John Carlson is responsible for strategy, operations, new business development, and property portfolio performance for over 19,000 luxury apartment units across Arizona and Nevada for Mark Taylor. Jeff Mark and Scott Taylor founded the company in 1985. Today, Mark Taylor is the largest multifamily developer in the state of Arizona; the company has built more than 20,000 units there.
Decades of Data
(1:44) – Today, about 82% of Mark Taylor’s apartment units are managed by third parties.
“What you have to know about Jeff and Scott is, a lot of their decision making over the course of those three plus decades has been translated through the lens of data. A lot of it through Scott’s background – he’s a CPA by trade,” said Carlson. “He really had to, from the ground up, understand the fundamentals of Phoenix, understand how the metro ticked from jobs to population growth, to what markets mattered from a multifamily perspective.”
He used that background to build a data set that’s now grown for decades. That, combined with intuition, has led to their success over time.
(3:40) – The market is as hot as ever, and Phoenix continues to be a huge target.
Before 2008, Mark Taylor mostly went for garden-style communities. That’s about 15 units to an acre. After the recession, they started to elevate different styles. They started building upward, so now there are about 40 units to an acre.
“We talk about the arms race to amenities,” said Carlson. “You look at the fitness centers, the amenities, the common areas are tremendous. So if you compare multifamily product to single-family home product in 2008, it was significantly different. Today, I’d argue that you can go to any multifamily deal that’s been built ‘15 and beyond and argue the finish levels are comparably better with amenities and locations you want to be in from a lifestyle perspective.”
(5:35) – Mark Taylor has the benefit of being able to look at things through the lens of developer-owner and manager.
(7:24) – Mark Taylor believes deeply in the Phoenix metro, even when the market tanked. They also feel they should always strive to be better.
“We really focused on how could we be better and create a product, a management, a lifestyle, that residents would want and seek? We focused a lot on that aspect at that time, and truly believed the market would come back,” said Carlson, adding that Mark Taylor has been around for so long, they’d seen crashes in the past and knew what to expect and how to handle things.
(8:45) – Why Phoenix?
“We think about Phoenix as having a large funnel over the metro of capital investments or cash and it’s spitting out chunks of money. You just can’t find enough deals. There’s so much appetite and demand for so many reasons,” answered Carlson.
One thing to consider is why people are leaving the markets they are and heading to Phoenix instead. A lot of people are heading out of coastal communities or areas that don’t have enough job growth, and they want to be in the Sun Belt.
Phoenix has one of the top three STEM schools in the nation, and the advancement in education can propel the work force. It also already has a lot of hot markets, like the largest semiconductor manufacturer for Apple. Carlson calls it the “open for business state.” The final key is that taxes remain at a competitive rate.
(12:25) – Birth rates matter for multifamily, for obvious reasons. Changes in birth rate decades ago affect things way down the line.
Understand What the Consumer Wants
(13:35) – Crisis can create opportunity, as we saw during the pandemic.
Before coronavirus, Mark Taylor had a model consistent with years of success from an overall operations standpoint. They learned they can make operations work even with doors closed, since video tours and self-guided tours, they learned, could make up for in-person interaction and elevate the business model during the pandemic.
You have to listen to the customers! If customers want to access the buildings and want to read reviews, but don’t necessarily need to be handled by someone during a walk-through, then do what the customers want.
(16:40) – Figure out what your residents want from a service perspective.
Mark Taylor just surveyed residents to get more data about what they want in smart homes – what they want and what they don’t.
(17:04) – Think about what you can do to be more efficient as a business model.
Build for rent is growing at a rapid pace. If that’s what people want, build it! Single family for-sale supply was mostly built in the suburbs and there’s a huge undersupply. Growth in rent levels and capital markets, and the increasing interest in build-for-rent all comes with the history of undersupply from the past decade.
(20:04) – Consider the demographic, the schools, and other aspects of the location that will impact who will want to live in that area.
Also understand what’s already available, and what’s being planned. Think about what’s going on in the municipality and whether the city is okay with growth. That will impact future investment.
It’s hard to predict what’s going to happen in the future. But data about similar circumstances that you can use to compare to what you’re going through now can help you to make an educated guess.
(23:22) – Right now, there’s a lot of cap rate compression. There are a lot of people chasing deals in the Phoenix market, and people are forgoing some precautions because they’re so eager to get involved.
