The
View from Initialized

Trillions of dollars in real estate— How do we fund the future we want to live in?

Housing is a trillion dollar industry. How can tech, finance and cities work together to bring about a society we want to live in?

December was a big day for our team here at Initialized. Opendoor, a company we invested in at the earliest stage, began trading on Nasdaq. Startups like Opendoor and Airbnb are transforming one of the world’s largest markets. I sat down with fellow Initialized partner and housing expert, Kim-Mai Cutler to discuss the future of housing and real estate.

Reflecting on Opendoor

Garry: Hey Kim, thanks for hopping on. What a day – Opendoor [going public] via SPAC.

Kim: Yeah, this must be a pretty big deal for you. This is the very first IPO for an Initialized company. You’ve been following Eric and the team the whole way. Looking back, how did the company even happen?

Garry: Eric has been a friend to me and the firm for a really long time. He sold his last startup to Trulia, so he’d been in the real estate market for a while. Honestly, it started with a very simple idea, which was, “Hey, when people actually buy and sell these things, they tend to use very little data.” If you’re a software engineer, you realize, “Oh, there’s data. In fact, there’s a lot of data. Can we put it into a software system that then actually gives you a dynamic price, one that you know you can make money on?”

But, where it really became real was when Eric realized, what if we actually offered it to customers? If you wanted to sell your home very, very quickly, could you do it through a website?

That’s my favorite thing about it, it was a very simple idea – one that hadn’t been executed on the way it needed to be. Once they did it, it started working. It goes to show, it’s the simple ideas.

(Credit: Nasdaq)

Making Housing More Accessible

Garry: Kim, you are our resident expert on all things housing. How’s that been like? What are some of the startups that you’ve been able to find?

Kim: A lot of the rules and norms that attractive metros in this country put in place also happen to make housing more expensive. Transitioning over into the venture side, I’ve really tried to find tools and products that make housing more broadly accessible to people and that’s manifested in a number of different ways: from Landed, which is helping educators and homeowners purchase homes in really expensive markets like Seattle, Denver, the Bay Area, D.C. and Hawaii, and more.

Then there are also companies like Abodu, which is making it possible for homeowners to quickly add a secondary unit in their backyard. This is becoming a really important lifeline in the context of the pandemic for a variety of reasons, be it because you want to keep your family safe, possibly even separated to social distance, or you’re bringing kids home from college. These secondary units are becoming important places to keep extended family close and healthy. Abodu was able to find out a very fast and quick way to get these housing units into backyards in literally weeks. From my experience, having studied the West Coast markets, it’s completely mind-blowing.

(Credit: Abodu)

Historically, given all the rules that were set in place around planning, zoning, variances, and more, if you want to do multi-family projects it often takes years, sometimes even more than a decade to get a mid-sized project done end-to-end. A few years ago there were a series of changes in the California State Legislature, which is also happening up in Oregon and Washington as well, that made it really easy to add secondary units. This has unlocked the flood gates, so to speak, of people adding these.

Housing is a Trillion Dollar Market

Garry: San Francisco alone is a $1.3 trillion market with a T, which is really insane. But isn’t that one of the big problems? People basically started treating their homes, not necessarily as just places that they live, but as both an investable asset and biggest component of their net worth.

Kim: Yes, that’s the big contradiction in American housing policy. If we had picked a different path, we would be in a very different situation right now. The path we took is based on the Anglo/British English property-centric model where housing isn’t just shelter, it’s also where many households store the vast majority of their life savings in.

It’s created this incentive structure, where housing has to be affordable AND a great investment. When you run those two ideas along several years and decades it just doesn’t make sense – it’s a contradiction.

I think that’s what we’re experiencing today; the post-war Baby Boomer generation got on the property ladder several decades ago, when housing was much cheaper relative to household incomes. They’ve been able to ride that property ladder and accumulate wealth through that, but what that has meant in the context of an economy where wages for a lot of the workforce are not moving as quickly as property, is that people fall to the bottom and don’t have access to it.

Garry: Yeah, it’s generational now, isn’t it?

Kim: Right. So cities try to compensate for that in a number of ways. And I think the Bay Area tries to do the right thing, like inclusionary housing for example, but those solutions aren’t really scalable.

Garry: We also need to build which we haven’t. The ADU law has been something that you’ve been tracking for a while and now that it’s here, it’s actually the most ripe way to get perhaps thousands of units per city.

Kim: It’s millions, really. This is what suburban West Coast markets are comfortable with. This is what the electorate and policymakers are comfortable with, so that’s what’s going to happen. A lot of the bills that we’ve tried to do around more mid-rise, or high-rise along transit corridors have been blocked, or stalled. But the laws around adding a unit in your backyard have just passed through every year. Consistently, this is what voters show that they want and so, this is what the broader housing market is going to deliver.

Garry: I think that’s why I like Abodu so much. You might have a dirt backyard that is literally doing nothing and you can turn that dirt backyard, for $200,000, into something that might actually be worth four, or $500,000, depending on the city it’s done in**. That’s unlocking value directly out of the ground.** If you take L.A. and SF, that’s $2.2 trillion plus $1.3 trillion worth of housing, and you could increase that housing stock by even 5% that’s hundreds of billions of dollars in value being created.

