Opportunity Zones And Housing Affordability, With Brad Padden

A housing affordability crisis currently plagues our nation. Can Opportunity Zones be utilized to effect real change that would bring more high density housing stock online?

Brad Padden, founder and CEO of Housing Diversity Corporation, joins the show to discuss how Opportunity Zones can help fulfill housing abundance and job creation in economically distressed communities.

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Episode Highlights

  • Housing Diversity Corporation’s model of multifamily development — bringing higher density, lower cost apartments to core neighborhoods — primarily for young individuals, couples, and seniors.
  • How regulations like density limits and parking requirements in certain cities have contributed to the current housing affordability crisis.
  • Key distinctions between the Seattle and Los Angeles Opportunity Zone housing markets.
  • The widespread criticism of Opportunity Zones to date, and how OZ funds and investors can steer clear of such criticism by adhering to the spirit and intent of the policy.
  • How to measure the social and environmental impact of Opportunity Zone projects.

Today’s Guest: Brad Padden, Housing Diversity Corporation

Brad Padden on the Opportunity Zones Podcast

About The Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. And today we’re gonna undergo a discussion all about housing abundance and job creation and how opportunity zones can help fulfill both of those things. Joining me today on the show to discuss those topics and more is Brad Padden, founder and CEO of Housing Diversity Corporation. And Brad joins us today from Seattle, Washington. Brad, welcome to the show. How are you doing?

Brad: Great. Thanks, Jimmy. I’m doing great today.

Jimmy: Yeah. Happy to be here with you, Brad. We only just met on this zoom call a few minutes ago. I can’t believe we haven’t interacted before because it sounds like you guys are doing a lot of work in OZs, but really thrilled to get to know you a little better throughout the course of our interview today. Let’s start with who you guys are and what you do, the Housing Diversity Corporation. Kind of an interesting name. And I know you guys are trying to tackle a huge issue facing this country, the housing affordability crisis as we were talking about just a couple of minutes ago before we hit the record button. We have a current shortfall of approximately 5 million units in this country and it might be getting worse before it gets better. And I know you and a lot of others like you are trying to tackle that crisis. But what do you guys do exactly? Maybe you can describe your model of multifamily development for my listeners who may be new to you and what you guys do.

Brad: All right, great. Yeah. No. So, Housing Diversity Corporation, the name really is referring to creating a diversity of housing types. And you know, what we know about people is everyone wants to have a courtside seat and not everybody can afford to have one. And so what we try to do at Housing Diversity Corp is bring people that might be down…up in the third tier down to the courtside by creating higher density, lower-cost apartments into core neighborhoods, very close to new opportunities in places where they might have jobs or transit or access to things like fresh food that if they’re living further out in the suburbs might not have direct access to.

Jimmy: And can you actually go into a little bit more about the model that you’re unfolding in Seattle and you’ve just started unfolding it in Los Angeles, and we’ll get into the specific projects in a minute, a little bit more about the model and how you came up with it?

Brad: Yeah. So, basically, I moved to Seattle in 2012. I came from the East Coast, the New York Tri-State Area [SP] where throughout my life I saw housing affordability go from extremely affordable to extremely unaffordable. And in 2012, I had the good fortune of selling a small business that my dad and I ran throughout my life and came to Seattle because I was drawn by the cloud and the cloud computing and the explosion of the opportunities that that brought. And I wanted to come to Seattle and create some new types of housing to help address this. What I saw was a mounting crisis that was happening both on the East Coast and on the West Coast.

And in 2012, Seattle had just passed some new regulations that allowed for a higher density housing without parking. Parking and density limits are things that have created scarcity of housing throughout the country. And so Seattle was really ahead of its curve in that and there was some great entrepreneurs who I was able to watch and who mentored me early on and gave me the opportunity to look at real estate in a different way and start to create much more higher density projects where before density limits and parking keep them larger apartments, less affordable apartments. And so it was a really unique time in the early 2010s, 2020s to do that in Seattle first and then moving on to LA City [SP] that has a much bigger footprint and even a greater need for housing.

