Interview: Jayson Lemberg of Pioneer Acquisitions: Part 1
July 13, 2017
In this EisnerAmper podcast, Jayson Lemberg, Principal at Pioneer Acquisitions, gives Dave Plaskow insight on the real estate private equity industry in the New York City and Chicago markets. Dave and Jayson discuss topics such as urban neighborhoods experiencing rejuvenation, the buying and renting trends of the millennial workforce, and ways of identifying locations that are likely to be strong real estate investments.
DP: First off Jayson, tell us a little bit about Pioneer.
JL: Pioneer was formed in 2008 by myself and my business partner, James Peterson. We both worked at the same real estate private equity fund here in New York. We saw that time as a great opportunity, given the market being in flux, to go out on our own and target distressed assets. Typically, we were going after note purchases at the time where we had the aim of getting the underlying asset, control the underlying asset. Given our previous work experience we were targeting primarily retail mixed-use. Unfortunately the lenders that we were communicating with, trying to buy particular notes, they weren’t willing to let those go. They were very well located assets, and they weren’t in enough distress to let go, so we evolved. And the first few deals that we did were no purchases of multi-family properties that were in distress in the Connecticut area. We did do a New York City deal – it was the defaulted note on a parking garage in Harlem. So those were the first deals that we did.
When we targeted opportunities in Chicago, which is another target market of ours, we started out looking at similar types of deals but we ended up acquiring some fractured condominium projects. So really what happened is with our experience in that asset class, touching on multi-family, we started to favor the asset class over our background in retail. We liked the risk-adjusted returns so from that point forward we just focused on multi-family and some mixed use. So that’s where we are today and New York and Chicago are still our target markets, but Chicago is predominantly where our operation is and we have over 2000 units in the Chicago land area.
DP: You say on your website that Pioneer’s goal is to acquire well-located assets in urban neighborhoods currently experiencing rejuvenation. What clues do you look for in a neighborhood that maybe is about to gentrify so that you’re ahead of the curve?
JL:I wouldn’t necessarily use the word gentrification because that can have some negative connotations. We aren’t targeting neighborhoods that are seeing an opening of trendy coffee shops or hipster bars. We’re looking for solid working class, middle class neighborhoods that are well located in urban areas, again Chicago is a primary target, that are seeing a benefit of over-gentrification of other neighborhoods, meaning that there’s closer neighborhoods in Chicago that have seen tremendous rent growth, that have really gentrified tremendously over the past 5-10 years, and they’ve become unaffordable to the renters that were in those neighborhoods previously. Those renters are now being pushed to other neighborhoods that have solid amenities like the neighborhoods we target, in terms of shopping, in terms of recreation, and definitely in terms of good transportation that works in and out of the city for jobs. We are seeing a lot of those renters looking for more affordable options and we are targeting those neighborhoods that are seeing a benefit of that push out of the truly expensive neighborhoods.
DP: So you’re not looking for the guys with the handlebar moustaches drinking Pabst Blue Ribbon, you know, the hipsters – and then run right in…
JL:Well they love Pabst all over Chicago… but that’s true.
DP: You mentioned that you have a strong real estate presence in Chicago. Why Chicago?
JL:Why not? Chicago – it’s funny – it’s been viewed as a fly-over city for a long time and I think it’s starting to lose that.
DP: The ‘Second City’?
JL:The Second City… it still is the third largest city in the country. Our selection of New York and Chicago as our primary markets stems from our previous work experience, so I was primarily focused on acquisitions in the New York area. My partner James was primarily focused on Chicago. This was for our previous employer. Clearly work experience was a driving force, but we’re also both Midwesterners born and raised, so we spent a lot of time in Chicago, we had family that lived in Chicago, so we’re very intimately familiar with the market, with the players, with how the city operates. But we really loved Chicago because it is a deep market. It allows us to achieve solid risk-adjusted returns for our investors. It’s historically been a slow and steady appreciating market with fewer booms and bust cycles as other cities, and given that our investor base’s investment horizon is very long term in nature, we see it as a good match. So we have successfully built an operation locally in Chicago that’s still growing, it’s thriving, that’s vertically integrated with property management, leasing, marketing – we’ve built all of that out – and we now own and manage over 2000 units in Chicago. So we have the framework, we have the foundation to continue to build scale, so we’ll continue to do that for the foreseeable future as opportunities present themselves.