Kim: I would also clarify that like people see the sticker price and it’s looked really high to them. And, admittedly, it is high relative to the median cost of a home in America. However, if financed with a home equity line of credit, the payments on a monthly basis can be $1100 or $1200, which is coverable by median rents in the area, even after the pandemic drop.

And then, on top of that figure, relative to what it costs to build a mid-rise building, per unit, honestly, it’s a third of the cost to build a mid-rise unit in the Bay Area. The price is high, but if you compare it to the alternatives and what’s actually politically possible and feasible here, it’s on a comparative basis much cheaper.

Garry: I think the reframe there is: if you look at these cities, they are considered world-class cities, at least, partially because of the access to capital.

Kim: Access to talent is one thing. Cities are like colliders for ideas and ways of living. It’ll be very interesting to see what happens in 2021, hopefully, as people can start to return to in-person activities and stop social distancing. There’s obviously going to be, on a relative basis, more opportunity in other metros throughout the United States. There’s going to be this wonderful urgency to come back into the moment and to be with other people in real life.

Staying in the Bay Area

Garry: While tech can only do so much, this is a good example of how we can actually help unlock several hundred billion dollars worth of value in even two of the top 10 most valuable real estate cities.

Kim: Yeah, but many jurisdictions have this problem. I also think that, more broadly, people are living longer and a lot of the housing that we built throughout the United States is both car-centric and just very centered on this idea of the nuclear family. And it’s so obvious now that, as parents age, we want to live in multi-generational households. Or, as markets get expensive, if you want to live near extended family, for a lot of people it’s just not going to be possible to get into the house ladder in nearby markets at all.

I have a friend who, with his brother, is in the process of building a two-story ADU in his backyard in the East Bay. It’s going to be like two brothers living next to each other in two houses.

Garry: That sounds wonderful.

Kim: Yeah, I know, I mean there’s no other way; the market here is so expensive. You’d be hard pressed to think of another way for people to do that, but ADUs make it possible.

Garry: Yeah, I think that’s one of the things that you and I share: We both grew up in the Bay Area, which is actually relatively odd for tech people. Most of the 90% of the people you run across, I think, don’t have a link to the San Francisco Bay Area. That’s one of the sad things, that most of the people I grew up with, either they work in tech now, or they had to leave.

They moved to the Central Valley or Sacramento. That’s the funniest thing about this Miami stuff. I’m not leaving to go to Miami. It’s worth it to me to stay here. I will pay my seven or eight figures worth of taxes because it’s actually worth it. This is my home. And I want those tax dollars to actually go to my community and this is my community. I’m from here and this is where I want to stay.

Kim: I’m of several minds about it. I think it’s a good thing if the industry is more broadly accessible in more metro markets in the United States. At the same time, I’m third-generation here and this region has done so much for my family that I feel very emotionally tied to it, and I want it to continue thriving and prospering, going forward. I feel both things at the same time.

Garry: Our hope is that it’ll create a really great billion dollar business that employs thousands of people, as well as housing people.

Kim: I feel really excited. Companies like Abodu are not just positioned to add just a little bit more housing on the margins. They’re actually positioned to add a lot more if you consider the legislative changes that are on the horizon.

Garry: And thousands of units is a thousand families that can stay in the Bay Area or L.A.

Kim: Yeah or more. Like Landed, they’re partnering with healthcare organizations and hospitals, starting in the Bay Area, but eventually across the entire country. I couldn’t imagine a more meaningful thing than helping nurses with down payment assistance so they can afford to stay in the markets that they so valiantly served this year.

And then, on top of that, Culdesac (note: founded by Opendoor alum, Ryan Johnson) –  they’re actually doing it. They’re building car-free cities and car-free neighborhoods in the United States, in places that have historically been incredibly car dependent.

I think there’s definitely a pathway towards making some really profound change in all of these spaces, so I’m pretty excited.

(Credit: Culdesac)

Garry: Yeah. I guess I’m just deep-down sensitive to tech because I’m from tech, it gave me everything I have. I’m also extremely aware of the unintended consequences of tech in society and I think we do have a responsibility to other people.

Kim: I totally agree with that and yet at the same time, I’ve also really thoughtfully picked companies, like Landed. Their customer base is more representative – Black, Latino and non-White buyers – than many other housing companies, in part because public sector work is much more representative. I’ve been very picky about what I do and so I don’t feel apologetic, or sensitive about it because I know that I’ve picked teams that think about these things from the core.

Garry: Well, I’m glad that we can have that actually be a part of our conversation, about how we decide what companies to fund. One thing I’ve always really appreciated about you, Kim, is that, as companies come into Initialized, I can always count on that perspective, which keeps us real, and grounded in a way that I would like to see all of tech really spend more time and be thoughtful about: What is our impact on society and does this investment put us more towards the world that we want to live in, or not?

For more conversations like the above, along other leadership and startup topics, be sure to check out my YouTube channel and subscribe. To stay up-to-date with all the latest in Bay Area housing, follow Kim-Mai (@kimmaicutler) on Twitter.