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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lags podcast.

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Speaker 3: I'm Joe Wisenthal.

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Speaker 4: And I'm Tracy Alloway.

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Speaker 2: Tracy, you know, one of the big themes obviously in

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Speaker 2: American life and the most recent election, was inflation. And

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Speaker 2: there are a lot of things that people think of

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Speaker 2: when they think of inflation. Maybe they think of egg prices,

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Speaker 2: it's in the news these days. Maybe they think of

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Speaker 2: gasoline prices. But a big story is like the cost.

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Speaker 3: Of living, is the cost of housing?

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Speaker 4: Yes, Actually, it's kind of funny. Everyone has their own

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Speaker 4: personal benchmarks for inflation, and mine is probably the cost

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Speaker 4: of mayonnaise, because I've been tracking that for a long time.

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Speaker 4: Not because I eat that much of it, but I

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Speaker 4: just find it interesting because it contains eggs and oil

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Speaker 4: and packaging and labor and all that stuff. And rent.

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Speaker 4: And guess what, Joe, my rent's going up again.

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Speaker 2: What about your mayonnaise consumption? It's funny to be sorry

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Speaker 2: when you said mayonnaise. I have to admit the first

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Speaker 2: thing that came to my head was like just like

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Speaker 2: imagining you in your apartment with the gar storing buckets

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Speaker 2: or gigantic tub of Costco mayonnaise iatiot with a spoon.

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Speaker 2: I'm sorry, you're really consuming a lot of mayonnaise. If

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Speaker 2: this is what comes to your mind when you think

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Speaker 2: about the cost of living.

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Speaker 4: Well, as part of my research for this, I can

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Speaker 4: tell you you can buy buckets of extra heavy mayo

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Speaker 4: off of Amazon.

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Speaker 3: Sounds good.

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Speaker 2: We're actually not doing a mayonnaise episode. We're talking about

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Speaker 2: the other one we're talking about.

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Speaker 4: I tried to throw in my rent stat Yeah, I know,

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Speaker 4: to keep you on topic, but you wanted to talk

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Speaker 4: about Mayo.

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Speaker 2: We'll do a Mayo episode at some point. But rent

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Speaker 2: is really interesting. Actually, in the government's measure there's so

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Speaker 2: many moving parts with anything housing, but most recently actually

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Speaker 2: the government's measure of rent price growth, which has been

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Speaker 2: a key contributor to overall inflation, et cetera. Actually it's

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Speaker 2: been moderating lately. We're sort of getting back to the

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Speaker 2: point where we're like at pre COVID levels of rent

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Speaker 2: price growth, right.

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Speaker 4: So it's still going up, but just not as much

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Speaker 4: as it was before.

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Speaker 2: But the perversity, perhaps it's a perversity, is that obviously

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Speaker 2: the FED jacked up interest rates quite aggressively to fight inflation.

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Speaker 2: Inflation has come down, tis a little longer than people expected,

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Speaker 2: but you know, it has come down. But one of

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Speaker 2: the things that we do know that happens is that

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Speaker 2: when the FED jacks of interest rates, that really has

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Speaker 2: an effect on housing development, which of course requires a

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Speaker 2: lot of capital and leverage, et cetera. And if you

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Speaker 2: look at a chart of say multifamily housing starts, buildings

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Speaker 2: five units or more, that's come way down since its peak,

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Speaker 2: like in twenty twenty two.

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Speaker 4: Yeah, so we had this huge wave of supply in

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Speaker 4: sort of late twenty twenty one twenty twenty two. As

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Speaker 4: you said, it's fallen quite a lot. The interesting thing

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Speaker 4: that I see here is like yields on bonds are

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Speaker 4: still going up. So we're at four point five five

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Speaker 4: percent or so on the ten year and that is

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Speaker 4: higher than when the Fed started cutting rates. So the

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Speaker 4: cost of financing these projects is still going up and

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Speaker 4: there's not that much activity.

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Speaker 2: Well, we did an episode in November twenty twenty three,

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Speaker 2: and our guests said something really interesting to me that

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Speaker 2: I've repeated probably many times, which is that for a

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Speaker 2: lot of multifamily developers, they might prefer a hard landing

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Speaker 2: in the economy, because sure, that might mean demand for

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Speaker 2: rent goes down or some of their tenants can't pay

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Speaker 2: their rent, But if it means that you get a

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Speaker 2: dramatic drop in interest rates because of howlever they are

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Speaker 2: at the cost of money, that might actually work out

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Speaker 2: better for them, which is sort of still blows my mind,

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Speaker 2: but it is what it is. And so one of

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Speaker 2: the other things that we're thinking about is like, well,

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Speaker 2: what's going on with all these multifamily developers carrying a

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Speaker 2: big debt and so forth, given the fact that rates

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Speaker 2: have not come.

