, we have a housing crisis here in California. In fact, it’s really true here in Silicon Valley, where we’ve created six jobs for every housing unit that we’ve built for over 30 years straight. Our population grows exactly as fast as we build new housing, and we don’t build new housing fast, because of the regulatory environment here in California.

But San Jose just got ranked the most expensive big city to live in in the United States, and the fourth most expensive big city to live in in the entire world. Our median home price is now between $1.6 and $1.7 million.

Andy: So, wait, I was wrong when I was comparing it to Vancouver. You’re telling me maybe it is as expensive or more expensive than Vancouver?

Erik: It’s the most expensive place around. It is so expensive here, it’s absolutely unreal when it comes to housing. And this is horrible for our economy. In fact, you know, as a developer, one of the things that really gets us is construction costs. And construction costs here are really driven by labor. And I’m not talking, like, the difference between union labor and non-union labor. I’m just talking about labor in general. We don’t have enough people that can afford to live here that build buildings. So when we get busy, there just aren’t enough people to build the buildings. And that’s what drives up the cost. And you kind of go, “This is crazy. We can’t even build buildings because the cost is too high, because nobody can live here to build the buildings.” It’s just, like, a very downward spiral with that.

Andy: Well, the fact…let’s shift to the OZ fund, or multiple funds. I mean, one of the cool things, going back to your vision, the big, bold vision, is, in California, it’s really hard to build, right? But, you know, you’ve talked about, you know, you obviously know what you’re doing, ground-up construction. The fact that this is even being built, on one level, is kind of incredible, right? So, talk about the OZ fund and the projects in it.

Erik: Yeah, the fact that, you know, we have eight projects between our two funds, and we have approvals for all of those projects. When we started the process, we didn’t have approvals. There were just pieces of land. You know, they had structures on ’em. And that we went eight for eight with exactly what we wanted to build, exactly what we thought we could build, was approved by the city. There was no major changes. A lot of that is a testament to the city of San Jose, and I do wanna give them their props, because their planning and economic development department is top-notch, and they really understand urban development, and what a city should be, and how to facilitate that. But still…

Andy: So, reading between the lines, even if the state of California is kind of anti-development or whatever, the local government in San Jose is not that way?

Erik: That is correct. Well, at least in downtown San Jose. In downtown San Jose, it’s where all the infrastructure is, it’s where all the transit is. It’s, if you’re going to do high-density development, where are you gonna do it? Here is the place for them. And they know that. And they’re good at it. They’re maybe the best place in all of the Bay Area to do it. Although there are a couple of other little spots. Some places in Oakland, some places in the city of Fremont, where they’re very pro-development, but a lot of the cities are very anti-development. The city of Cupertino has been notoriously anti-development. They’ve had several big projects that have had referendums and huge political battles. Half their city council got, you know, taken out in the last election because of just the awfulness going on there.

But, I mean, in the city of Cupertino, Apple has 85% of the office space in the entire city. You would think that they could build some housing for those employees, but that’s not what’s happening, right? To have those types of approvals, that, in California, is the, call it the largest development risk. I mean, I always think as a professional developer, everybody out there that owns a piece of property is always thinking, “Well, what can I build on here?” Whether it’s your house. “Oh, I could do an addition on my house.” Or you got some, you know, [inaudible 00:27:02]. “Oh, I could put an extra unit back there.” Or, “I could expand my industrial property by 500 square feet this way,” all the way up to people that are building giant buildings. So, being able to be a professional and understand how to design buildings is also one of the keys to doing ground-up development.

You have to be able to build cost-effective buildings. And this is easier said than done. We see a lot of folks who have entitled, big projects here in San Jose. They are the property owner. They hired an architect, and then they went and they processed plans through the city. And when the plans come out and they get their approvals, you go, well, that was a big waste of time. They designed a building that you can’t build. Cost 100% more than my building to build because they didn’t understand how the structural system needs to facilitate the plumbing, and the mechanical system and all that kind of stuff. It’s kind of a shame. My philosophy has always been, and is still to this day, when you start your project, you start that first design, you have your kickoff meeting, you have to grab your architect, and you gotta get your general contractor. Your architect has to have the vision. They wanna build the Taj Mahal. They wanna get, you know, awards for the beauty of their project. It’s gonna be the greenest, the best building ever built.