People from California have been searching on MarkTaylor.com like mad these days; folks moving from that state bought about a fifth of the company’s properties in Phoenix last year. Some probably will go back after the pandemic and could cause a boomerang effect. Carlson just don’t know how bad that will be.
(26:55) – The single-family for sale market is a seller’s market as well as an employee’s market.
“That employee can go find viable work in other markets without much effort. There’s some flexibility advantage to being employed today in my opinion, especially if you have skills. If you build your skill base, you don’t necessarily have to go back to San Francisco, you can find a plethora of jobs here. And, you might like Phoenix better,” said Carlson.
(29:00) – Cash is king.
Right now, Mark Taylor doesn’t acquire properties, it’s just building. But the “filter over Phoenix” Carlson mentioned is driving up price rates and cap rate compression.
“You have to play the rules of engagement today,” said Carlson. “The rules are different today. You have to modify your acquisitions strategy around that. I know guys that will never get a deal in Phoenix because they don’t play the game the way it is today.”
(31:00) – You have to understand what you’re buying. Know the square footage, the competitive set, what the developer is like, whether the community will stand the test of time, and what your strategy is.
“We call it the Upgrade or Imagination Story,” said Carlson. “Something that’s very prominent today still. So you buy a vintage 90s or 2000s deal and say ‘I’m going to put 20,000 of Cap X in and underwrite a $300 rent pop. That kind of has to happen today to get you to the right number to get the deal so you can make sense of it. We track every deal that transacts since 1991. There’s been almost 3,000 deals transacted.”
Sometimes the vintage apartments from the 90s will do better than ones built in the 2010s, because they sell a story.
(32:55) – Data might not be a crystal ball, but it certainly helps people to look back. Without data, people are more likely to make emotional purchases that may not actually be the best decision.
“Anyone that’s probably Gen X or older has probably gone through marriage or family formation, having kids, what have you. You need more space. So a lot of times people are buying real estate because of that, not because of the fundamentals of real estate,” said Carlson. “If you believe in the market long-term, that’s okay. I think the folks that get in trouble both individually and from a group or larger investment tool, the strategy is you buy things and you try to time the market. I’ll give you an example, you buy a deal today but you have to get out in three years. With short-term financing, you don’t know what’s going to happen. There could be a black swan.”
In contrast, if you have a long-term strategy, you know real estate will fluctuate but if you have a reserve for the home, that’ll be fine.
(36:35) – Labor is a big issue right now.
“Qualified labor on the construction side is very difficult. For every five drywallers we have, we need 15. I think the supply chain will start to shake out, and as that improves, we still don’t have the labor to support it, so we’re building as slow as ever,” said Carlson.
(37:40) – Some people are being saved just by market conditions. They might have bad lease-ups, make obvious mistakes, yet they get bailed out because people are willing to put in capital and take the risk in Phoenix.
Eventually, those people are going to get caught in their mistakes. But Arizona is a pro-business state with a good public perception, the same way Texas has had in years past. Millennials are interested in the city and investment in education has been great, so the city is expanding for natural reasons. Perception of a hot market helps fuel that into reality.
(41:35) – The moratorium on evictions put in place during the pandemic affects risk for investors.
“Any time you have a government entity such as the CDC over-reach – and you can see right up to the Supreme Court, they somewhat agree with that, if you read their argument from the most recent brief – but I think that’s a concern for everyone. Because striking down evictions – we’re in the business of creating homes for people, but there’s certain folks that have gamed the system and continue to do so, and you have to be able to execute through that process,” said Carlson.
Carlson says you have to be able to protect property rights. There’s an anti-landlord perception that doesn’t hold up to reality. Carlson says you can see investment leaving other major metros like Seattle and Portland that are anti-landlord.
(43:40) – Many deals have been underwritten with the expectation of certain economic vacancies. Investors have to know to have reserves.
“You still have to look at historical numbers. Look at your bad debt tendencies, look at your trailing 12 if you’re looking into an acquisition. I think all of those things matter. I don’t know that it changes your underwriting, but you have to consider it from a risk perspective,” said Carlson.
Carlson says the data proves rent control doesn’t work because it offsets the reality of supply and demand.
“I personally wouldn’t go develop a deal in Portland today. I’m sure there are folks that’ll do it, but I’m confident the investment focus on that city today is lower than it was five years ago.”
Carlson says it’s important right now to get the true data out. “Not rhetoric, actual information.”
(47:30) – You have to get involved. Join groups in multifamily that have a pulse out on the environment. That way, you can find out more about the land you have your eye on.