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Speaker 4: Down, Yeah, let's talk about it.

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Speaker 2: Well, we are going to be speaking with the same

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Speaker 2: guests who commented that in twenty twenty three, we're going

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Speaker 2: to be talking about all of these dynamics. Really the

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Speaker 2: perfect guest. Thrilled to welcome back onto the show. Lee Everett,

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Speaker 2: head of research and strategy at Cortland, which is a

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Speaker 2: multi family owner operator roughly eighty thousand units nationwidely, Thank

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Speaker 2: you so much for coming back on the podcast.

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Speaker 5: Thank you for having me.

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Speaker 2: I've actually just wanted to have you back on to

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Speaker 2: talk about this specific that there's a lot we're going

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Speaker 2: to talk about but as Tracy mentioned, rates haven't come down.

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Speaker 2: I know people were like, all the fens guests are right,

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Speaker 2: this is relief, is insight. How stressed out are a

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Speaker 2: lot of these entities by the fact that after all

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Speaker 2: this time we haven't seen any rate relief.

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Speaker 5: It's interesting. I think stress is hitting sort of all

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Speaker 5: sides of the market. You have your bigger, more well

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Speaker 5: established shops that have been managing through this, able to

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Speaker 5: handle the higher rate environment, but have obviously taken a

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Speaker 5: very real valuation hit on their existing portfolios, like to

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Speaker 5: thirty percent, depending upon the portfolio composition. At the same time,

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Speaker 5: you've had record demand hitting the sector because cost to

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Speaker 5: buy housing is exceptionally unattainable today. And then on the

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Speaker 5: other side, you're having a very material impact on the

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Speaker 5: supply side. And I think that's what's really unique. If

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Speaker 5: you think back to September, the tenure was around a

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Speaker 5: three six. I think the day chair pal cut us

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Speaker 5: by fifty basis points. Well, we're at almost a four

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Speaker 5: to six today, and I remember that night you heard

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Speaker 5: reports about developers out at like local dinners. Yeah, they

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Speaker 5: were calling it fed day and getting ready to put

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Speaker 5: shovels in the chip exactly, and what you've seen instead

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Speaker 5: is increased stress on both the short end and the

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Speaker 5: long end of the curve. That's given you trouble on

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Speaker 5: the short end to start new housing and trouble on

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Speaker 5: the long end to afford longer term for ownership housing.

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Speaker 4: You mentioned that some of the bigger players are better

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Speaker 4: able to deal with higher rates. Can you talk about

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Speaker 4: how people try to offset some of these higher rates

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Speaker 4: and is it the case that there is still an

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Speaker 4: ability to refinance and turn out your debt or is

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Speaker 4: that starting to go away now?

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Speaker 5: I think extend and pretend what you're referring to and

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Speaker 5: the always popular looming maturity wall discussion is what you're

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Speaker 5: hitting on. And what we're seeing there is the established

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Speaker 5: owners that have strong relationships throughout either Fanny and Freddy,

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Speaker 5: balance sheet lenders, etc. They're able to continue to negotiate

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Speaker 5: and work out loans and delays. The people that got

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Speaker 5: out really far over their skis the syndicators, the new

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Speaker 5: entrance to the place, and a lot of what we

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Speaker 5: talked about last time. Those players are sort of hitting

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Speaker 5: the end of their window here. And what we've seen

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Speaker 5: in the financing space actually, as we delve into this

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Speaker 5: a bit more is there's so much liquidity on the

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Speaker 5: debt side that wants to come back to work. They

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Speaker 5: want to be rid of the these sort of balance

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Speaker 5: sheet hindrances that are these unproven players in the market,

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Speaker 5: and they want to get back to work with the

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Speaker 5: sponsors they appreciate. And we've generally seen spreads come in

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Speaker 5: about one hundred basis points from their peak, so that

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Speaker 5: has helped limit some of sort of the financing pressures,

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Speaker 5: but it's certainly a far cry from a one percent

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Speaker 5: tenure to a four or five ten uere. So it

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Speaker 5: depends a lot on who you are in the space

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Speaker 5: and how this has impacted you today.

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Speaker 2: Right because twenty twenty one, probably part of twenty twenty two,

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Speaker 2: we were like in that era where Instagram influencers we're

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Speaker 2: posting about to get in. You know, rent prices always.

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Speaker 4: Go to talk multifamily landlord.

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Speaker 2: Yeah, TikTok, multi family landlords. Rent always goes up. We

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Speaker 2: have a new project is probably called the Reserve. It's

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Speaker 2: in the suburbs of Houston and has a pool table

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Speaker 2: and there's no kids allowed to pool table. And you're

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Speaker 2: guarantee me and a bunch of them got wiped out.