And the general contractor’s gonna wanna build, you know, something equivalent to 1960s Soviet housing. And then, every single meeting, throughout the whole process, they need to fight each other in that meeting. And what you end up with is a beautiful building, absolutely functional, but at the same time is cost-effective to build. And that’s our true value-add when it comes to development.

Andy: Yeah. And absolutely, because, you know, bringing it back to entrepreneurship, the perfect building that never gets built, it’s not really much of a building, right? And back to the housing shortage, or just the crisis, which is also an opportunity for investors with development is, you know, we need to get houses built. We need to get housing units built. So, you know, getting the thing actually launched, that’s the name of the ballgame.

Erik: You know, a recent statistic came out here in Silicon Valley that’s just so eye-opening. If we wanted to have, for housing, supply to equal demand, we’d have to build around 150,000 housing units. That would, say, stop our prices from just going through the roof. And we’ve never built more than 5,000 in a single year in history. So that’s how far behind we are. And for all the folks out there saying, well, build more below-market-rate housing, or build, you know, all housing. We’re not even putting a band aid on a bullet wound. Either with below-market rate or market rate, we just can’t build enough, period. The state is taking some initiative to take power away from local land use authority, from city councils, because the city councils aren’t doing what they’re supposed to do, which is improve housing. It makes a lot of sense, actually. One of the state senators, Scott Wiener, said it best. He said, “If you’re a small-town city council member and you approve housing, you’re walking the political plank, because you won’t get reelected because you’re being elected by 100 people swing, and those 100 people are gonna vote for your opponent because you approved housing.”

Politicians, the two things they want, to get reelected, or to get elected to a higher political office. So they can’t approve housing. If they do, they don’t get that. And so the state is coming in and doing some stuff, although, call it somewhat ineffective. It’s not creating a huge dent in the problem, but over time, it’s slowly working, and maybe it will over the next, like, 25 years.

Andy: Sure, sure. Okay. You know what? I’m not gonna get into all the political stuff because we’ll be here all day. I do feel like you’ve kind of almost undersold, though, the Opportunity Zone fund. Going back to the vision, I mean, we’ve barely even talked about what you’re actually building in the fund.

Erik: Sure. So, our current offering is our Opportunity Zone Fund II. We have four projects in it. First project, Echo. It’s about 400 units of multi-family. It’s a high-rise. Right next door to that, our second project is Icon. Icon’s a 500,000 square foot office building. Then we also have the Keystone Hotel. It’s a Marriott Townplace Suites, 172 keys. And then our final project, the fourth one, is called Gifford Place. And it is a senior living facility. And even more specifically, it’s assisted living and memory care. So, those are the four projects. We like having a diversified portfolio of projects. In fact, our Keystone Hotel is already under construction, so that’s pretty exciting. The diversification is great. You know, when we started the fund, office was the hottest thing in the world. Now office has become, especially in the newspaper, not quite as popular. It’s nice to have a diversification of product types, just for this exact reason, right? And [crosstalk 00:32:12]

Andy: And Erik, you know, yes, sorry to interrupt, but on the office, I mean, I think it needs to be said. Is it across the street or next door to the Googleplex? Where, I mean, it’s not just an office, right? Like, we’re building a random office building somewhere. I mean, this is going to be one of the premier office buildings in the area, correct?

Erik: It absolutely, it’s going to be. It’s absolutely beautiful. It’s right next to the future BART station, just making it the epitome of transit-oriented development. It’s on Santa Clara Street, which is kind of the main drag of the central business district here in downtown San Jose. And it’s about six [inaudible 00:32:53] blocks from Google’s future, we call it their mega campus. They haven’t quite named it yet. They’re telling themselves, “Downtown West.” Which, “Downtown West” is great.

Andy: So, they get half of downtown? They’re downtown west, or they call it, just, the whole region?

Erik: Well, the core of downtown, the historic downtown San Jose, is on the east side of the 87 Freeway. And Google, over the last five years, has purchased 80 acres of property on the west side of the freeway. They almost bought everything west of the freeway. They’re planning on building 7 million square feet of office and 6,000 residential units. At buildout, it’ll be their largest campus on Earth. It’s a 10-year, $19 billion buildout, and they started construction last year.

