Bobby Turner wants to make sure more people can afford housing in Los Angeles and other cities, and to earn solid returns for his investors, too. That’s why the former chief executive of Century City’s Canyon Capital Realty Advisors just launched the Turner Impact Multifamily Fund, the latest initiative from his socially conscious investment firm, Turner Impact Capital in Santa Monica. The fund’s investors include the University of Michigan and Citi Community Capital. Turner spoke with the Business Journal about high rents burdening working Angelenos and how impact investing can generate more than just karmic returns.
Question: Why did you start the new fund?
Answer: We are trying to tackle some of society’s most daunting challenges. Not through government or philanthropy, but using market forces to create sustainable solutions. And one of those challenges is affordable housing. Mayor Eric Garcetti will tell you one of the biggest challenges we face in Los Angeles is the shortage of workforce housing. People earning 50 to 80 percent of the median income are basically priced out of quality options. Many are spending 50 percent of their income on rent. That is untenable. It comes at the expense of health insurance, food security and so many other things.
Given L.A.’s real estate prices and sprawl, many people here accept long commutes as a cost of living here. You think they shouldn’t. Why?
The environment, economy and household well-being all suffer when housing is not present in proximate areas. Think of the family drain when you’re not home in time for dinner, to be a mentor to your kids. Think of the effect driving for hours has on the environment. Finally, think of the lost productivity if you’re commuting 90 minutes each way every day. That’s untenable.
There’s obviously demand for affordable housing in convenient neighborhoods. Why hasn’t more of it been built? And why is your fund trying to buy properties instead of building them?
The economics don’t work to build new workforce housing at the moment, given the high costs of construction and labor. You can’t build workforce housing and generate a market return. So in the interim, I’m in triage mode. The existing stock is disappearing. When those properties go on sale, typically more opportunistic buyers come in looking to drive profitability. The easiest way to improve profitability is to improve the property and increase rent. That’s not what we want to do.
What do you want to do?
We need to deliver a market return to our investors. And we can do that by reducing expenses. I don’t know anyone who goes home to a B-quality home in a C-quality neighborhood and says, “I’m really proud of that.” And that’s why the population is itinerant. But if you can create pride in rentership, you can increase duration and lower the costs that come with turnover. We’re not looking to improve the properties, were looking to enrich the properties. We enrich them by providing relevant and meaningful services at no cost to us.
Give me an example.
I just built a K-8 public charter school in south Dallas for 800 kids. Right around the corner from that school is a 300-unit workforce apartment that’s for sale. I’ll probably be a bidder; Blackstone and Colony will be bidders. We can pay the same price, but after that we differ. Rather than putting in Sub-Zero refrigerators and Caesarstone countertops and jacking up the rent, I want to focus on delivering educational services. I’ll go to the school and offer to provide subsidized housing for five teachers and their families. And as part of that deal, we have some common area that we’re going to turn into a mentoring ground – staffed by those teachers – every school night. Families already spending 50 percent of their income on rent can’t afford extra tutoring. And what did that cost me? That cost me taking five units off line. You’ll always have structural vacancy, but I’ve turned them into productive use that enriches the community.
You have a long track record of getting big-time investors to bet on urban neighborhoods. How have you done it?
Over the last 20 years, we’ve proved that investing in social impact can drive better returns. For one, most people in the real estate industry are speculators. Social impact is not speculating on demand. We’re focusing on marketplaces where there is a huge existing demand for infrastructure or services, and also where the traditional investor has been the government or philanthropy. You can generate better risk-adjusted returns because you’re not speculating.
Good, sure, but better returns?
There’s no correlation between social impact and market indices. There are millions of kids on the waiting lists for charter schools. Regardless of the unemployment rate, the Dow Jones industrial average, that demand isn’t going away. What I like to say about social impact is you will typically underperform in a bull market, but you’ll outperform in a bear market. You’ve got real alpha in your portfolio.
A lot of people say income inequality is the biggest reason working-class people can’t achieve their goals. But you disagree. Why?
The history of America has always been one of a great disparity in wealth. It may be more extreme today, but the reality is what he have is a disparity of hope. As long as the 99 percent believe that with hard work and education the American dream is feasible, everyone plays nice in the sandbox. When they believe the system is rigged, that’s when you have intensive despair and intensive despair breeds intensive violence. That’s what we’re seeing in Baltimore, Ferguson and Cleveland. We need to restore hope to those communities, not worry as much about income inequality.
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