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Speaker 2: What happened to them since we talked? And then how

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Speaker 2: talk about it from the more established operators, and how

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Speaker 2: much of a relief has it been that some of

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Speaker 2: this I don't know, new money, whatever you want, TikTok

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Speaker 2: money has maybe gotten washed out.

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Speaker 3: Tell us how that story ended.

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Speaker 5: I would call it a thinning of the herd that

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Speaker 5: we're still going through. I don't want to necessarily call

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Speaker 5: up people by name, but sure you can see in

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Speaker 5: the news there is a certain prominent syndicator that basically

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Speaker 5: doubled their positions and became a top thirty owner in

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Speaker 5: twenty twenty one or so, and banks are personally suing

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Speaker 5: the founders of that company on carry guarantees. Today, you've

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Speaker 5: seen potential investigations and some of the debt funds being

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Speaker 5: talked about in the space, and that relates specifically to

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Speaker 5: valuations on some of these assets that weren't maintained or

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Speaker 5: taken care of by certain owner operators. So you're seeing

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Speaker 5: a high level of delinquency. A lot of these properties

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Speaker 5: that were these new money and TikTok landlords have a

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Speaker 5: ton of leans against them because they weren't paying their

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Speaker 5: contractors they weren't executing their value add and ultimately they're

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Speaker 5: going to be in a world of pain. Would be

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Speaker 5: my sort of outcome at the end of all of this, because,

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Speaker 5: as I said before, the banks are just getting tired

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Speaker 5: of carrying this on their balance sheets, same with the

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Speaker 5: debt funds, Like you can't make money with this much

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Speaker 5: bad money hogging your book.

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Speaker 4: I have a really basic question, which I feel kind

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Speaker 4: of bad asking because I used to cover commercial real

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Speaker 4: estate and I should know this since multifamily is the

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Speaker 4: forgotten commercial real estate as I sometimes call it. But

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Speaker 4: what's the best thing to look at if you want

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Speaker 4: to just get a gauge of multifamily markets health, So

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Speaker 4: you know, I can look at like permits or something

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Speaker 4: like that, But that number is really volatile. I'm not

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Speaker 4: sure how much it's actually telling me.

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Speaker 5: Yeah, I think there's sort of two high level factors.

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Speaker 5: One is going to be your rent growth, because that's

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Speaker 5: going to feed your NI growth. The other factor is

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Speaker 5: going to be your cap rate, which we talked about

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Speaker 5: this a little bit last time. Your cap rate is

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Speaker 5: essentially your yield your income over your price. As money

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Speaker 5: is entering the space, prices go up, so you get

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Speaker 5: healthier cap spaces, and that's on the sort of for

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Speaker 5: sale side. And as NOI goes up, you also can

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Speaker 5: get tightening of cap rates because you get a higher

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Speaker 5: value in the NI and that also would be sort

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Speaker 5: of your high level indicator. And what we've seen in

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Speaker 5: cap rates is they've just started to flatten in the

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Speaker 5: last few months, but they're up roughly one hundred bases

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Speaker 5: points across the board and that's where sort of that

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Speaker 5: twenty to thirty percent hitten valuations I mentioned has come

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Speaker 5: into play.

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Speaker 2: All right, let's talk about from the perspective of a renter.

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Speaker 2: So I have some familiarity with the Austin, Texas housing market.

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Speaker 2: Supply and demand apparently has worked very beautifully. There are

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Speaker 2: a lot of people wanted to move there, and then

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Speaker 2: there's just towers up everywhere, including deep into the suburbs.

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Speaker 2: And then actually rent price I believe it's actually negative

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Speaker 2: for many years in Austin, which you know, seems like

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Speaker 2: good news overall. That's a rare story though, but we've

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Speaker 2: had this big fall and anyone can just go on

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Speaker 2: Fred and search do privately owned housing units started units

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Speaker 2: and buildings with five units or more and see that

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Speaker 2: we've had this big drop over the last two years

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Speaker 2: roughly since the peak of all these developments. What's going

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Speaker 2: to happen play this out a little.

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Speaker 3: Bit over the next two years.

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Speaker 2: Were supply needs demand here, and you know we already

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Speaker 2: have these affordability rent is already basically expensive everywhere, even

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Speaker 2: in Austin with the declines.

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Speaker 3: Is it going to get worse?

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Speaker 4: Yes?

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Speaker 5: I think frankly, we're about to transition from what has

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Speaker 5: been a very renter friendly market to again a landlord

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Speaker 5: friendly market over the course of the next two to

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Speaker 5: three years. And that's going to be particularly driven by

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Speaker 5: what we're seeing on the supply side. We're going to

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Speaker 5: have over a million units come to market over a

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Speaker 5: two year period here in twenty four and twenty five. Okay,

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Speaker 5: but peak supply is hitting in the next six months.