Andy: Only 19 billion. They couldn’t do 20. No, I’m just…

Erik: Yeah. It’s actually a fantastic project. And it’s really integrating itself into downtown very nicely the way that they’ve designed it. Google has really done, call it, it’s like an urban planner’s dream, what Google has decided to do with this campus. And we love it. We have three projects that are literally hundreds of yards away from it. Our office is six blocks away from it, so a lot of real positive synergy with what they’re doing. And kind of, as I mentioned, other developers have really come into downtown as well. They have lots of really great projects. We know almost all the developers. There’s probably 10 active developers in downtown. We have periodic meetings with each other, and we root each other on. You’d think it’s competition, but it’s not competition. It’s, we all know that we’re building this synergy for a greater downtown San Jose, and that if they build a project and I build a project, both of our projects will be worth more.

Andy: Absolutely. You know, as investment theses, maybe it’s not a complicated thesis, but a good thesis doesn’t need to be complicated. Makes me think of, like, building in the Washington D.C. area, or Arlington, Virginia, or, like, anybody building around there, I’m like, I would not bet against that. I wouldn’t bet against all of the money in that area and all of the growth. Unfortunately, sometimes in that area, same thing. As investment theses go, building near Google’s largest headquarters on Earth, like, that’s a pretty strong thesis already, just that right there.

Erik: It is. And, you know, it’s very interesting to us too, that we’re one of the only active Opportunity Zone funds here in Silicon Valley. I would’ve thought that a lot of these other groups would’ve utilized the Opportunity Zone program. But what I found is a lot of the other groups, you know, some of them are, you know, very wealthy individuals, that self-fund a lot of their big projects. Other ones raise money from, you know, the Texas Teachers Pension Fund. And they raise money a billion dollars a clip. And to them, they don’t need to raise money from individual investors in the retail channel. So, that leaves us. And because we’re one of the only shops here doing it, investors across the country understand the Silicon Valley market, the power of it, and they get over their, you know, feelings towards California politically, and they understand that it’s a good business deal. And so that’s what we’re finding. And that’s, you know, we have almost 800 investors between our two funds now, our two Opportunity Zone funds, and that’s kind of a testament to what we do here.

Andy: Well, last thing on the Opportunity Zone fund. So, I know that the office, it is gonna be a premier office building in the area, in frankly one of the premier cities, especially in technology in the world, but it’s still office, right? Is office untouchable? I mean, I think a lot of investors, they hear “office” and they’re just like, “Oh, move on.” Brain shut off. They don’t even wanna hear about it.

Erik: You are saying exactly what has been happening, especially in the headlines. Headlines have been bashing office hard. You know, Silicon Valley is an interesting place, right? Even during COVID, we probably had the best office market in the country. We saw more transactions of existing office space than really we’d ever seen before. And they were selling for these record prices. We became the safe haven for big equity groups that had money to place in office. They put it here. And that happened all the way through 2021. We saw that slow down to kind of a more normalized level. But what we’ve seen is, you know, our rents have gone down a little, but not a lot. Our vacancy rate has gone up a little, but it hasn’t gone up a lot. We still see big tech companies taking big leases. And…

Andy: Well, and Erik, if I could… Sorry, I was just thinking. I think maybe it took a year or two for some of these companies to figure out, not every worker is super productive at home. Some are. So, I don’t see offices going away, you know?

Erik: I don’t see it as going away. It’s probably not gonna go back to exactly what it was before. We’re lagging the rest of the country in return to office. And so, while a lot of places, especially in Texas, they’re almost back to pre-pandemic levels, we’re only, like, 60%, 70% of the way there. So we’re not seeing that big flux yet. And a lot of that’s because, here in Silicon Valley, the companies hired so many people in 2021. I mean, they hired hundreds of thousands of people. They were cannibalizing each other. And tech workers got to write their own ticket, and if they wanted to work from home, they were gonna work from home. What we’re seeing now, especially with the layoffs that have been occurring, is a lot of people are going back into the office because they don’t wanna lose their jobs. And the employers, you know, they’ve gotten more power.

We’re still not back in five days a week, but I’ll tell you, traffic is just about as bad as it was pre-pandemic. But I’m gonna tell you some interesting things because I get a lot of comments about the layoffs themselves. I mean, if you read even our business journal right now, it says, every other article is, “Zoom cuts,” you know, “13% of their workforce.” “Facebook cuts 12,000 people,” on and on and on. You know, I think the big companies here have only laid off, like, 5% of the total amount of folks that they hired during the pandemic.