“I think that’s part of the equation today; we’ve worked through a lot of the land that was zoned for multifamily and to go through a re-zoning case today is difficult at best. Those are things they have to consider,” said Carlson. Join a Multifamily Administration, get to know your City Council, and invest time personally to understand the area.
(49:00) Data is part of it, but it isn’t the whole. You need the story behind the data, and have to understand the sentiment of that area of town.
“We also have to start supporting candidates that get it. We can’t just align with someone that we think they’re the right candidate or they’re the best of the two. We have to start identifying leadership that understands what we face today because of that negative sentiment, the negative storyline that continues,” said Carlson.
Finding the Right Team
(53:30) – “The first part of our vision statement is to become the most admired brand nationally,” said Carlson. “What I mean by that is, we want the Mark Taylor brand to really spread out across the country.”
People all across the nation have heard of that brand. Of course, within Phoenix, people have heard of Mark Taylor and most know they’re luxury apartments.
“That matters to me because we know residents look outside of location – safety, security, and service. There’s a connection of safety and security, and quality service with Mark Taylor. And I have to ensure that meets their expectations, so when they move into a Mark Taylor community, it fits with them.”
That’s why Mark Taylor removed itself from Class B assets in 2015 because it didn’t fit their brand. You have to make sure that employees with Mark Taylor follow the company’s principles and support the brand in order to ensure residents are getting best-in-class service.
(56:22) – Hiring a management company means looking at their core belief system. Look at their track record, their market knowledge, and how successful they’ve been.
“As little as ever, you think about the typical RFP process. Anyone in this business knows, ‘Oh we got a deal here, Property XYZ, we’re going to do three RFPs to see which management company should be selected for this deal.’ We’re really good at operations; I wouldn’t say we’re the best at RFPs. Meaning you’re putting a lot of time-intensive work into creating this 40-page document that doesn’t really showcase what you’re trying to accomplish or what you’re doing.”
Instead, Carlson suggests people just go to Mark Taylor communities and see for themselves what the company is like. Data and the track record is great, but it helps to see things in person so you can get a feel for who’s running the organization and the type of people they have there.
“For us, as an example, we look at 11 characteristics to ensure that we’re protecting who’s coming in to the Mark Taylor family from an employee perspective. We want to match our mirror,” said Carlson. From there, people are onboarded with the mindset that they’re joining a family and that this is a career path, not just a job.
You have to consider whether your brand or your growth is more important. Mark Taylor uses its brand to accelerate its investment opportunities.
(59:30) – It’s hard to get inertia going. Those first sales are the hardest.
“I think what I’ve learned is, I should’ve said no more often,” said Carlson. “I say no more often than I ever do yes today. Make sure you’re aligning yourself with the right clients, the right partners. Too often in the past, I’d say, ‘I need to get 300 units, or I’m trying to reach this unit objective,’ and then you look back and realize, ‘Wow, I knew that was going to be a bad relationship before I inked the PMA, because our philosophies are different.’ I’m not saying that person is bad or wrong, but we need to be in sync.”
What to Be Wary of As a New Investor
(1:01:35) – You have to first understand what your financial thresholds are. If you’re limited on capital, start small. Consider whether you’re capable of riding out the storm if there’s a downturn.
(1:02:55) – Mentorship is important too
“I think you should find or identify someone that has done this, so you can avoid some of the pitfalls during that process.”
(1:03:40) – Work through the fundamentals and create a plan.
“I don’t think too many people get in a car and drive to Yosemite without a plan,” said Carlson. “You have to know how much gas you need, how much money you need, where you’re going to stay. All those things. You have to plan out your investment more so than anything else. What are you going to do in 5 years? What are you going to do in 10 years? What’s your loan structure? What’s your exit strategy? Think long-term about that. I takes time and effort. I know a lot of people want it now, but you have to think about that strategy.“
(1:04:30) – Mark Taylor plans to keep on keeping on. They’re still growing within Phoenix. Those conversations are accelerating, and the interest in the area is increasing.
(1:05:50) – Keep in mind that the market will always have ups and downs.
“You can’t predict it exactly. No one has a crystal ball. We have as much data as anybody, and I don’t know what’s going to happen in 2023. So, utilize everything you know, collect as much data as possible, and make a thoughtful decision based on what you need, what your objectives are individually as an investor, and move forward. You’re going to make some mistakes as an investor, and that’s okay,” said Carlson.
(1:06:30) – There is such a thing as too much data. But the most difficult part is translating data into what it actually means and using that to make a decision.