DP: Good! Curious… what’s the difference between doing business in Chicago versus New York City?
JL:I would say there are two primary differences. The first would be the level of competition, so Chicago still is a very competitive market but what it lacks is the scale and the depth of the foreign capital that’s being invested. It is starting to grow, but certainly not to the degree of New York City, as well as the multigenerational wealth that’s being invested in real estate in New York that is willing to park money for sub-three-percent return for generations ultimately if they’d like. While we do have a long investment horizon, we can’t really compete with those buyers in New York, so Chicago provides us with a little more of an opportunity to compete on an equal playing field, so to speak.
The second key difference for multi-family investors is that Chicago does not have a rent control or rent stabilization program. It’s a totally free rental market. We can execute our investment strategy, which is to buy vintage class B, class C apartment buildings that are in need of aesthetic rehab, so we can update the units with new kitchens, new bathrooms, flooring, paint, what have you… and be able to charge the prevailing market rent commensurate with that level of upgrade. We can’t replicate that in a city like New York. If we were to buy the same type of building, class B, class C, there’d be some level of rent control or rent stabilization, and underwriting and executing on such a deal is a completely different animal than what we’re used to.
DP: Interesting. Now I was also reading on Pioneer’s website that, correct me if I’m wrong, it seems like to some degree a sweet spot for you guys is millennials – you do a lot of off-campus housing. Yet we’re hearing that college enrollments are down a little bit and recent grads are staying home longer or maybe venturing into real estate a little later in life, and I’m just curious as to how demographics like this factor into your real estate strategy?
JL:We have ventured into the student housing arena as of late. We did purchase two sizable portfolios from the University of Chicago over the last two years, in excess of 1000 units across 30 buildings. Those buildings were restricted to graduate students and faculty, but we really saw it as an opportunity to replicate our model on the north side of Chicago. Just so you’re aware, University of Chicago is in the Hyde Park neighborhood which is on the south side. We saw the opportunity to replicate the rehab of vintage era buildings - that’s exactly what these buildings were the University was selling, off campus housing. We didn’t necessarily see it as a student housing play because the Hyde Park market is definitely – I’ll use the word ‘gentrification’ – it is gentrifying and it’s a thriving neighborhood very close to downtown where obviously there’s a large student population. But in our view’s also a neighborhood appeal, and an affordable neighborhood, that people may see as another option out of the more expensive core neighborhoods of Chicago. It also has tremendous research centers, as well as a major hospital and healthcare in the neighborhood. We saw it as an opportunity to really rehab units and offer it to the free market, not necessarily only to students. That being said, we clearly will have, and we do have a lot of students, so we’ve learned how to cater to that demographic, and it is definitely a demanding demographic. But what we love about the neighborhood is the fact that the university is the anchor and we believe, as a lot of university towns or cities, neighborhoods are protected from economic swings - we see that as very true in this neighborhood. In fact I would say it probably is more insulated or better insulated than other lower tier universities in smaller markets just because of the reputation of the University of Chicago. You know it’s a world-renowned university, one of the best in the world, as are its research centers. So we’re comfortable it withstands economic swings.
In terms of grads staying at home longer, maybe putting off their home purchases, I think that’s definitely been true. Although I think that, for the foreseeable future, it’s going to only be a benefit to the renter community, the size of the renter pool, because I think you are seeing a lot of those individuals moving out of their parent’s homes now that the market is improving. I also believe that home buying is still a difficult proposition. It’s still hard to get a mortgage. It’s a big endeavor, and so I think that will still remain the case and that the renter pool will remain pretty substantial.
DP: On the plus side it does seem like there’s a movement of people to cities rather than rural areas.
JL:Absolutely. You may read headlines that Chicago has lost some population and I think generally that’s true, however what you’re seeing is a shift of people who are in the outlying suburbs moving into the city. So we’re still comfortable with Chicago having strong fundamentals in terms of industry that’s there, major corporations – but what you have seen is those major corporations move from outside the city. MacDonald’s for example is moving into the city. And that’s just one example. There’s plenty that have been moving downtown. So there’s definitely a growing pool of young millennial workers who want the city life, and I think that’ll continue.
DP: Location, location, location.