Hello and welcome to another live episode of the Odd Lots podcast. I'm Joe Weisenthal and I'm Tracy Alloway. So we're here at the Vermont Theater in Hollywood. And of course, you talk about Hollywood, but you also have to talk about the real estate industry. We know this has always been a hub of booming real estate industry, but what did the changes in economic development and the housing market? How does it manifest itself here?
That's right. So we have a real treat for you. We're going to be speaking to an absolute legend in the world of residential real estate, someone who actually called the subprime bubble before 2008 and maybe even more importantly, called the bottom of the housing market after 2008. And then we're also going to be speaking to a relative newcomer in the world of commercial property, someone who's doing new things in LA and trying to develop basically a new neighborhood. So enjoy our conversation with the legend Bill McBride of Calculated Risk, as well as Zach Lasry, real estate developer, founder of the Western Company.
Thank you both so much. Zach, what do you give us the quick overview? What do you do? What's your job?
I'm a real estate professional.
Okay. What does that mean? Because there are a lot of people who could say those words.
So my goal with the Western Company, the goal that we have is that being able to say I'm a real estate professional is more exciting than it normally is.
So I come from a theater and acting background, and what I noticed was the developments that I was seeing in Los Angeles. I moved here in about 2014. Okay. You have a really exciting neighborhood pop up in Silver Lake or Echo Park or Highland Park. Yeah, and all that. Whenever scaffolding would go up for a new building, there's generally, oh, no. What's that going to be? And that's not the reaction that you should have when a new building is being built. There should be some excitement. What is that going to be? What kind of new creative spirit is going to enter into that structure? And I just don't think the commercial real estate industry is that inspiring in that way. Those outcomes haven't been so inspiring. So our goal is to sort of infuse development with the art spirit.
So I'm going to ask a very basic LA question, and I'd be curious to get both your takes on this. And again, Joe gave the caveat earlier, which is we've been to LA a couple of times, but we don't know that much about it. Whenever I come here, I am sort of stunned by the diversity of independent businesses compared to New York. I think about this. Yeah, there's so many mom and pop shops. Like I pass by a linoleum emporium on the way over here, which I just don't think you would ever see in New York. And I'm sure the direction of travel for a lot of independent businesses isn't that great. But how have so many managed to survive in LA so far compared to other places in the US?
Well, I think when I went to school in New York, I went to NYU, and a lot of my most talented friends left New York and moved to Los Angeles because New York just got too expensive. And yeah, LA, it's expensive to buy a home in LA. You can generally find a good rental deal in a really exciting neighborhood. It's a lot harder to do that in New York City. So you have people who are just dedicated to their craft who can survive in LA and focus on their art, versus in New York, it's a lot more difficult to be able to focus on your craft while being able to pay rent. So I think you just have more of an experimental group of people who are moving out here and who exist and trying to start and create new ideas.
Bill, I thought I would also address the density issue. Yeah. In New York, you have really high density, and therefore you're going to have high rent for a particular location. Here we're really spread out. Yeah. Which is an issue, by the way. We should address zoning in LA because we can't stay spread out forever or as spread out as we are. But I think that's a reason that you see so many mom and pop shops, which is great. You know, my community, I live right off PCH, Pacific Coast Highway, and most of the stores are mom and pops. There are some chain restaurants and stuff, but. So, you know, I think it's the density that I love. I have to say, I've talked about this. I love strip malls. I love seeing the Korean restaurant next to the tooth whitening place, next to the vape shop, next to the karate school. To me, that's like one of my favorite things. I love driving past multi-use development.
But Zach, when you're thinking about, okay, you want to create a building that actually gets people excited rather than another building. Yeah. What are the ingredients to that?
I think you have to be focused on the... So the way that we're trying to approach finding tenants, we like to think of it almost like how A24 tries to find filmmakers. Yeah. Okay. So how can we find someone who has a vision? We're not trying to find another Shake Shack. I mean, yeah, I think so. Shake Shack is awesome. I love going to Shake Shack when I'm at the airport, but I don't necessarily need Shake Shack everywhere else. So I think people get a lot more excited when people are trying new things and are trying to test the limits of even pastries, whatever it is. If you're passionate about a thing, then that passion usually translates into an exciting new result. So that's how we approach trying to find tenants.
How do you think about the trade-off, if there is one, between taste and I guess profitability? Because I think about A24. A24 makes a bunch of really good movies. There are a lot of good movies out there that don't necessarily make a lot of money, and unfortunately, some of the movies that make a lot of money are, you know, Marvel superhero things that are the same thing over and over, as we were discussing with Hayes. But like, how do you turn taste into actual profit when it comes to property?