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Speaker 5: And if you look at relative time from a peak

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Speaker 5: supply and then b to getting to a level of

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Speaker 5: low supply than you saw last cycle, every major market

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Speaker 5: in the country will be there by the end of

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Speaker 5: twenty twenty six where delivering less housing units than they

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Speaker 5: did on average from seventeen to nineteen in apartment buildings.

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Speaker 5: So you're going to go below prior cycle supply very quickly.

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Speaker 5: At the same time, we do have it exceptionally strong

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Speaker 5: labor markets here, and the demand story has been outstanding.

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Speaker 5: So twenty twenty four is going to end the year,

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Speaker 5: depending upon the data provider you use, as the first

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Speaker 5: or third highest year for rental demand. Ever, twenty twenty

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Speaker 5: one was the prior record, So we're seeing people form

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Speaker 5: rental households at unprecedented rate in the US, and as

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Speaker 5: that supply comes down, you're going to see that demand

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Speaker 5: struggle to frankly, find high quality, well located assets to

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Speaker 5: move in, and you're likely to see that relationship flip

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Speaker 5: at that point.

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Speaker 4: So the other thing that affects multifamily housing construction other

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Speaker 4: than interest rates has to be just general confidence, I guess,

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Speaker 4: in the direction of the economy, the direction of the world.

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Speaker 4: And certainly there's a lot going on right now. We're

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Speaker 4: recording this on January twenty eighth, and there's news that

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Speaker 4: the Trump administration is freezing a whole bunch of federal spending.

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Speaker 4: I think it's something like twenty percent of federal spending

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Speaker 4: that includes presumably stuff like Section eight and other affordable

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Speaker 4: housing measures. Would that be expected to hit multifamily as well.

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Speaker 5: Yeah, and I think it's probably easiest to sort of

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Speaker 5: start at the top. Right When you're building multifamily, you're

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Speaker 5: generally trying to build to an acceptable return on cost. Frankly,

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Speaker 5: what we're doing is putting an investor's money together in

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Speaker 5: generating returns for them. Multifamily isn't built for free, and

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Speaker 5: it can't be in this sort of economic world. And

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Speaker 5: a general rule of thumb is a six plus percent

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Speaker 5: return on cost. So cost to build, you want to

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Speaker 5: yield over six percent of that to get a building

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Speaker 5: to pencil that tracks up closer to seven depending upon

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Speaker 5: the institution. Because you need to build to that yield

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Speaker 5: on cost, you have to have rents that are high

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Speaker 5: enough to generate enough rental revenue to drive that return.

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Speaker 5: So in order to build today, you have to build

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Speaker 5: it exceptionally high rent levels. Because of the cost to build,

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Speaker 5: because of the cost of interest rates. The only way

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Speaker 5: to drop that is to drop the cost, and that

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Speaker 5: cost drop typically comes for affordable housing from the federal government,

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Speaker 5: be it HUD grants that are then deployed through the

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Speaker 5: local housing agency, be it lie tech, be it any

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Speaker 5: sort of an ensemblage of ways to cut cost.

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Speaker 3: That's how you can get.

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Speaker 5: To affordable rents on the supply side, and then on

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Speaker 5: the demand side you can and cut rents by literally

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Speaker 5: giving people a rent check, which is what Section eight is,

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Speaker 5: and that again comes from the federal government via grant

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Speaker 5: given to the local housing agencies to deploy. And if

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Speaker 5: that money dries up, you have immense problems in terms

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Speaker 5: of a feeling the demand for these people because you're

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Speaker 5: cutting rent on the Section eight side and b encouraging

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Speaker 5: future construction of affordable apartment buildings.

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Speaker 2: Just to be clear though, because there are projects that

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Speaker 2: have their market rate rent and then they have some

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Speaker 2: allocation to what people call affordable units right in different

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Speaker 2: cities or whatever, I have different rules about how much

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Speaker 2: you need to allocate. Is that Section eight housing two

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Speaker 2: or is Section eight housing like how much does it commingle?

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Speaker 2: Does this also affect development of buildings that people don't

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Speaker 2: think of as quote affordable housing projects.

