Black, Indigenous, and people of color (BIPOC) developers see opportunities that some traditional investors miss, said Josh Childress, CEO of Landspire Investments, at the ULI Los Angeles 2023 Urban Marketplace conference.
A diverse audience of commercial real estate developers, investors, and owners attended the conference with a single question: How? How do BIPOC commercial real estate stakeholders access capital or get a seat at the table to pursue the deals and projects that have the potential to spark growth and change in underserved communities? Childress and Jennifer McElyea, managing partner of Ethos Real Estate Capital, joined Robert Jue, CEO of Standard Real Estate Investment, for a discussion about capital access.
Investing in Diverse Developers
McElyea and Childress represented a broad spectrum of investor profiles. McElyea went the traditional route of investment banking, while Childress took a self-directed path to commercial real estate following a career as a professional athlete. While their backgrounds were different, their message was the same: diverse real estate investors generate meaningful value by providing a unique perspective on prospective opportunities.
Childress called this differentiated access. “If you look at real estate private equity firms, they all went to the same schools, talk to the same brokers and are in the same groups. We are different,” he said. “We have different networks and we are sourcing different opportunities. We have exposure to the blind spots that they might not realize they have.”
For Childress, this realization came when his firm found a distressed hotel asset in Newport Beach during the pandemic, California. His company Landspire Investments saw the potential which helped them secure capital partnerships. “[We found an] asset that is unique and has an opportunity to provide a great return,” he said. “We saw it, and they didn’t.”
McElyea agreed that diverse stakeholders will find more opportunities to create value and realize strong returns, but said that to reap that benefit, capital sources need to be intentional about their investment partners. “The best solution is to put capital in the hands of diverse lenders,” she said. “If you want to be intentional about how capital is invested, you have to be intentional about who is placing that capital.”
More Capital Is Coming, Slowly
Change is coming, but not at the pace that one might expect given the spotlight and investment in DEI. According to Childress, companies have collectively promised $2 billion for DEI efforts, but only 3 percent of that capital has actually been deployed. “We have to hold them accountable to the promises they make,” he said.
In pitching deals, McElyea has seen an improvement. “Capital is coming slowly. More and more, there is money for communities that were once redlined by lenders. For lenders, it is all about risk mitigation,” she said. To improve your chances, investors need a thesis and a strong narrative. “For lenders, it is all about risk mitigation.”
For McElyea, the bigger problem is securing start-up capital for business operations. Investors need to build teams to source deals, and you need capital to do that. Too often, investors won’t invest in start-up CRE companies without proven results. It is more difficult for an investment firm to get funding than a start-up tech venture. “It is very hard to get start-up capital, she said. “The only real way to do that is to get a loan.”
Commercial real estate companies are committed to DEI, but for many BIPOC developers, the realities of navigating this space are still challenging. Childress and McElyea said that the change is coming, but there are still barriers to overcome.