Jimmy: Yeah. A lot of interesting nuggets in your last response there, but I think the overall theme was our housing is becoming less affordable and scarcer. I think a lot of that is due to sometimes well-meaning regulations but the fact of the matter is multifamily in this country is very regulatory-driven that industry. What kind of problems does that create? Maybe you can characterize a little bit better than I did what we mean when we say regulatory driven.

Brad: Yeah. I think, you know, again, for apartment buildings and multifamily, it really comes down to parking requirements and density limits. Small apartment buildings, if you have to park, those small apartment buildings, it’s really very difficult. And so you end up with these large luxury apartment complexes simply because they can build an abundance of parking underneath them. But what we need as a country is not necessarily an abundance of parking. We need an abundance of housing. And so for every bit of parking that we produce, we actually produce less housing. And so cities around the country, Seattle was one of the first, began to lift parking requirements and increase density limits. So, Seattle was kind of a leader in that and that occurred again in about 2010/2011. And other cities took note. And people often ask me and say, like, you know, “Why do you think there should be demand for these small apartments?” And we know that there’s demand if regulation allows it to be produced. The issue has been not a lack of demand, it’s been a lack of supply and the ability to produce that supply.

Jimmy: Right. And it’s oftentimes those well-meaning regulations that produce that lack of supply that introduce additional scarcity into the marketplace. And I think that’s part of what…or a large part of what’s led to this housing scarcity issue that’s unfolded all over the country, but particularly in many of the coastal cities on both the West and the East Coast. Am I kind of on the right track there?

Brad: Yeah. Yeah, absolutely. And it can seem threatening, to have, you know, to increase density and to remove parking requirements to some folks, right? And I think one of the things that we find in our buildings is there’s a… When we bring our investors through and walk through our buildings, there’s this aha moment that they have where they go from skeptics to completely understanding why somebody would wanna live in a 350-square foot apartment if they could walk to everything and it’s across the street from the hospital and down the street from City Hall and, you know, 4 blocks from a park and 8 blocks from a Whole Foods. There’s always that aha moment. And it’s either, “Aha, I lived in a place like this when I was younger,” or, “Aha, this would be a great place for my son or daughter to come and live when they come back from school because they can’t afford anything else in Seattle or LA or pick your city.” So, it really does create new opportunities. And this idea that entrepreneurs in the free market can help solve some of our big problems is something I’m very passionate about. I’m definitely, you know, on the side of the entrepreneur solving the problems as opposed to central control. So, I’m not suggesting no zoning or no regulation, but sensible, workable legislation and regulations that allow entrepreneurs to do what they do in solving the big challenges facing our country.

Jimmy: Sure. That all sounds great to me. I’m a huge fan of that entrepreneurial spirit myself. So, you mentioned about 350-square foot units that… And it does sound rather small, shockingly small, right, to someone who may not be used to that. Who are your typical residents in the units that you’re developing? Are they working professionals? Are they younger? Are they older? I don’t suppose you may have a lot of families, certainly not large families living in a 350-square unit or a square foot unit, but tell me a little bit more about who your residents are, who you’re targeting there.

Brad: Absolutely. Our residents tend to be singles or couples, probably first, second, or third job out of university. We tend not to get students because it’s still not super inexpensive housing, although when I look at the price of dorms these days, they’re extremely expensive. Actually, you can save some money living in our apartments. But we can get graduate students. And the age tends to be between about 25 and 35 years old. So, these are young professionals that are probably trying to save money, pay off student loans. We get quite a lot of people that have transitional-type jobs like traveling nurses who come and they’re looking for an inexpensive place to live that’s really centrally located and walkable. So, there’s quite a large subset of folks that love our type of housing. And I could see this housing appealing to seniors too as they need these more affordable places. I mean, senior housing is a whole nother issue facing our country that hasn’t really been solved. Maybe slightly larger apartments with walk-in bathtubs and things like that. But for now, Housing Diversity is really focused on these individuals and couples.