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Speaker 5: So in those sort of mixed buildings, you're going to

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Speaker 5: see more of a price lock, going to see a

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Speaker 5: supply side affordable building, be it tax credit, be it

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Speaker 5: a locked price on x percentage of AMI, which is

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Speaker 5: ultimately what you're going to say, say area median income,

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Speaker 5: which is how Fanny Freddy all of them essentially set

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Speaker 5: what's affordable through HUT, so that won't be destroyed or eliminated. Frankly,

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Speaker 5: usually when people are building, they understand in Massachusetts you

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Speaker 5: need x percentage of the building to be affordable, so

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Speaker 5: they need the building to pencil around that. Honestly, typically

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Speaker 5: it just means higher rents in the rest of the

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Speaker 5: building to fund those units. So I don't expect that

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Speaker 5: to dry up. What I expect our larger scale community

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Speaker 5: investment projects to revive an area within a town like

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Speaker 5: a Pilson. We looked at buildings with one of the

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Speaker 5: states prior at a prior job, and that was looking

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Speaker 5: at doing a massive housing development that would be entirely

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Speaker 5: affordable for the community there. And this is in Chicago,

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Speaker 5: So stuff like that's going to disappear. Purpose built is

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Speaker 5: going to disappear. Was planning to build an entirely voucher

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Speaker 5: building through Section eight, that's going to disappear, So you're

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Speaker 5: going to have real pain in that stuff, at least

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Speaker 5: in the short term. I mean, in theory, this could

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Speaker 5: be a quick turnaround and it's just a big wave

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Speaker 5: of disruption that goes away in four weeks, but there

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Speaker 5: is a world where it severely impacts housing construction at

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Speaker 5: the lower level.

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Speaker 4: What are people in the market saying about it right now?

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Speaker 4: Or is everyone just sort of in weight and see mode.

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Speaker 5: I think, like most things, it's weight and see mode.

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Speaker 5: I think that's been the general markets approach to this

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Speaker 5: entire administration transition, just because you need so much clarity

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Speaker 5: to start figuring out real world impacts here, and that

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Speaker 5: very much trickles into the cost to build stuff, with

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Speaker 5: the tariffs, with the deportation impacts on labor and things

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Speaker 5: along those lines.

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Speaker 2: Let's talk about deportation impacts on labor. What are the

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Speaker 2: estimates for what percentage of the multifamily workforce, whether it's

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Speaker 2: construction and or maintenance, whatever else, is undocumented labor.

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Speaker 5: It's estimated twenty percent of construction workers in this country

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Speaker 5: are undocumented labor. I'd venture to guess it's similar for

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Speaker 5: the whole multifamily industry when you look at staffing and

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Speaker 5: things along those lines. And I think when you look

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Speaker 5: at a combination of deportation of construction workers as well

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Speaker 5: as the sheer amount of labor it's going to require

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Speaker 5: to rebuild huge swaths of California. I think you could

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Speaker 5: be looking at a massive deficit in labor within the

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Speaker 5: construction space. And when you think about that, that's going

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Speaker 5: to be your strongest lever. That's going to hit your

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Speaker 5: cost to build, and that's what's going to drive up

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Speaker 5: those rents that are necessary. Is all of this immense

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Speaker 5: pressure you're going to see in the labor costs.

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Speaker 2: Tracey, I hadn't even thought about the huge demand for

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Speaker 2: construction labor that's going to come out of California.

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Speaker 4: But yeah, because of the fire.

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Speaker 2: So we have the fires, we have deportations, we have

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Speaker 2: the end of a lot of affordable housing projects at

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Speaker 2: least temporarily, and the intro straight shock all coming together

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Speaker 2: so far, this is what we've covered so far. At

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Speaker 2: the same time to sort of like constrain the supply

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Speaker 2: of new housing in the coming years.

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Speaker 4: Well, the irony is like everyone's building at the same

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Speaker 4: time after the wildfire's right, so like everything is just

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Speaker 4: going to go up. Actually, that reminds me we should

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Speaker 4: talk about insurance rates because I think this is another

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Speaker 4: source of pressure on multifamily, which is that insurance rates

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Speaker 4: for a lot of these operators have also been going

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Speaker 4: up quite a lot, and there aren't that many levers

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Speaker 4: they can pull in order to reduce that particular cost.

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Speaker 5: Yeah, I think this is another situation of kind of

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Speaker 5: the haves and have nots. At Cortland, we ensure our

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Speaker 5: entire portfolio, and when you're able to sort of spread

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Speaker 5: risk over eighty thousand apartment units, you can get far

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Speaker 5: more beneficial rates if you're a small owner in La.

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Speaker 5: If you're a small owner in California, Florida and Texas,

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Speaker 5: I don't know what you do today. Rates had hit

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Speaker 5: an estimate of three hundred per unit at one point

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Speaker 5: in Florida to ensure some buildings. Well, there's been some

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Speaker 5: normalization since then and costs have generally stopped with the

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Speaker 5: massive spikes again pre wildfires, but it's just a huge,

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Speaker 5: huge cost that hits everyone, and it's tough at this

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Speaker 5: point in time to enact in certain markets, and that

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Speaker 5: includes also Texas. Tornado Alley's had as much of an

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Speaker 5: increase as you've seen in Florida in California to date.

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Speaker 3: So where's the rubber beat the road?