Well, the lucky thing about real estate is, even if the tenant fails, which is sad, but the real estate still maintains its value, and then a new tenant generally will come in. And it's not like a movie where if no one sees the movie, you just write off the loss. So the real estate generally retains its value even if there's a failure.
Bill, you mentioned zoning, and one of the questions, you know, we've had a lot of conversations about zoning. But, you know, people fight about, oh, is this residential? Is this business? Etc. From your perspective, like when you think about we want to crack the puzzle, we want to make affordability, etc., we want this to be lively. In your research, how important is like getting that regulatory piece of the puzzle correct?
Well, if you talk to the home builders or the apartment builders, it's the biggest piece. Okay. So I think getting zoning changed. I mean, you know, we've passed some things in California. California has passed the ADU laws. Yeah. They're really taking off in a lot of parts of California. Yeah. Now, the only problem is that's a small increase to the housing stock. So it's, but, you know, actual zoning is really changing. Zoning is really hard. You know, they have done some things like near transport centers, you can build a lot higher density. One of the things that, we're in an official housing crisis in California. So I think we're still in it now, that was four or five years ago. And you weren't allowed to reduce density now. So if you bought a six-unit apartment building, you couldn't build four condos. Or in my community, what was happening was people with all kinds of money were buying two or three homes in a row and building a real mansion, not a McMansion. And they've stopped that. So because density was actually decreasing in the beach communities, which, you know, is kind of the opposite of what we kind of need. And I'm speaking a little bit against my own interest in that, because we'll have more traffic. And thank you for your... But by the way, just to add to Zach's comment, when I was talking with him, I think one of the things that really adds value to what he's doing is he's taking an area and building it into a community and making it kind of like a symphony. You go into that community, it's like a symphony. And, you know, I thought it was an incredibly exciting idea to not just build one building, which is what a lot of people do, but they are taking multiple buildings and trying to build a whole community with new restaurants and real vision for that. And I think that will have a real big impact.
But Zach, say more about that. So what happens when you're buying multiple buildings in a single neighborhood and sort of aggregating those developments versus maybe just cherry-picking a few properties that are scattered across the city?
So yes, the idea for what we're doing on Western and Melrose came mostly from reading this book, The Death and Life of Great American Cities by Jane Jacobs. And she was talking about the sidewalk ballet in Greenwich Village. And growing up in New York City, I had seen that firsthand. And Greenwich Village is one of the most exciting neighborhoods to just walk around and do nothing because you're experiencing culture by just existing. And that was the one thing I always felt like is missing in Los Angeles. There are a few of these great main streets in LA, but there's very few. And generally when they exist, they end up sort of turning into airport shopping malls eventually. And that's just very disappointing because speaking of zoning, New York is basically all mixed use. So if there's a street, I mean, Manhattan at this point is so expensive that it's hard to have independent businesses. But for a while, even if there were a lot of chains on one street, you could go to a side street, see something interesting. LA doesn't have the luxury of doing that because roughly 95% of the city is residentially zoned. So if you have a community that has their main street, have all of the culture and life taken out of it, then that's it. Yeah. You got nothing because it's just residential around you.
You know, sometimes there are these fights on Twitter where they talk about like what are the best, most walkable cities. And there's like, oh, New York is very, very walkable. And then there's like, oh, LA is at the bottom. Except it's always so nice, the weather out here. I don't mind walking an hour, so I'm actually totally fine. I actually think LA is a great walking city because I never have to worry about the weather. I think it's one of the most walkable and so pleasant to walk here. But I know it does not meet what most people are talking about when they say walkable.
I'm curious though, like, okay, you have this vision as a community, etc. How much right now is your business being affected, or how much when you're thinking about this, are you thinking about the headwinds that we talked about with Hayes right before it? The fact that there is this very big industry that is on the decline, and how does that make you think about the business, the opportunity set?
So I think the commercial real estate industry is having a really tough time. Yeah. Because for a long time we've been able to make money by financially engineering outcomes. And now the financial conditions are not super great for those financially engineered outcomes. You can't get a cap rate and an interest rate arbitrage and make money. Yeah, you can't throw a bunch of people in a room of 140 IQ and do some spreadsheets and figure out how to make money when the interest rates are higher than what you bought the building for on a cap rate. Right? So now you actually have to make the product good. I'm serious, and I think that's what's really exciting about what we're doing is we're seeing rents increase where we are. Because I think we've made a really exciting product by investing in talent. There's a lot of new apartment buildings in LA. I don't think many people go around going, wow, that's such a beautiful, cool new apartment building. I think most people are like, oh God, not another one of those. Yeah, boring generic apartment buildings. So I think the commercial real estate industry now we have to actually make good products if you want to make money.
