Banking on KC – Lee Harris of Cohen-Esrey
Listen now or read the transcript below:
Kelly Scanlon:
Welcome to Banking on KC. I'm your host, Kelly Scanlon. With us on this episode is Lee Harris, the president and CEO of Cohen-Esrey, a family of companies involved in apartment management, development, and investment. Lee is also well-known in entrepreneurial circles where he is considered a mentor and an advocate. Welcome, Lee.
Lee Harris:
Happy to be here.
Kelly Scanlon:
You must be so busy right now with the real estate market as hot as it is, and I know that single-family is what's getting so much attention these days. You concentrate, like I said, on the apartment management and investment side. Talk to us about what's going on there. What's the market like? Is it keeping up with single-family? I mean, you should have a really broad perspective because you started in 1975, right out of college doing this, and have a lot of history to compare it to.
Lee Harris:
Well, that's right, Kelly. In the 46 years I've been doing this, I have never seen a market like we're seeing right now. My partner, Bob Esrey, has said the same thing. He's been in a little longer than I have. We were both shaking our heads and it's kind of a pinch-me moment, certainly in the apartment business. Let me address the single-family market briefly. As you probably know, in Kansas City and elsewhere in the country, we're seeing this phenomenon of pricing and values that are just going through the roof for single-family homes.
Lee Harris:
And people say, "Well, why is that?" This all goes back to the Great Recession, financial crisis 2008-2009, and we have yet to see the production of single-family residences at the rate that we did pre-recession. There is a shortage of single-family homes across the country. And as a result, obviously, supply and demand, you've got pressure on the upside with values and household formations continue to increase. We've seen no dip in that. The same thing is translating into the apartment game.
Lee Harris:
Our analysis shows and we've looked at this number for several years now, we need to produce about 425,000 to 450,000 multi-family units every year, year in and year out, to keep pace with demand. We're running somewhere in the 275,000, maybe we'll pump up to 325,000 units in a year, but we're woefully inadequate in terms of the production. As a result, we're seeing apartment occupancies at all-time highs. We're seeing rents continuing to increase. Delinquencies are low. Turnover is low.
Lee Harris:
It's kind of the perfect storm in a good way for the apartment industry. Single-family homes used to be our competitors, and they still are to some extent. A lot of times when people would move from an apartment, they were moving because they wanted to buy a home. Well, the availability of homes is, as I said, in shorter supply, and we're also seeing an interesting demographic shift that, again, Bob and I have never seen before.
Lee Harris:
We have baby boomers, my generation, which has been an 80% homeownership cohort, that group of people, that generation is saying, as they retire, many of them, "Hey, we don't want to live in a single-family anymore. We want to be more footloose and fancy-free." And as a result, will rent an apartment. The 72 million person generation, about 77% now is the homeownership, and each 1% is about a million, a million one, in terms of population. You're talking about a fairly significant shift of baby boomers moving into apartments.
Lee Harris:
Then we have the millennial generation, which is even larger. I think it's 75 million, something like that. You'll see different statistics. But the millennial generation is more of a renter by choice it seems. Yes, there are some issues with student debt causing problems. There are issues with saving enough money for down payment on a home, but a lot of millennials are getting married later. They're having children later. They like the apartment lifestyle. And as a result, there's pressure on apartments for amenities and creating that lifestyle experience.
Lee Harris:
We have that generation, which is about a 37% homeownership cohort. It used to be 34%. It's bumped up a little bit. But again, you have a large generational cohort here of people that want to live in apartments.
Kelly Scanlon:
You have pressure on both ends. You have the millennials on the one side, and then you have the baby boomers on the other who are leaving their homes after they've raised their families. And then you couple that with the shortage of inventory and you have the backlog that you do and all those pressures that you talk about.
Lee Harris:
Well, and then add in one more generational cohort, and that's the zoomers, the generation Z, which is the traditional renting generation, 18 to 25-year-olds. And that's a huge and growing cohort. Now we have three generational cohorts that are very large that are putting all this pressure on housing, whether it's single-family or multi-family. And then you compound this with affordable housing, which is one of our business units. We develop affordable housing. There is at least a six million household shortage of affordable housing in this country.
Lee Harris:
As long as I'll be in this business, we'll never catch up there. This is a really challenging time from a housing standpoint where the consumer is concerned. It's wonderful for those of us in the apartment business that are producing housing and investing in multi-family housing.