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Speaker 2: We're going to have you back on sometime in twenty

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Speaker 2: twenty six, maybe somewhere twenty twenty six, if the pattern

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Speaker 2: goes what are we talking about?

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Speaker 5: I think what you're looking at in twenty twenty six

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Speaker 5: is a very investor friendly rental market again, and we

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Speaker 5: sort of have returned to where we were last cycle.

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Speaker 5: What I think is really interesting in what I see

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Speaker 5: in the housing market today is almost a displacement of

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Speaker 5: people living where they want rather than people not being

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Speaker 5: able to afford housing. And it's Art's at the top.

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Speaker 5: The baby boomers have the vast majority of three plus

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Speaker 5: bedroom homes in this country, and they aren't giving those

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Speaker 5: up despite plummeting bedroom utilization rates, so the millennials can't

401
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Speaker 5: really push into the housing they want. Some millennials continue

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Speaker 5: to rent or buy first time homes things along those

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Speaker 5: lines gen Z at the same time as the richest

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Speaker 5: earning young generation on record. Because of Frankly, the baby

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Speaker 5: boomers exiting the.

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Speaker 3: Labor force feel it that way, though from what I.

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Speaker 5: Now they do not, But the FED strongly disagrees with

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Speaker 5: their feelings.

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Speaker 3: So when you live, FED doesn't care about your feeling.

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Speaker 3: Oh sorry, no, it's fine.

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Speaker 5: When you look at this confluence of factors. What you've

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Speaker 5: seen is really higher earning people living lower down what

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Speaker 5: used to be considered the quality spectrum. So in our portfolio,

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Speaker 5: we've seen incomes jump to almost one hundred thousand dollars

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Speaker 5: per unit on average. Our credit scores have spiked to

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Speaker 5: around seven hundred, and our ages in the low thirties.

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Speaker 5: That's a well earning, strong young America worker, and that's

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Speaker 5: a cross our portfolio that's primarily in the Sun Belt

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Speaker 5: with some mid Atlantic and Western exposure. So you're seeing

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Speaker 5: an exceptionally high quality, credit worthy tenant and you're seeing

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Speaker 5: huge demand for that housing. And that's because nobody's building

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Speaker 5: in the well located areas. You can't build single family

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Speaker 5: homes in good school districts today. The local builders are

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Speaker 5: entirely out of the market. They've been absorbed by the

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Speaker 5: big boys since the Great Financial Crisis, and you're seeing

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Speaker 5: starts in those high quality locations plummet at a greater

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Speaker 5: rate than you're seeing them in the further out locations.

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Speaker 5: So you're going to have this tight labor force. Everybody

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Speaker 5: is going to need to work preventing some kind of

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Speaker 5: crazy AI situation, and you're going to have these high incomes,

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Speaker 5: and everyone's going to want to live in the same

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Speaker 5: well connected, good areas, and you're likely to see rents

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Speaker 5: in those areas begin to pop because that's where this

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Speaker 5: supply wave is winding down the quickest, and that's where

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Speaker 5: it starts. Aren't going to backfill the current supply.

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Speaker 4: Just to be clear, though, the expect increase in rents,

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Speaker 4: is that enough to offset all of the pressures from

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Speaker 4: higher interest rates.

439
00:23:07,280 --> 00:23:09,640
Speaker 5: I think you're likely to see what's happened in the

440
00:23:10,080 --> 00:23:12,959
Speaker 5: single family sector after the GFC happened a little bit

441
00:23:13,000 --> 00:23:15,639
Speaker 5: in the multifamily sector, where there is a thinning of

442
00:23:15,680 --> 00:23:18,160
Speaker 5: the herd. I don't think it'll get to the point

443
00:23:18,200 --> 00:23:21,000
Speaker 5: where I think four home builders have fifty percent of

444
00:23:21,040 --> 00:23:23,840
Speaker 5: new homeless things today or some crazy number like that.

445
00:23:24,080 --> 00:23:27,959
Speaker 5: But you're likely to see the small developers end up

446
00:23:28,000 --> 00:23:30,639
Speaker 5: consumed by the bigger developers that can handle it better.

447
00:23:30,920 --> 00:23:33,720
Speaker 5: And you're likely to see continued pressure in the multifamily

448
00:23:33,760 --> 00:23:37,959
Speaker 5: space where smaller funds, smaller operators, people that can afford

449
00:23:38,000 --> 00:23:41,000
Speaker 5: interest rate caps, that can't ride out long term higher

450
00:23:41,000 --> 00:23:44,679
Speaker 5: for longer are going to have to exit or ultimately

451
00:23:44,760 --> 00:23:48,640
Speaker 5: be absorbed into a larger player. So to answer your question,

452
00:23:48,680 --> 00:23:50,399
Speaker 5: it would be much easier for the industry on the

453
00:23:50,440 --> 00:23:53,159
Speaker 5: whole to have lower rates. I think a three to

454
00:23:53,200 --> 00:23:56,159
Speaker 5: a three five the industry is just fine three to

455
00:23:56,200 --> 00:23:58,640
Speaker 5: three five on the tenure. To be clear, I don't

456
00:23:58,640 --> 00:24:00,480
Speaker 5: know how soon we can get there. I think in

457
00:24:00,480 --> 00:24:03,240
Speaker 5: the meantime we're going to see a calling of the herd,

458
00:24:03,280 --> 00:24:03,760
Speaker 5: if you will.

