Juno Development: Building the Future of Multifamily Housing
By: Jim Schroder
Tags: Housing, Cities, Real Estate, Sustainable Development, Development

The last decade has witnessed a boom in the multifamily housing industry. As former partner and CFO of TriBridge Residential, one of the largest private developers in the Southeast, I saw firsthand how rent growth, low interest rates, cap rate compression, and overall asset appreciation all made being a multifamily investor and developer a lucrative business in most major U.S. cities. Even so, developers have not been able to build enough housing to meet the needs of our nation’s growing population.

Recent years have highlighted that increasing housing supply remains a massive challenge in cities across the U.S. Despite adding over 10 million units to the national housing supply from 2010–2020 (including nearly 3 million multifamily housing units), that’s still 5 million units below the 60-year, long-term average (including 1.4 million units below average for multifamily)(1). When you consider the demand side of the equation, most economists estimate we have a 3–4 million unit shortage of housing today. Based on this fundamental mismatch, it’s clear that we have to radically change how housing and apartments get built. Specifically, we need to think differently about what and how we develop.

What the industry builds has not materially changed in the past decade. New multifamily housing is predominantly 5-story wood frame construction (sometimes over a 1- or 2-story concrete podium) and focused on “luxury” housing at the top quartile of incomes. This is due to the high cost of construction and development, as well as the corresponding return the project generates to investors — the primary drivers of what gets built. The high cost of building multifamily has several causes: a slow and customized design process, construction reliance on manual labor (which faces skilled labor shortages), multiple layers of inefficient management, consistent delays, and the same unsustainable materials that are responsible for negatively impacting our environment and resident well-being.

How we develop underpins the source of the annually escalating costs (even during recession) and further exacerbates the housing shortage. There have been no significant process or material improvements in the industry to drive down design or construction costs for the past 50 years due to the fragmented nature of the stakeholders and the lack of R&D. The numbers don’t lie: the real estate industry spends less on R&D than virtually any other (<1% of revenues vs. 22.5% for the electronics industry). Many developers in the industry want to keep the inefficiencies in place because they make substantial profit by taking advantage of the opaque and complex process. Those developers who do want to think differently typically fail due to structural barriers to innovation with dozens of disparate stakeholders.

R&D as a % of Revenues by Industry

https://stats.oecd.org/Index.aspx?DataSetCode=BERD_INDU; https://www.statista.com/statistics/270233/percentage-of-global-rundd-spending-by-industry/#:~:text=In%202016%2C%20the%20industry%20spent,in%20order%20to%20remain%20competitive. Note: even if you attributed 100% of construction and real-estate activities R&D (and took the highest numbers for each in the data — $1.07B and $579M) to the market cap of multi-family alone — $2.9T (not all of RE), it would be .05% of market cap. If you took all of RE, assuming a 5% cap rate in MF — you’d get 1% of “NOI” being spent on R&D. If you actually used the $17T number for all RE and used the $1.6B number for R&D, it’d be .001% of market cap and .2% of NOI (assuming a 5% cap rate)

Yet the ramifications of continuing to develop the way we have for the last 50 years is only going to impede the future state of cities, continue to hurt the climate, further exacerbate the housing supply, and ultimately, continue to impede housing affordability. I wanted to join a team that is creating a new set of values and changing the conversation around how development happens.

This past summer, I learned about Juno’s approach to productizing the development process with the goal of bringing about a more integrated, streamlined, and systematic approach to how housing in cities is designed, built, and developed. With my deep experience in real estate development, investment, and finance, I saw their model, their team, and the product and systems they were creating as the way forward for development. I reached out to their CEO, Jonathan Scherr, and two months later I left my role at Tribridge to build out Juno’s growth engine as Head of Real Estate.

There are four key reasons why I believe Juno is set to fundamentally change ground-up development in ways that will benefit residents, communities, landowners, and investors.

Product Differentiation: In the development industry, buildings over 100 units have become commoditized in their design, features, and values. As an investor and developer, I saw firsthand how cityscapes were being inundated with the same type of new, commodity housing. Juno is set to develop housing that is different at its core. The idea of giving residents (and communities) a healthier, more sustainable, and better designed home at price points they can afford is a paradigm shift for this industry. Predictability in Underwriting: A productized approach, centered around componentization and systems development, means that it’s possible to have greater certainty on cost and schedule and to optimize unit mix based on yield on cost, not just a back-of-envelope calculation. This precision makes it possible to have greater certainty much earlier in the underwriting and development process. Speed of Execution & Lower Risk: Productization provides for more efficient and predictable timelines. The design process is over 55% faster and the construction process is over 25% faster for a combined 35% in time savings. More importantly, tighter variance around schedule and cost overruns provides more certainty and leads to lower cost of capital. Sustainability: Beyond being good for the world, it’s smart for investing in the future. The Juno product is healthier for the residents, better for the environment, and will address the nation’s housing shortage and affordability as we build scale. Collectively, a Juno project is both environmentally and socially responsible investing, both of which are trends that are attracting increased capital allocations to real estate.

Taken together, these benefits will enable Juno to fundamentally change how housing in cities is brought to life. When successful, this model has the potential to change far more than the act of creating buildings; it has the potential to fundamentally change the risk profile of ground-up development forever.

I’m excited for what 2021 has in store for us as we take on this massive opportunity. If you are a landowner, developer, or investor, we would love to connect with you on how the Juno system will offer you a superior product, faster delivery, and reduced risk, all while seeking to provide more attainable housing long-term.

The future of housing is bright, and Juno will lead the way. Join us!

Jim Schroder is the Head of Real Estate at Juno.