One of the things that I think it’s worth mentioning is that, you know, housing is a closed-loop system. There’s only so much of it. You mentioned at the beginning of the podcast, there’s a shortage of 5 million housing units. Part of our plan is to help alleviate this issue of scarcity of family housing is taking folks that are living in three, four, or five-bedroom houses, you know, a bunch of roommates and bringing them into the urban core where they can walk to work and share the higher density lifestyle and support the local retail. And what that’ll do is it’ll unload one of those houses that might be appropriate for a family because the cost of building a new house is so much higher than the cost to reuse an existing house. Really, the old houses of the ’60s and ’70s are the affordable family housing that we need. The solution for family housing is not to build brand new buildings with 2000-square-foot apartments for families, it’s just too expensive.

Jimmy: Right. That makes a lot of sense. And the solution might be to tamp down the demand for that type of housing by creating more supply in a different category, which is your high-density units that you’re building there. I wanted to shift gears a little bit and, hey, let’s talk about opportunity zones for a few minutes here. You guys are developing in Seattle and in Los Angeles-based opportunity zones. Can you talk to us a little bit about the distinction between those two markets and what you’re doing there exactly?

Brad: Yeah. Both cities have some really great opportunity zones and we’re very thankful for the regulations that came out in about 2018. We’ve been following the regs when they were first proposed, followed them through the several revisions. And basically, we operate in Seattle and LA’s opportunity zones near high opportunity areas of those cities. So, our business model really focuses on placing people adjacent to high-opportunity neighborhoods. And high-opportunity neighborhoods are places, again, where they can have access to jobs, transit, fresh food, parks, and all the amenities that make our cities so great. So, both Seattle and LA have some great opportunity zones. In LA in particular, we’re working in a downtown LA neighborhood, Koreatown, and Hollywood. And in Seattle where the OZs are a little bit more scarce in the urban core, so we’re working on kind of the south end of Seattle, including the Rainier Valley and the Chinatown International District.

Jimmy: Right on. What would you say are, like, the biggest differences between those two markets? You got your start in Seattle, a little smaller market, a big city Seattle, but not quite the scale of LA. Are there any other big differences there in terms of their opportunity zones and how you have to develop in those two cities?

Brad: Well, I think you hit it on the head there. You’ve got a city that’s much, much smaller in Seattle, a little bit easier to wrap your hands around and kind of understand. LA is a bit like the Wild West. Their land-use code is less defined, there’s a lot more variability and what they do and don’t allow it seems to change day to day. But LA is a 550-square-mile city. And so from an opportunity standpoint as a developer, there’s just a lot more places to create housing and a lot more opportunity to do so. So, you know, it’s an interesting juxtaposition, the two markets, but our core product is in Seattle, right? We have 2000 units in Seattle, approximately, and about 1300 of those units are in opportunity zones. And these are projects that are under development or in the markets. We have both stabilized operating assets and projects that are being built or in the process of being permitted.

Jimmy: Good insights there and interesting to hear a little bit more about what you’re developing. What about pushback on opportunity zones? Pretty much since, I would say, spring or summer of 2018 when opportunity zones first started actually becoming a thing they’ve been open to widespread criticism. Then very recently earlier this year, Senator Ron Wyden of the state of Oregon sent letters of inquiry to a handful of qualified opportunity funds asking them, “Hey, what the heck are you guys doing? How are you a opportunity zone fund? Why should the taxpayer be subsidizing these types of investment projects?” There’s clearly been a lot of opportunities on pushback. But the program at its heart really does have a lot of good, meaning intentions behind it. What are your thoughts, Brad, on some of the criticisms of the OZ program and how do you guys steer clear of it?