Kelly Scanlon:
We still talk about the Great Recession. It was a heavy hitter in our lifetime. But why are we not seeing the catch-up? It's been a while now.
Lee Harris:
It's the same reason that we're also not catching up on the multi-family side. Single-family and multi-family in the same boat. There are a lot of issues with housing development costs. There's a lot of problems with the NIMBY, the "not in my backyard" crowd that's in every single city. It's becoming increasingly more difficult to build a single-family home or to build an apartment community. In fact, in Atlanta, where we have some properties, there are large swaths of the counties there that have a moratorium on adding new apartments.
Lee Harris:
It just drives the pricing both from a rental standpoint, as well from the cost to buy an apartment complex, those are going through the roof. We're seeing that kind of trend elsewhere. Building material costs are higher and higher. Land costs are higher. Tap fees and all the development costs to get a piece of land prepared, it's become the area very difficult. I can tell you, one of our apartment communities generally takes...
Lee Harris:
When we build a new affordable community of say 300 units in San Antonio, Texas, or in Denver, or in Madison, Wisconsin, it'll take a good three years from start to finish. And along the way, the cost structure changes. Developers have to be very, very careful. They have to build in many margins of safety for all of these expected, but unexpected occurrences.
Kelly Scanlon:
You mentioned amenities earlier and you talk about the three generations that are in the marketplace for multi-family in particular. What are some of the hot amenities and how do you build apartment complexes that appeal to all three of the generations that you mentioned?
Lee Harris:
We have seen a real change in the nature of amenities over the years. It used to be that, for example, a really nice resort-style swimming pool was for bragging rights. It wasn't used that much. The sundecks weren't used that much. Well, guess what? Today, renters want to use the amenity packages. These are packages that we install. We have both the new construction where affordable housing is concerned, and we have an acquisition program where we buy what we call class B apartments. These are apartments that were built in the late '80s up through 2015-2016.
Lee Harris:
What we try to do is create a best B or a product that mimics class A in all respects, whether it's in-unit interiors, whether it's amenities. The only thing we can't do is change the ceiling height, for example, but we can pretty much mimic class A otherwise. We are putting the same kinds of amenities in affordable housing as we well, and those include, for example, the resort-style swimming pool that I mentioned. They include fitness centers. They include outdoor grilling areas that are covered, with nice propane grills, for example.
Lee Harris:
Bark parks. We embrace the pets, and we are installing dog parks on most of our properties with the obstacles and the water. They're fenced and they're very nice, but we also are installing dog washes. You can wash your dog. You don't have to do it in your bathtub. And that's very popular. Another thing that's very popular are parcel lockers. Everybody's getting more and more delivery of Amazon and Walmart and the other retailers. We are installing these parcel Walker systems that are available 24 hours a day with a code that you can activate by phone.
Lee Harris:
You can go pick up your package anytime you want, rather than having to wait until the office is open and you go paw through the amount of packages in the clubhouse.
Kelly Scanlon:
Talk to us about what affordable housing means and what role it plays in the overall economic development of an area.
Lee Harris:
Sure. It is absolutely critical to the workforce. And what we're talking about really is workforce housing. These are people that make 60% of the Area Median Income, maybe 80% of the Area Median Income. You're talking about police officers. You're talking about firemen, teachers, nurses in many cases. What we're really talking about here are people that drive our economy, especially the service end of things. Here's the math. I can build a 300 unit apartment complex where rents are 17, $1,800 a month to make it work.
Lee Harris:
And many of the folks in the workforce cannot afford that kind of rental rate. If we use the affordable housing tax credits, which are a federal credit, there are sometimes... We are able to twin those with state credits. These are development subsidies. These are not rent subsidies. What effectively happens with these tax credits, corporations are able to offset some of their tax li day with the credits. We monetize those credits and use the funds to buy down the cost of development.
Lee Harris:
The cost is still the same, but the rental rate that we charge might be for that same 17, $1,800 a month apartment might be half that, 800, $900 a month, which is affordable to the workforce. A big part of our focus with our affordable housing development unit is in larger markets. I mentioned San Antonio. I mentioned Denver, Colorado Springs, Madison, Wisconsin, where the economy is desperately in need of housing that the workforce can afford because there are companies expanding and needing to add second shifts in plants. They're not able to do that if people don't have housing.
