Pioneering Urban Workforce Housing - Interview with Mosser Capital Management CEO Jim Farris
Gautham Deshpande, Audit Partner and Private Equity Leader in the San Francisco office at EisnerAmper, sits down with Jim Farris, CEO of Mosser Capital Management, a leading investor, acquirer, and operator of value-add rent-stabilized urban workforce housing in transitioning neighborhoods in California. Jim discusses urban workforce housing and his firm’s growth and transition, challenges, trends, and more.
Gautham: Can you give us a brief overview about Mosser Capital Management?
Jim: My partner and his family, the Mosser family, have been in San Francisco since the 1950s. Since then, they’ve been investing in residential housing and apartment buildings and doing turnarounds and developing properties. Today we're a mature, fully vertically integrated institutional investment platform managing over $1 billion in AUM with all of the functions, including acquisition to construction, asset management, and investment management, as well as the operating business that's been here for a long time. You’ll hear people who work here say that they like working for a 60-year-old startup. We're in a great position, poised for significant growth.
Gautham: How have you successfully managed the transition from a large, family-based investing model to an institutional investing model?
Jim: We developed a business case for a long-term investment strategy focused on the core business that Mosser had developed and honed over several decades in the rent-stabilized and urban core housing space. Our track record, high mid-teens levered returns and stable cash-flow growth provided a compelling opportunity for new investors to work with Mosser. We started with high net worth investors on smaller properties, and grew quickly into larger transactions. We then established programmatic joint ventures and are currently in the process of raising our first co-mingled discretionary investment vehicle. To date, we’ve partnered with some of the most respected institutional investors in the country and are excited about continuing our path of growth.
Gautham: What do you see as your biggest challenges as you continue on this growth trajectory?
Jim: One challenge everybody faces, particularly in this area, is how to grow and control costs in a business that's not funded by others—a business that's not a venture capital-backed firm, but a traditional business that pays for itself. How do you grow and retain the right talent to do that tactically, and what is the level of talent needed? While you need exceptional talent in key roles throughout the organization, you also need role players with specific skill sets that can excel in a particular position as a part of the larger organization.
Gautham: What are you doing that you don’t see your peers doing?
Jim: Our reputation sets us apart from our competition. This, in large part, has been developed by my partner Neveo Mosser, who has been running the company for a long time. We have a very amicable relationship with all of our tenant groups, with all sides of the political stakeholders in areas where we operate. And we have a long expertise in how to develop and maintain those relationships. I think that is unique in our business.
There are no institutional discretionary vehicles focused on rent-stabilized and work-force housing in the urban core markets that we’re targeting in San Francisco, Oakland and Los Angeles. This is a sub-sector of the market that historically has been difficult for institutional investors to both access and understand the value proposition which, at this point in the market, is substantial. Affordable housing in all forms is in a crisis state across the country, particularly in California. We like to think that we’re contributing to solving this problem by providing quality, affordable housing options for middle-income professionals and families who want to be in close proximity to where they work and live. We're fully integrated and focused on a localized strategy that has remained inaccessible to institutional investors. We're on the affordable side of the housing spectrum on the West Coast, which is a great place to be. And we can get pricing power if we have the ability to act quickly. So for us, having a fund or having discretionary capital is important.
Gautham: How do you pick the right assets to invest? What are the most critical items you look for before investing in an asset?
Jim: We start with the traditional methods of underwriting real estate investments. These begin with analyzing the opportunity’s long- and short-term market fundamentals, determining how the investment fits into our current strategy or the investment partnership/portfolio we are building, and ending with sub-sector and specific property considerations isolated to the rent-stabilized market and the individual asset particular to each region.
Gautham: How has the multi-family investing landscape changed since the last downturn?
Jim: Throughout this cycle there has been a large allocation shift toward multifamily from the institutional investment community. As the cycle has continued, specialty and potentially more defensive sub-sector products of multi-family (e.g., student housing, affordable housing, rent stabilized housing) have received much more attention from traditional investors than they had prior to the downturn. There is large concern currently on asset value durability and reduced margins going forward, and this has increased the interest level in investing in niche market sectors with fully integrated platforms that can control costs and have better execution.
Gautham: What trends are you seeing now and expect to see as we progress in 2019?
Jim: There is starting to be a divergence between seller expectations and buyer willingness to pay. This trend started last year, more on the value-add opportunistic sector where you saw institutional capital pulling back. The buyer appetite is softening and that appetite was transferred to more of the core spaces. Over the last year or two, that appetite for the core spaces is being diminished by the outlook on future returns, which are 4%-5% total returns. Currently there's a large focus on how to invest in a defensive manner, in either a strategy or an asset class that can achieve higher than a 5% total return. The strategies that are gaining the most attention are those which are defensive if there's a correction in rents or a correction in values.
Gautham: What has helped you get to where you are now in your career, and what advice do you have for others?
Jim: I've always been an entrepreneur on some level. Like many entrepreneurs, you have to go with your instincts to some degree. Going through business school helped me to take my entrepreneurial talents to the next level once they were coupled with a strong institutional foundation of knowledge and experience. My education has played a key role as well as my willingness to learn and confidence to push myself to grow as a professional and as a person. I enjoy learning the process of what it takes to grow and build something—to do it in a way that's both dynamic and scalable.
It’s important to look back and ask, "Why weren't we successful?" or “Why were we successful?” Real estate investing has traditionally been highly experiential and intuition-based. So to have that skill, which is rare and the ability to combine it with an institutional-level analysis, is special.