Monthly Update

Dear Investors and Valued Partners,

This a consolidated update for all our investments, with a brief update on our pipeline and what we are seeing in the market. Our 2022 year-end financials and K1s are well underway and will be delivered by the end of March.

Highlights from the past month for us include:

• Completing the “risky” sub-surface work at Cornus House in Tacoma with no cost overruns and the project still fully on schedule
• Beating our targets for pre-leasing Betula House… almost 30% pre-leased with four weeks to go
• Maintaining near-full occupancy on our managed portfolio

Cornus House

199-Unit Opportunity Zone project in Tacoma, WA

Cornus House (pictured above) is on track and on budget. We completed our ‘ground improvement’ which involved drilling are 240 columns of grouted gravel, each 30” wide, that extend 10-40’ through the subsurface fill to bearing soils. This was the riskiest part of our project, as it was impossible to fully know what was beneath the surface.

The tower crane base has also been placed, and the crane will be erected this Friday, March 3rd. Feel free to join us onsite that day between 10am-12pm!

Other March milestones include installation of the concrete placing boom and final footing excavation/placement. By the end of March, all subsurface work should be complete which will allow us to much better predict final schedule and budget.

Betula House

50-Unit Opportunity Zone project in Seattle, WA

Betula is less than a month from opening and is already 30% pre-leased at pro forma rents with zero concessions offered. This success is due to our leasing team killing it, and the apartments just being really awesome. Our “eco 1BRs” are leasing especially strong – validating the demand for efficient, affordable apartments that are not studios.

The last major project milestone is the primary power. Switchgear procurement times have been delaying projects across the country, quoted at 65-80 week lead times. The electrician ordered the switchgear in 2021, but received it only in the nick of time last December. It’s now been installed and we are waiting for Seattle City Light to pull the primary feeders from the power pole into the building. We are hoping the work will be complete within the next 10-15 days at which point final inspections can be completed.

Please look out for an invitation to an open house as soon as the building is energized and safety PPE is no longer required.

Balconies installed on the south side of the buidling. They will be wrapped in clear cedar planking, as required by Seattle’s Design Review

Acer House

114-Unit Equitable Opportunity Zone development in Seattle, WA

Acer House continues to make steady progress towards our contract rezone. The City issued its preliminary decision, which on review was found to have two minor issues that needed resolving. One of these will require re-noticing the project for public comment for two weeks. The City staff is aware of our urgency and has been very helpful in moving us through the process as quickly as possible. In short, we do expect to have the final decision this month which is very exciting.

In parallel, we are beginning to have discussions with various equity investment groups. Following the rezone decision, there will be a period of about 6 months before final permits. We intend to use that time to finalize our capital structure and project timing.

Fraxinus Apartments Portfolio

108-Unit Eco-Housing portfolio in Portland, OR

Since our last update on Fraxinus, we have made the major change of bringing our property management in house. Mia, one of our valued employees from Seattle, relocated in October and got the buildings to full occupancy almost immediately. Once again, we see the value in purpose-built, hands-on management for eco-apartments.

The Portland market in general has been slow to recover from the Pandemic, but some positive signs are on the horizon. Stubbornly low rents are starting to tick up. We just implemented a 5-7% rent increase today (March 1st) and are signing leases at the new rents. Tight occupancy suggests we will have some pricing power headed into the summer leasing season.

We’ve also been at work making some capital improvements. We’ve converted two extra common rooms into bedrooms, something we think we can do 5-6 more times as units turn over.

Picea Apartments Portfolio

280-Unit Eco-Housing portfolio in Seattle, WA

The Picea portfolio is doing great. We are continuing to see strong leasing activities and rents in line with our budgets. Vacancy is around 1-2%, and we had the fun experience of touching 100% occupancy a few times in the month.

With turnover low, we are able to use our maintenance team to make minor upgrades to the buildings, most notably upgrading flooring and installing drop-in electric cooktops in all apartments where we have the capacity. While prior owners gave tenants countertop burners, we find the drop-in variety to feel much more substantial. Built in cooking devices will also make our properties easier to refinance, as the most attractive Federal Agency (Freddy Mac, Fannie Mae) programs require ‘full kitchens’.

Unlike what we hear from our “luxury rental” peers, we have not seen meaningful seasonal declines in rental rates. We do anticipate an increase in rents in the spring and summer months. We continue to monitor leasing conditions very closely.

Basement apartment at Alcove First Hill where we covered the prison-chic concrete floors with wood grain LVT.

Investment Pipeline

The following is a brief update on our project pipeline

• Araucaria House – 18 single family houses in Tukwila, WA. This is our “Missing Middle Housing” project across the street from Seattle in Tukwila, WA. The big news here is that there is a promising state law making progress now which will allow for up to 4-6 houses per parcel. That will dramatically increase the capacity of this site. We are monitoring this closely.

• Arbutus House — ~250 unit Opportunity Zone project in Tacoma, WA. This is our next big Tacoma project, right across the from Cornus House. We have the site in contract for closing in early 2024. We plan to start permitting now to ensure we qualify to “vest” under the current building codes which change in July.

• Taxus House – 50 units eco-1BRs in Seattle, WA. This project is getting close to permitting, and we are excited to move forward with it hopegully the end of the year. The “Eco 1BR” product type is very promising. We have 12 similar units at Betula, which have been very strong in pre-leasing. Once Betula is stable, we will begin to move forward here, ideally in the fall when we hope to see some relief on interest rates.

   

In addition to these development projects, we are actively monitoring the market for acquisitions, and have been making offers at prices where we can see a path to success on our dual mission of below market rents and above market returns.

Elevated interest rates require purchase prices to come down, and we have not yet seen this happening in a meaningful way. We will remain disciplined, but also start to look for creative ways to make deals happen, including through the insertion of non-profit and public funds. Stay tuned for more on this.

Economy notes – construction prices

Clearly, we are in a unique time in the economic cycle where ‘the market’ expects a major recession to arrive but it stubbornly refuses to do so. One interesting element as to why the Fed has had a hard time in delivering the reduction in economic activity that is needed to reduce inflation is that the construction sector has been remarkably resilient. There are still a record number of housing units under construction and there have not been the usual layoffs of construction jobs that usually signal the beginning of a recession.

A by-product of this is that the contractors and building trades are still very busy. Reductions in commodity prices have not really been passed through to project owners. Our most recent pricing suggests the end prices to buyers remain around 5% higher than last year. While this is within the allowances and contingency for which we have budgeted, it’s still quite frustrating considering that we also have rapidly increasing interest rates to contend with.

However, there are cracks starting to show. We hear from our partners with the City of Seattle that there has been a delay in new project starts and a drastic slow-down in permit applications in the last six months. We have started to get inbound sales inquiries from GCs and subcontractors looking for work, something which has never happened before. It’s clear that a slowdown is coming, which should have an impact on both pricing and rents, bringing new projects into balance. We will be ready.

Thank you!

As always, thank you for your support and please do not hesitate to reach out with any questions!