Kelly Scanlon:
Cohen-Esrey outside of Kansas City as well, but for Kansas City, let's focus on that, where do you see Kansas City headed in the real estate market, whether it's multi-family, single-family? Kansas City has been consistently ranked as one of the hottest markets in the last few years. Is that sustainable?
Lee Harris:
Yes. I think it's sustainable to a point. It's not going to be a boom market. Never has been. It's not going to be a bust market. It never has been. There are some boom and bust markets that I can point to elsewhere in the country, but Kansas City is not one of them. It happens to be kind of a Steady Eddie as I like to say, but it's actually right now from a multi-family standpoint seeing some fairly significant growth. We see a lot of apartment development around the city. People say to me, "My gosh, aren't we going to be overbuilt?"
Lee Harris:
And yet, almost every single one of those properties is 100% occupied or in the high 90s and the rents are on the uptrend. I think that that's not going to change for the foreseeable future. I do have some concerns about how we deliver affordable housing. In Johnson County, for example, that's always a challenge to find a site that's not way, way, way out on the perimeter. Intra locations aren't easy to find for a full affordable. I think that single-family will continue at a moderate pace.
Lee Harris:
Again, we're not seeing huge overbuilding of single-family either. I like the fact is I used the term moderate, I like the moderate approach where we continue to add housing stock, but we're not doing so on the basis that it'll wreck the market, either single-family or multi-family. I see good things for years to come.
Kelly Scanlon:
Let's shift here. I mentioned earlier that you have a passion for entrepreneurship. What drives that, Lee?
Lee Harris:
That's a good question. I've been asked that before, and I guess it's just kind of the way I live my life with an entrepreneurial spirit of self-reliance to a great extent. By the way, that was instilled in me by my parents. Never feel like you're being victimized. Take responsibility. Be accountable. Guess what? All of those are entrepreneurial traits, I believe. I guess I credit my parents for the discipline. The early morning, 5:30 AM piano rehearsals that I did while my parents I'm sure lay in bed listening and cringing with the bad notes and taking out the trash every day.
Lee Harris:
I had a whole series of chores. At the time, I didn't think anything about it, but I think it did set a good pattern for me. It probably helped me possess the entrepreneurial traits that I think I probably have.
Kelly Scanlon:
Strong family in there. Strong work ethic. You've even written a book and you continue to write a blog for entrepreneurs called An Entrepreneur's Words To Live By. What are some of the topics that you cover in your book and in those blogs?
Lee Harris:
It's kind of my philosophy of life that I want to control my thoughts. And a lot of what I write about is being in control of our thoughts because I believe that the way we think produces in the outer. If we have a negative attitude, if we're thinking negative thoughts, that'll manifest in negative ways. It's pretty simple calculus. When we take a positive approach and have a positive mindset and are undaunted and resilient, then guess what? I think that that manifests in life in many positive ways.
Lee Harris:
That's kind of the underlying theme of my blogs and certainly how I wrote the book. By the way, I wrote the book because I wanted to share some ideas. It wasn't so I could make a bunch of money because I certainly didn't. I didn't promote it. It just was kind of a passion. Writing is a passion for me. And the same with the blog. I don't take ads. It's just out there for anybody that wants to read it. And hopefully, if it helps one person each week when it's posted, I'm thrilled about that.
Kelly Scanlon:
Really you start more with the mindset, the entrepreneurial mindset, and some of the rest of it will flow from that. But if you don't have that entrepreneurial mindset and that right attitude and approach, it doesn't matter about the rest of the tactics.
Lee Harris:
Yes, that's correct. You're aware that I've been a mentor through the Helzberg Entrepreneurial Mentoring Program. You mentioned the nuts and bolts and basics and fundamentals of business. The way I've always worked with my mentees is on a more holistic basis. I need to understand what's going on in their lives because it's pretty hard just to parachute into one little compartment in somebody's life and give them ideas and coach them without understanding what the other pressures are, what else they're faced with.
Lee Harris:
We kind of work with a holistic approach, and then we begin to talk more about the blocking and tackling in their business. I've made some wonderful friends through that mentoring program. I've learned so much from the mentees that I've been blessed to work with over the years. I think I've gotten more from them than they've gotten from me.
Kelly Scanlon:
I've got to ask you. I'm really curious about all of the advice and the mentoring that you do, what is the most surprising thing that you've learned about yourself as a business person over the years?