Andy: Wow.

Erik: That’s kind of just to show you. Also, interesting statistic. You know, 1.6 million people work here in Silicon Valley. During the dotcom, which was a real downturn, they fired, in layoffs, around 300,000 people. So far here in the Valley, we’ve laid off about 12,000. So, not even, like, a blip on the radar. In fact, our unemployment rate is now at 2%. Six months ago, it was at 2.2%. So we actually have more jobs now than we had six months ago, despite all the layoffs and headlines. Also, all the big companies that announced layoffs, they’re not laying off a whole lot of people here. It seems that they’re consolidating here into Silicon Valley. You know, like, for example, Google laid off 12,000 people. Yeah, they laid off 1,600 people here, where they have 18 million square feet of office.

Andy: Wow.

Erik: So, almost nobody. Microsoft laid off 10,000 people. They laid off 46 people here. Meta laid off 11,000. They have their headquarters here. They have about 6 million square feet of office here. Of that 11,000, it’s 2,500 were here. And that was kind of the largest one. Apple hasn’t laid anybody off. In fact, Apple has just leased another 1.6 million square feet of space, just recently here in Sunnyvale. And you kind of go, so where are all these, like, real layoffs happening? It’s not really a thing that’s going on. I mean, I guess it is happening, but in Silicon Valley, we’re not really feeling it, I guess I’d put it that way.

Andy: Well, the labor market is still very tight. And, I mean, I have the impression, you know, armchair theorist here, but I have the impression it’s exactly what you said. It’s companies that are consolidating, almost using economic disruption as a pretext, increase profit margins a little. Like, that’s okay. They’re companies. They’re doing what they wanna do. But we’re not really seeing the economy go into this depression or anything. And I think a lot of company, you know, they watch their cash flow in real time, so I think it’s kind of like the recession, in a way, I think it’s been way over-exaggerated, almost that everyone’s rooting for a recession, you know?

Erik: I think you’re exactly right. To me, what it seems like is the companies went a little bit too wild hiring people during the pandemic, and now they’re looking, okay, well we can get rid of our bottom 10%, call it, you know, layoffs because of the economy and then we won’t [inaudible 00:41:30.714] That’s really what’s going on.

Andy: Exactly. Yep, yep. I think that’s 100% right. So, I wanna respect your time. I know we’re running short on time, but I did wanna ask you about the new DSTs. So, you let us, actually, at AltsDb, you gave us the ability to launch this story. So, we are excited to announce it. But, you know, I’m thinking Urban Catalyst, you’re known for OZs, you’re known for Silicon Valley real estate. This is something different. So, I guess, how does the DST fit into the brand or vision, or what is the vision with the DST product?

Erik: I’m so glad you asked. You know, we’re really excited to launch our DST. It’s an industrial product in Dallas, Texas. Here at Urban Catalyst, you know, we’ve been real estate folks for a long time. We’ve owned and managed a ton of buildings for the companies we’ve worked for throughout history, as well as our personal portfolios. We have marketed ourselves over the last couple years really as an Opportunity Zone fund, focused on ground-up development, San Jose, all day. And when we said, “Oh, we’re gonna do this other type of product,” because it makes a lot of sense to us. It’s real estate, it’s a quality asset, has a lower risk profile, it’s, you know, income-producing property that’s existing versus ground-up development. Ground-up development has more risk, and general has higher returns. Existing, stabilized asset, lower risk, lower returns.

So, for us, it was a very simple transition. And we wanted to expand our fund platform to provide more opportunities for our investors. Delaware Statutory Trust, I mean, it fits right in our wheelhouse. Tax-advantaged real estate. That is what we do here at Urban Catalyst. We raise funds for tax-advantaged real estate. We raise funds for properties that we can control. And so that’s what we did here with our DST. We launched into the market. You raise money from individual investors. We’re built to raise money from individual investors, both in our direct channel and through, you know, wealth managers. So, overall, it was a perfect transition for us, and we’re really excited to have it out there. It took us a long time to put it together, because we wanted to make sure that we could just bring the most quality property to the market as our first one, so that folks could see that the same type of quality and excellence that we put into our Opportunity Zone funds, we put that into our Delaware Statutory Trust as well.

