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The Real Deal Los Angeles

Pizza will be served: Inside Travis Kalanick’s real estate revolution

The Uber co-founder and new CEO of LA-based City Storage Systems sees a $10 trillion market in industrial assets catering to the Internet economy, like food delivery
By Dennis Lynch | May 07, 2018 10:19AM

Travis Kalanick and 1842 W. Washington Boulevard, the CloudKitchens site (Credit: Joshua H. via Yelp, Forbes, Pixabay)

Covered in a mural and located across from a cemetery, a block-long single story warehouse in Pico-Union could easily go overlooked.

But this West Washington Boulevard industrial site is ground zero for a nascent real estate venture that repurposes distressed assets, giving them new life in the new economy.

And while distressed real estate doesn’t usually make headlines, when the new man in charge is Travis Kalanick, attention must be paid.

The Uber co-founder and self-described serial entrepreneur, who was forced to resign from his company last year, has a new job as CEO of a real estate investment holding firm. Called City Storage Systems LLC, the company has big plans for small properties like the one in Pico-Union.

CSS wants to fuse distressed assets “particularly in the areas of parking, retail and industrial,” with digital-age businesses, it says. CSS provides a home for restaurants and retail businesses along the lines of how Amazon uses its warehouses to supply its vast e-commerce business.

Essentially, CSS wants to redevelop industrial real estate to cater to a future based around the Internet. Kalanick, who took Uber from a small startup to a multibillion-dollar behemoth in a decade, claims there is “$10 trillion in these real estate assets that will need to be repurposed for the digital era in the coming years,” based on in-house analysis on global parking and retail assets.

Kalanick will pump $150 million into the L.A.-based company through his new investment fund, called 10100, a reference to his childhood home address. Kalanick announced the decision to lead CSS in March, and was greeted with a wave of publicity and some head-scratching.

His investment in the 15-person startup allows Kalanick to buy out the remaining outside investors, Recode reported. Among those with a stake was venture capitalist Chamath Palihapitiya of Palo Alto-based tech startup Social Capital, according to Recode.

CSS is the first major investment for Kalanick after he resigned from the ride-hailing giant in last June, stepping down from his CEO post amid reports the company fostered a hostile work environment and skirted existing laws.

His departure included a $1.4 billion payout after Kalanick sold a third of his 10 percent stake in Uber to Japan’s Softbank, whose investment valued the company at $48 billion.

After helping disrupt then forever change the taxi industry and the gig economy, can Kalanick do the same for distressed real estate? And will the revolution begin on West Washington Boulevard?

Kalanick has expressed a “particular interest” in two of the CSS business-to-business operations: CloudKitchens and CloudRetail. Both companies rent non-traditional space to restaurants and retailers that do all of their business online.

The concept reduces overhead for small businesses, thereby lowering the barrier of entry for the companies that can’t afford to rent traditional retail or restaurant space.

CloudKitchens supplies the equipment, delivery services, and marketing services to companies. Because they would only use these locations as a back-end for their web presence, the companies would not need a highly visible space for customers.

That business model does fill a need, said Vicky Schiff, a managing partner at Calabasas lender Mosaic Real Estate Investors. Schiff recalled working with a friend who needed a test kitchen for a fast casual venture.

“It was super expensive and almost impossible to find,” Schiff said.

The permits, certifications, and equipment required to build a commercial kitchen make them out of reach for many startups. Schiff said that the market is “missing the demand” for that and other spaces meant for small online businesses.

“There are buildings in dense urban locations that need changes of use and there are businesses that have demand for them,” she said. “Commercial kitchen demand is one of them.”

The “cloud kitchen” concept isn’t exactly new. A rival to online food ordering service Seamless called Zomato launched a cloud kitchen service in India last year. But Kalanick is among the few high-profile and deep-pocketed investors to commit so much money and see the potential to take it mainstream.

In L.A., CloudKitchens is operating out of the 1842 W. Washington Boulevard warehouse, which company founder and Kalanick pal, Diego Berdakin, purchased in 2015. There are about a dozen food delivery businesses there, including several pizza shops like Made in Brooklyn NY Pizza, Joe’s Pizza, Thick N Tasty Pizza, along with others like Tasty Wok and Sala Thai.

The company also has locations in San Francisco and Chicago, and intends to enter the New York market, according to its website.

CloudKitchens already has a familiar backer. Shortly after Kalanick announced his “new gig” on Twitter, Dara Khosrowshahi, the current CEO of Uber, responded. He tweeted out his congratulations, and added that CloudKitchens was “a super-interesting partner” of Uber’s food-delivery service UberEats.

The other company under the CSS umbrella is CloudRetail, a similar service for retailers, though in the earlier stages than CloudKitchens. Cloud Storage Systems co-founder Sky Dayton hinted that the firm could operate both CloudKitchens and CloudRetail from the same location.

Much of the commercial real estate considered distressed in the U.S. is retail space vacated by businesses that have been pummeled in the e-commerce boom, like Sears and Toys R’ Us, Bon-Ton Stores and Macy’s.

But CSS may have to wait for the market to stumble before it can scoop up any properties at less than a premium — especially given how well industrial is performing — said Terri Delhamer, owner of the Riverside County-based brokerage GRE Land and Commercial Real Estate. Delhamer, who specialized in distressed assets around Southern California during the last down market, said now is a good time to have capital ready to deploy.

“The way you capitalize on a commercial recession is to have cash and move quickly, because the people who get in trouble are trying to save themselves from foreclosure,” Delhamer added.

It is a long-term strategy and appears to be part of CSS’s plan. Dayton indicated the company was in no rush to expand, even though Kalanick’s involvement boosts the CSS growth potential exponentially.

The company has a “multi-decade perspective that allows us to prepare and build now for huge changes coming to our cities.”

“Every cycle has its beginning,” he added. “If you wait until you’re at the trough, it will be too late.”