Lee Harris:
Yeah. I think I have learned to be a little bit more mellow and not quite as hard-charging as I was in my earlier years. I've also learned how important culture is in an organization. The whole notion of command and control just doesn't work anymore. I don't know that it ever worked really well. I grew up in a generation where command and control was kind of the way it was done.
Lee Harris:
Through my mentoring and through just my general experience over the last 46 years with the same company, I think I have evolved away from the nonchalant attitude about culture, poo-pooing it, and come to realize that culture is foundational. At Cohen-Esrey, we really focus a lot of resources and dollars on our culture. It's a customer-focused culture, both from an internal customer and an external customer. I've learned all of that over the last almost five decades.
Kelly Scanlon:
Culture really is what sustains a company for the long term. You have to have a good product and customer service and all the above. But if you don't have that culture there, you're just going to churn, churn, churn, churn, and then the products and the quality will suffer too. As we enter a brand new year, 2022, if you had to give entrepreneurs one piece of advice to start the new year, what would it be? Would it be something specific to emerging from the pandemic, or would it be more universal?
Lee Harris:
It would be understood very clearly what your vision is. Let's just talk about somebody's company. What does it look like when you get there? And is that five years down the road? Is that 10 years down the road? This is something else that I learned, and I think it's really important as we go into a new year to think about our vision and explain in clear, concise language what does it look like when we get there. To tell you a quick story, for years, people have asked, "Well, what's Cohen-Esrey's vision? What's your vision, Lee?"
Lee Harris:
I had it all in my head, but I'd never really spent the time to articulate it. Back in I think it was 2016 or so, I wrote a Wall Street Journal article. I actually mocked up The Wall Street Journal masthead, and I picked the name of a real reporter, and I talked about what Cohen-Esrey looked like in 2026. It was just like a newspaper article that was quite long and that became the genesis for our corporate vision. That has been quantified into what we call Vision 2026.
Lee Harris:
I think everybody, the 400 and some odd people that are on our team pretty much across the country, has a very clear understanding of where we're headed and what it looks like when we get there. I can't encourage entrepreneurs enough to spend some time working on your business in terms of understanding what the vision is, making sure it's clear to everybody, as opposed to working in the business, which we all have a tendency to do probably more than we should as entrepreneurs.
Kelly Scanlon:
I love that newspaper article approach. Anyone who's listening that is an entrepreneur, do that. Sit down over the next few weeks and write as though it's going to appear in The Wall Street Journal, or if you like Forbes better, or if you like Inc. Magazine, whatever it is. Write that article about yourself. What a fun exercise to do. You might just see a lot more profit and stability too.
Lee Harris:
That's right. And it was fun. That was the other thing. It was a lot of fun to write. I still share that to this day. It's exhilarating to see what the vision is. It's a shared vision with... We adjust certain things about it. Then, of course, measuring how we're doing against that vision. What does it look like on December 31st, 2026? I am just thrilled that we're on the track we're on and I can't wait. Well, I can wait because I don't want to get 2026 here too soon.
Lee Harris:
I'm that much older. I just know that it's going to be so fun to celebrate what that looks like, and then we'll set a new vision.
Kelly Scanlon:
Lee, thank you so much for being with us on this episode of Banking on KC for sharing your insight into the real estate market and into entrepreneurship as well. We really appreciate your time.
Lee Harris:
Thank you very much for having me.
Joe Close:
This is Joe Close, president of Country Club Bank. Thank you to Lee Harris for being our guest on this episode of Banking on KC. Kansas City has earned a reputation for entrepreneurship and Lee is well-known for his entrepreneurial spirit and advocacy, especially as a mentor in the Helzberg Entrepreneurial Mentoring Program. Now, Lee and his team at Cohen-Esrey are harnessing that entrepreneurial mindset and spirit to tackle the affordable housing challenges in more than a dozen cities around the country.
Joe Close:
As Lee points out, affordable housing is key to economic development. When workers can't find an affordable dwelling, the workforce is diminished, existing companies cannot expand, and startups struggle. Country Club Bank supports efforts to bolster the inventory of affordable housing and is committed to working with Cohen-Esrey and others to provide innovative solutions. Thanks for tuning in this week. We're banking on you, Kansas City. Country Club Bank, member FDIC.