Andy: Yeah, I mean, I guess, as an outsider, you know, you all do have that brand name and you have that, you know, the 506(c) direct investor base, and just awareness of Urban Catalyst. So that makes sense, expanding. To me, one consistent theme is these geographic locations that are, like, boom towns. Like, I don’t know what other way to put it. Just with, like, really solid underlying long-term demographic, economic growth. It kind of goes back to what I said about Google and their IPO. It’s just, like, if you’re a long-term thinker, and you kind of can fast-forward and you say, well, look at the growth that’s happening every year. Imagine what this real estate, this piece of dirt, is gonna be worth in 10 years, in 20 years. To me, that’s kind of a theme with your thinking.

Erik: I’m glad you said that. We are always looking at the overall markets, and as far as which markets are great. When it came to our Delaware Statutory Trust, you know, the first thing that we had to determine when we created this program was which asset class were we gonna target. The two most common types of DSTs, apartments and industrial. DSTs, you know, you need to have rent growth associated with them, or then, at the end of a certain period of time, you won’t be able to sell the asset for what you sold the DST for. Because there are additional costs associated with selling the DST, you know, creating the structure around it and all of those types of things.

So, we didn’t wanna just go into an apartment deal where you think, “Okay, well the market will go up over the next few years and it’ll be fine.” We wanted to go into a net lease environment, where we could have built-in rent increases into our leases. And so that’s what we found here with this property that we have. We have a 10-year lease, 3% built-in rent increases, so that we can show, in a contract with a quality tenant, that 10 years from now, we will have a value that is similar to the value that we’re selling the DST for now. And that is an exit strategy for our investors. So that was kind of our number one goal, from the very get-go. And industrial property is great. Other type of net lease properties, you got retail, you got office. Office obviously not the hottest thing. Retail, you know, Amazon has taken out, like, 15% of all retail over the last 15 years.

Andy: Well, isn’t industrial…it reminds me of multi-family. Isn’t it, like, kind of an area where the supply and demand mismatch is so severe?

Erik: It is. And what we’re seeing in the Dallas-Fort Worth metro area right now, I mean, not only has the population increased by 20% over the last 10 years, but it’s the second-largest industrial market in the country. And there’s lots of new industrial development. That development’s really on the outskirts of Dallas and Fort Worth. This property is in the city of Dallas, right in between Dallas and Fort Worth. It is a fantastic location. Two things that we had that were must-haves for us in the acquisition of this property, one was we needed to be in a major metropolitan area. Number two was we needed to be near a major freight cargo airport, and the Dallas-Fort Worth airport is that. So we hit both of those with this property.

At the same time, we wanted to be in a market where we’ve seen historically strong rent growth. In our submarket, we’ve seen rents go up 14% year over year for industrial. So it was really great that you can have your lease, and you can say, well, I’ve got it built into the lease that the rents are gonna increase 30% over 10 years. But also knowing that by the time you get to the end of 10 years, your lease is probably under the market rents because rents have gone up that much over 10 years. I like to say, we like to do business based on a business plan, not on speculation. And that’s what we do, but it is nice to have a little speculation in your back pocket that it’s gonna be a strong rental growth in the market itself over time as well.

Andy: Exactly. It’s kinda like you’re underwriting conservatively, you know, like, planning to be conservative with that, but then there’s built-in upside. [crosstalk 00:47:52]

Erik: That’s absolutely right.

Andy: Yeah. Erik, you know, I know we’re running outta time. I just wanna thank you so much for coming on, sharing your insights. I mean, the Silicon Valley story, it never really gets old. Thinking of it, it just reminds me so much of that Google IPO, and speaking of Google, right? Silicon Valley, but I just love your big, bold vision. I mean, honestly, as an entrepreneur, I just find that inspiring to think big, think bold. It’s awesome.

Erik: Well, I appreciate that. We wanna do what’s right for here in San Jose and what’s right for our investors. And a big, bold vision was the plan, and we’re just in the process of executing it and making a lot of forward progress in doing so.

Andy: Where can our audience of advisors and high-net-worth investors go to learn more about Urban Catalyst?

Erik: To learn more about Urban Catalyst, please visit us at urbancatalyst.com.

Andy: Thanks so much for coming on the show today, Erik.

Erik: Hey, thank you, Andy, for having me.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.