459
00:24:04,320 --> 00:24:07,399
Speaker 2: I'm very bullish on driverless cars, but assuming that they're

460
00:24:07,440 --> 00:24:11,520
Speaker 2: not in mass production or mass deployment in the next

461
00:24:11,560 --> 00:24:14,200
Speaker 2: couple of years, talk to us about like how far

462
00:24:14,320 --> 00:24:16,359
Speaker 2: people are going to be having to commute. If it

463
00:24:16,480 --> 00:24:19,639
Speaker 2: sounds like the desirable places there's no building, people are

464
00:24:19,680 --> 00:24:21,879
Speaker 2: having to build further and further out, what do we

465
00:24:21,880 --> 00:24:23,439
Speaker 2: talk about. What are some of the places, What are

466
00:24:23,480 --> 00:24:27,240
Speaker 2: the hotspots, you know, three hours outside of Charlotte or whatever.

467
00:24:27,600 --> 00:24:29,560
Speaker 4: You're literally describing my house in connection.

468
00:24:29,600 --> 00:24:33,520
Speaker 5: Yeah, right, I mean that's really what you're seeing. The

469
00:24:33,560 --> 00:24:36,840
Speaker 5: places right now getting the highest out migration from Atlanta,

470
00:24:36,880 --> 00:24:41,040
Speaker 5: where I relocated for Courtland are Gainesville, which is a

471
00:24:41,080 --> 00:24:44,399
Speaker 5: separate msa an hour and a half outside of the city.

472
00:24:44,480 --> 00:24:47,840
Speaker 5: You're seeing it in all of these sort of tertiary

473
00:24:47,880 --> 00:24:50,359
Speaker 5: markets because that's where people can afford to build, and

474
00:24:50,400 --> 00:24:54,920
Speaker 5: that's home builders and apartment developers chasing cheaper land basis

475
00:24:54,920 --> 00:24:55,520
Speaker 5: and cheaper.

476
00:24:55,600 --> 00:24:57,960
Speaker 3: People don't commute from Gainesville to Atlanta.

477
00:24:58,040 --> 00:24:59,760
Speaker 5: If you have a hybrid job, you might commute to

478
00:24:59,760 --> 00:25:02,159
Speaker 5: North at Lanta wants some time, or you work remote

479
00:25:02,560 --> 00:25:05,800
Speaker 5: but driverless cars. That's a place you could see benefit

480
00:25:05,880 --> 00:25:08,840
Speaker 5: from that. It's a place trying to grow because it's

481
00:25:09,080 --> 00:25:13,080
Speaker 5: exceptionally difficult to get a home in North Buckhead today

482
00:25:13,200 --> 00:25:16,120
Speaker 5: or even in some of the closer in suburbs. It's

483
00:25:16,160 --> 00:25:19,760
Speaker 5: exceptionally expensive. So I think you're going to see people

484
00:25:19,760 --> 00:25:23,320
Speaker 5: commuting further and further out because that's the accessible product.

485
00:25:23,400 --> 00:25:26,800
Speaker 5: But also I don't know if demand for that product

486
00:25:26,840 --> 00:25:29,880
Speaker 5: is frankly as high as it is for the better

487
00:25:29,960 --> 00:25:34,520
Speaker 5: located product. We run independent renter surveys things along those lines,

488
00:25:34,520 --> 00:25:37,240
Speaker 5: and it seems location matters more to people today than

489
00:25:37,280 --> 00:25:40,240
Speaker 5: space to a degree, and I do think that favors

490
00:25:40,359 --> 00:25:57,600
Speaker 5: multi family investment in the longer term.

491
00:25:57,720 --> 00:25:58,080
Speaker 3: Trady.

492
00:25:58,119 --> 00:26:01,159
Speaker 2: I just want to be clear that if you have

493
00:26:01,240 --> 00:26:05,040
Speaker 2: to commute even part time from Gainesville to Atlanta, or

494
00:26:05,040 --> 00:26:08,639
Speaker 2: if you have to live in some small multifamily development,

495
00:26:09,160 --> 00:26:12,800
Speaker 2: I do not blame gen Z for thinking things aren't great,

496
00:26:12,920 --> 00:26:15,600
Speaker 2: even if nominally on paper their incomes are high.