Brad: When we developed the business model of Housing Diversity Corp I think we were really trying to do well while doing good. That was, like, kind of a core tenant of our business model was, like, how do we solve a big problem while also doing right by all the stakeholders to the cities, the communities, the neighborhoods, the renters and the investors? It was this kind of holistic view. And so I think that dovetailed pretty nicely with the OZ regs. I mean, when they first came out, we were reading things about, you know, the spirit of the opportunity zone legislations. And we’ve always kind of maintained that one of our core tenants of our product is to always be thinking about that spirit of the regulations. And for us, that means, again, creating opportunities for people, improving outcomes and lifestyle improvements, and fostering housing abundance which is an issue, a core issue facing our country. And so I think, you know, if you’re thinking about opportunity zones and you’re thinking about the type of project you’re doing, you have to think a little bit deeper than, you know, I’m creating jobs, I created this many, you know, new construction jobs because I don’t think that that necessarily has the… It doesn’t capture the broad range, I think, of potential criticisms that you can get for the project. So, we steer clear of, you know, luxury and expensive or things like self-storage where there may be some questions from folks in the government that might be looking at that saying, “Is this really in the spirit of the opportunity zones?”

Jimmy: Those are good thoughts there. And I think, you know, your product type in particular, high-density multifamily, that’s…as we’ve kind of expounded for the last several minutes of this podcast episode, it’s very much needed in this country. So, it’s gonna be… I think your projects, your fund is probably safe from a lot of that criticism that some other developers may have opened themselves up to. What about social impact and measuring that? There’s been OZ reform legislation that was introduced earlier this year that might require some additional reporting and measuring of the types of impact that different qualified opportunity funds are gonna have. We’re not there yet. We don’t have those transparency and reporting requirements except for the very bare-bones that we currently have from IRS Form 8996. But Brad, how are you measuring your social and environmental impact that your projects are having even before any type of reporting requirements come into place?

Brad: Yeah, it’s a great question. I was a Boy Scout and one of the core things you learn in Boy Scouts is to be prepared. So, we’ve been measuring using a third-party company our impact and doing surveys with our tenants to really verify positive outcomes in living in our types of projects, but some might say, you know, “Oh, small apartments, that seems cool,” or, “Wow, that’s too small for somebody to live in comfortably.” So, it’s important for us as a responsible and equitable developer to always be testing our hypotheses because, you know, we produce a product and then we put it out on the market and we wanna find out, “Hey, did we achieve our goals?” And so we’ve been doing impact reporting for the last year. We have an impact report already produced to create a baseline for us moving forward. We’re updating that again this year. And again, this is using a third-party to ask our residents actual questions about their lifestyles. How much did their commute change? How many minutes did they save each day? Were they able to sell their car and go to a more transit-oriented walkable lifestyle? Are they happier? Have they taken on new hobbies? Those types of questions. And it’s really interesting, and also self-validating, and it helps us to create a better next product, project, right because we’re always thinking about our next project as much as we are finishing existing projects. It’s looking to the future. There’s such a huge need for housing and we wanna produce the right kind of housing for our cities, for our communities, for our neighborhoods, for our investors, and for our renters.

Jimmy: No, I think that’s great. You’re actually talking to your customers and asking them what they want more of, what they want less of. And I think that absolutely will help everybody, in the long run, achieve a lot of wins, help you put up more product type that people want that’s in demand. So, I applaud you for your efforts in doing that. And we’ll see what OZ reform legislation unfolds in the future. But for now, it’s good that you and I know a lot of others like you are also collecting that data and working toward making sure that this thing is actually working that you are adhering to the spirit and intent of the opportunity zone legislation.

Well, Brad, I’ll cut you loose there, I think. But real quick before we go, can you tell our listeners if they’re interested in learning more about you and what you guys do at HDC, where can they go to learn more about Housing Diversity Corporation?

Brad: Our website is a great place to start with that, housingdiversity.com. And I’m on LinkedIn, so feel free to connect up with me on LinkedIn. And look forward to talking to your listeners at some point if they wanna reach out. It was great talking to you, Jimmy. I appreciate it. And looking forward to keep you posted on what’s going on here.

Jimmy: Likewise, Brad. Thanks for joining me today. And for our listeners and viewers out there today, as always, I will have show notes available on today’s episode at the “Opportunity Zones Podcast” website at opportunitydb.com/podcasts. There we’ll have links to all of the resources that Brad and I discussed on today’s show. And also be sure to subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episodes. Brad, thanks again.

Brad: Thanks again, Jimmy. I appreciate it.


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