COVER STORY, APRIL 2004

GOING AGAINST THE GRAIN
Pacific Properties takes a gamble to develop sites in struggling markets.
Lara Rauba

While it may be easier to find success in booming markets such as Southern California, Pacific Properties has found that great projects can be developed anywhere — especially in markets that are often overlooked by other companies. “Everyone would love to be in Southern California, but we also believe strongly in markets that aren’t in favor right now,” says Steve Molasky, chairman and CEO of Las Vegas-based Pacific Properties. “Projects are more difficult to get done [in those areas] but they are also more financially rewarding.”

The Hampden is being developed on the site of a former hotel property in Denver. The project, which is scheduled to open in late 2005, features 291 apartment units and 15,000 square feet of retail space. When completed, The Hampden will be one of the largest mixed-use developments in the area.

This philosophy is exemplified in the company’s current project, The Hampden, located at Hampden Avenue and Interstate 25 in Denver. “We are focusing on urban infill in markets that the rest of the world thinks are in the tank,” says Mark Cassidy, president of Pacific Properties. “And Denver is probably on everyone’s ‘horrible’ list.” But entering this type of market is one of the company’s strategies for success. “We’re buying [the Hampden property] at two-thirds the cost of what everyone else paid [in the area] 5 years ago,” says Molasky. “It’s a great location — we’re by the light rail, by the freeway, in a great neighborhood. Our numbers look great.”

The new Hampden project, which is scheduled to open in late 2005, will be one of the few new, large multifamily/mixed-use projects in the Denver area. The development will feature 291 apartment units and 15,000 square feet of retail/restaurant space in a four-story urban village, situated between a grocery store and a United Artists theater. Only steps away from the Southmoor Light Rail Station, the community is especially attractive to professionals as it offers quick and easy access to the Tech Center, Cherry Creek and the downtown area.

“Even people that thought we were crazy for developing right now in Denver had to admit that the site was an A-plus location,” says John Ausburn, executive vice president of development with Pacific Properties. “It had everything we were looking for in this type of urban infill, high-density project.” The prime location also helps to ensure the project’s success. “In a city like Denver, where traffic is significant, this project will be at a real advantage,” says Ausburn.

As cities become more congested, projects like The Hampden become more valuable. The Hampden will also serve as a development model for other cities in similar situations. “Most cities that are taking a leap to spend significant money on light rail need this kind of thing to happen,” says Ausburn. “We’re serving as their poster boy right now.”

Another reason Pacific Properties chose to develop in Denver, despite its struggling economy over the past few years, was the fact that the city has very strong dynamics. “Denver has had its ups and downs, but it has a loyal base of people that live there,” says Molasky. And Cassidy believes that by the time the project is finished in late 2005, Denver will be back on its way to being a top market. “Either you believe or you don’t believe that Denver will be back — and I fundamentally do,” he says. “I’ve seen Denver go through the cycle before.” Ausburn has a similar view. “When this project opens its doors, it will be one of the largest projects in Denver, and I believe that the demand will be very strong at that point — based on what’s happening and what’s in the pipeline,” he says.

While the company currently focuses a significant amount of its attention on urban infill, it has also been prosperous in other areas of development, particularly in the Las Vegas area. Molasky, a second generation developer, founded his own company at the age of 21 to develop multifamily projects. As his company grew, Molasky realized that he needed an expanded team of experts to move forward into other areas of development. “Being a builder in Las Vegas, I never had to do high-density stuff,” he says. “The market kept expanding out and out and was mainly two-story garden apartments.” Soon enough Molasky and his team were venturing into development projects in other areas of the West, including California.

Pacific Properties’ diRenzo is a $20 million multifamily project located in Riverside, California. The development features 158 apartment units in seven two-story buildings.

Some of the company’s current California projects include di Renzo in Riverside, the Vineyards at Valley in El Dorado Hills and The Regatta in Sacramento. di Renzo is a $20 million project nearing completion. The community is located on the site of a former shopping center, which the company had rezoned for 158 apartments in seven two-story buildings. Because the company positions its developments to add more than just housing to a community, Pacific Properties also contributed $300,000 towards the first phase of a 20-acre city park. “We’re not just looking for deals,” says Molasky. “We really want to build nice projects and make strong contributions to the communities we are in.”

Vineyards at Valley View is a 344-unit community in the Sacramento suburbs. The $36 million project features 20 two-story and two three-story buildings on 22.69 acres set in the foothills. Also in the Sacramento area, the company is developing The Regatta, a 146-unit project near the intersection of the I-5 and I-80 freeways. This community will fill a need for multifamily housing as there has been no new apartment development in the surrounding area for the past 8 to 10 years. The site formerly housed a church and was rezoned by Pacific Properties for housing.

The company is successful in developing a broad range of projects due in part to its size. “We pride ourselves on the fact that we are small enough to be able to respond quickly, more so than other larger companies,” says Molasky. The company is able to gauge trends and fluctuations in the market and adapt accordingly. It also tries to gear its product to what is needed in each submarket. If there are only a few three-bedroom apartments in a submarket, the company will then decide to build some three-bedroom units, says Cassidy. It is not bound by the structure or rules that govern some other companies. “We are not the small guy but we’re not the big REIT guy,” adds Cassidy. “We have a niche that we can do, that the REITs won’t do.” This also allows the company to take more risks.

An example of a gamble the company recently took was with a piece of property in Carlsbad, California. The developer who originally purchased the 20-acre property started the zoning approval process, but after 2 years the project stalled. “That’s when we stepped in,” says Cassidy.

There were difficulties because part of the land — almost two-thirds — had to be preserved as it was home to the California Gnat Catcher, a small bird native to the area’s wetlands. “We also had to accommodate affordable housing and had to go through architectural approvals in addition to the Gnat Catcher situation,” says Cassidy.

Despite the hurdles it had to overcome, Pacific Properties got the land entitled and approved by the city council and is currently underway on construction. Twelve acres of The Summit at Carlsbad have been preserved for the Gnat Catcher population and the remaining 8 acres will feature 13 three-story buildings of apartment homes. This was a circumstance in which the company’s size allowed it to more quickly adjust to what the situation required.

The company plans to continue its development projects across California, in part because of the changes that are taking place there. “The barriers to entry in California have been tremendous,” says Cassidy. “But you are now starting to see a trend away from that. Cities are beginning to be more open [to development]. Used to be you would go to city council meetings and literally get run out. That has changed now.”

Cassidy has found that cities are beginning to realize that high-density projects often have a good tenant profile with high-quality people and are a complement to the area. He adds that while cities are often economically motivated, they are now seeing that alternatives to retail, such as multifamily/mixed-use developments, can be complementary to existing retail projects. Lifestyles and demographics are also changing, increasing the need for urban infill projects in many cities.

“Five years from now, we’re going to be in a lot more markets,” says Molasky. “We try to stay current and build what people want to live in. We enjoy what we do — we try to build something that is not only profitable but good for the community, too.”

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