All in the (Multi)Family: Q&A With Decron’s David Nagel
Decron Properties has been in the business long enough to have seen several up-and-down cycles.
And after the 2009 recession, David Nagel, the firm’s president and CEO, was determined to learn a lesson from the upheaval.
Decron was founded by David’s father Jack Nagel as a single-family construction company called Nagel Construction Company in the fifties. By the seventies, the company had graduated to developing apartment complexes and eventually grew to invest in commercial too.
The elder Nagel, a holocaust survivor who passed in 2018 at the age of 96, renamed the company Decron, a mash-up of his four children’s names: David, Esther, Careena and Ronnie.
Now David is returning the family to its multifamily roots. Since 2009, Nagel has divested from commercial properties to focus on middle-income multifamily assets. Over the course of the decade, Nagel reduced the company’s commercial footprint from 3 million square feet to 1.2 million, and from 40 percent of the portfolio to 15 percent. Most recently, Decron sold an office complex in Huntington Beach to developer Onni Group for $97 million. Nagel has also expanded the company’s geographic footprint, and now has properties in Southern California, Northern California, as well as Seattle, with hopes to expand along the Western seaboard.
Commercial Observer spoke with Nagel about his bet on multifamily, his concerns over rent control legislation, and why he’s expanding outside California.
Commercial Observer: Why did you decide to disinvest from commercial?
David Nagel: Coming out of the great recession, we realized that commercial office and commercial retail are so much more vulnerable to the deep changes in our economic cycle. As a result of that, we made the big decision to reduce our commercial office and retail portfolio over time. Our commercial portfolio has shrunk from 3 million square feet to, with this sale in Huntington Beach, about 1.2 million, and we’re not done selling.
Today we’re about 80-20, and we see that ultimately going down to 90-10. We probably won’t leave commercial altogether but we don’t see ourselves growing in that [sector] because of so many factors hurting that business.
Why focus on multifamily?
We’re particularly focused on middle-income earners. Our renters, depending on the submarket, make somewhere between $60,000 a year to, let’s say, as much as $120,000 a year. We’re looking at a new acquisition in Kent, Washington. In that asset, the wage earner who will be renting will earn somewhere between $60,000 and $90,000. In the Bay Area, it’s more expensive, in Walnut Creek, Mountain Valley, Emory Creek, it’s closer to $75,000 to $120,000. We’re focused on higher middle-income earners.
We’re providing them with affordable luxury, finishes that compete with brand new product — vinyl plank flooring, quartz countertops, quality lighting — the difference is because we’re buying older product, from the seventies or eighties or nineties, and renovating that product, we’re able to provide the same quality at about 20 percent less than brand new product. That’s our niche. We think there’s a lot of people focused on brand new product, there are some exclusively focused on affordable for lower-income, but it seems like nobody is playing in the world of taking care of the middle-income earners.
And why are you looking to expand outside California?
It’s because of the legislative factors. We’re concerned about being able to create this affordable luxury product, because of legislation changes. We are concerned about Costa Hawkins and changes to existing rent control laws. We’re concerned about the laws around just cause eviction and vacancy decontrol, which we see as the most important item to incentivize landlords, so that when and if a tenant decides to leave, for whatever life choice reason comes about in their life, we can upgrade that apartment which will allow us to charge more.
Do you have any affordable inventory in your portfolio?
We do have a few communities that have a mix of market-rate and below market rate (BMR) housing. We also have several communities where we encourage and accept section eight [housing vouchers], but not more than 10 percent is truly affordable. That’s simply because it’s hard to find those deals. There’s a tremendous shortage of affordable housing, so the deals are few and far between.
Are you worried about having so much exposure to the multifamily sector?
The way we’re addressing that is stretching our geographic region; we’re also in Northern California and in Seattle. We used to think that was the best way to run our portfolio, to equally divide it among asset classes. But what we have found over time is that — excluding industrial — office, retail and hotels, all three of those asset classes are challenged by the volatility of the supply. There’s just too much product, too much office, too much retail, too much hotel supply, so the returns are very choppy. While in the short term you may be able to make money, over the long run, we feel we’re much better off, because the multifamily supply is limited in all submarkets. There’s just not enough rental housing to accommodate the number of people who live here.
E-commerce is creating the oversupply of needs in all those industries. Airbnb is a problem for hotel ownership, online retailing is a problem for retail, and the ability to work out of your home or out of your car has created a problem for the supply of office. Where you sleep, e-commerce can’t attack that. That asset class is protected. For now industrial is also protected because land is so expensive, so it’s hard to create more industrial. That’s why we don’t mind having most of our eggs in one basket.
Can you elaborate on the legislative issues you’re concerned about?
Vacancy decontrol. That is ultimately the most important thing that legislation needs to protect, that in NYC now has been changed. That is the concept of allowing the owner of the real estate to invest in their properties, enough money to maximize rent, following it being vacated by a renter.
Also important is the concept of just cause eviction, which allows landlords to renovate buildings over time. It doesn’t allow you to break leases but upon the expiration of a lease, and with proper notice to renters, the landlord has a right to raise rents or to let the renter know that you want the apartment. Renters are protected already through statewide legislation that landlords are not allowed to raise rents more than 9.9 percent. I see no problem with that.
The most important thing that I’m focused on is the protection of vacancy decontrol, so the landlord has the ability to reinvest in that real estate, and allow a fair return on real estate investment.
What’s your response to those who say that Los Angeles is facing a housing crisis?
My reaction to that is, the solution of rent control, and such stiff regulation that it disincentivizes you from investing in your building, is not a good idea. If they take away vacancy decontrol, nobody will reinvest in buildings. It’s true that we have a serious problem with housing shortages. There are ways to encourage more affordable development, one incentive is through property taxes. I’m sure that’s an idea that should be considered.
What about the proposed changes to Proposition 13, which currently stipulates that a property is only reassessed when it trades?
For me, that was the straw that broke the camel’s back. The threat of Prop 13 having a split role, where Prop 13 is only going to protect housing and no longer protect commercial office and commercial retail. Potentially, commercial owners can have a huge amount of increase in their property taxes. There are people who own their properties for a long time, and if they’re going to be reassessed at today’s standards, those owners run the risk of a huge problem. If the taxes go up and the landlord’s desire is to pass through the increase to tenants — whether a pass-through in office or a triple net lease in industrial or retail — the tenant is going to see that as a rent increase, and that’s going to hurt rents’ ability to grow. Tenants only care about overall occupancy costs, so if rents go up, they’re going to be resistant to expand or renew their lease.
Are you involved in any ground-up development, or would you consider it now with the city’s TOC guidelines, which allow for additional density near public transit?
We are not involved in any ground-up development right now. With TOCs, land costs per unit go down and allow you a break on parking. Those are good ideas but in the end, construction costs are so high, that those units are not very affordable. They’re only affordable to people making $150,000 a year. Probably starting rent is $3,000, and renters are supposed to make three times as much as their rent, so using that math, renters need to make about $10,000 a month. We hope to get into more development soon but not right now, being that it’s the potential end of an economic cycle.