497
00:26:15,800 --> 00:26:19,919
Speaker 4: Well, yeah, that, thank you. I'm sure they'll appreciate that.

498
00:26:19,920 --> 00:26:20,520
Speaker 3: I just want to be.

499
00:26:20,440 --> 00:26:22,320
Speaker 5: Clear on one point I do want to put on

500
00:26:22,359 --> 00:26:25,639
Speaker 5: that though, our internal rent to income ratios today are

501
00:26:25,680 --> 00:26:30,080
Speaker 5: actually thirty basis points lower than they were in twenty eighteen. Okay,

502
00:26:30,280 --> 00:26:34,920
Speaker 5: so our apartment buildings today, despite thirty percent post COVID

503
00:26:35,320 --> 00:26:38,439
Speaker 5: rent gains, it's interesting, are more affordable because since COVID

504
00:26:38,480 --> 00:26:40,919
Speaker 5: we've had a thirty four percent increase in our new

505
00:26:40,960 --> 00:26:41,840
Speaker 5: renter incomes.

506
00:26:42,560 --> 00:26:44,919
Speaker 3: But it's a different cohort anyway, Sorry, Tracy Goo.

507
00:26:45,240 --> 00:26:48,960
Speaker 4: So we're talking about the desirability of cities and everyone

508
00:26:49,040 --> 00:26:51,480
Speaker 4: wants to live there, but you can't really build. One

509
00:26:51,480 --> 00:26:54,080
Speaker 4: of the other things that Trump promised, in addition to,

510
00:26:54,520 --> 00:26:57,760
Speaker 4: you know, mass deportation and things like that, a reduction

511
00:26:57,800 --> 00:27:02,679
Speaker 4: in federal spending was perform and I guess I'm curious, like,

512
00:27:02,800 --> 00:27:04,879
Speaker 4: have you seen any action on that or is there

513
00:27:04,920 --> 00:27:08,439
Speaker 4: an expectation that maybe the federal government will in some

514
00:27:08,520 --> 00:27:12,000
Speaker 4: way be able to ease up the bureaucracy around building

515
00:27:12,080 --> 00:27:12,760
Speaker 4: new construction.

516
00:27:13,840 --> 00:27:17,000
Speaker 5: I don't know how he has any impact there it's

517
00:27:17,119 --> 00:27:21,600
Speaker 5: just they're so local driven. He can't touch impact fees

518
00:27:21,640 --> 00:27:26,680
Speaker 5: on local areas. You can't start touching fire and safety fees.

519
00:27:26,800 --> 00:27:32,080
Speaker 5: So I don't know how in a federal system the

520
00:27:32,119 --> 00:27:36,159
Speaker 5: federal government can control local impact fees, and I just

521
00:27:36,560 --> 00:27:38,399
Speaker 5: I can't connect the dots there.

522
00:27:38,640 --> 00:27:41,199
Speaker 2: Well, setting aside what the federal government can do. Do

523
00:27:41,280 --> 00:27:44,600
Speaker 2: you see there's the MBIA movement all around. Do you

524
00:27:44,640 --> 00:27:47,600
Speaker 2: see them having an effect as the dial being turned

525
00:27:47,640 --> 00:27:49,840
Speaker 2: anywhere in a meaningful way.

526
00:27:49,920 --> 00:27:50,880
Speaker 3: Outside of Austin.

527
00:27:51,560 --> 00:27:54,560
Speaker 5: I think it's unfortunate. They've gained the most traction and

528
00:27:55,040 --> 00:27:59,480
Speaker 5: possibly the hardest turn and to build environment possible in theory.

529
00:27:59,520 --> 00:28:03,080
Speaker 5: You've seen some government elected officials change, You've seen some

530
00:28:03,359 --> 00:28:06,840
Speaker 5: positions change. I think there's probably some more momentum in

531
00:28:06,880 --> 00:28:10,639
Speaker 5: San Francisco than there's ever been before. You obviously, of

532
00:28:10,720 --> 00:28:13,600
Speaker 5: the South, it's just build, build, build, But it's hard

533
00:28:13,640 --> 00:28:16,400
Speaker 5: to put pen to paper on if they're actually achieving

534
00:28:16,440 --> 00:28:20,280
Speaker 5: things when you can't pencil new buildings in high quality

535
00:28:20,320 --> 00:28:21,200
Speaker 5: locations today.

536
00:28:21,960 --> 00:28:25,720
Speaker 4: So a lot of multifamily loans have found their way

537
00:28:25,840 --> 00:28:30,600
Speaker 4: into either CMBs so commercial mortgage backed securities or colos

538
00:28:30,680 --> 00:28:34,800
Speaker 4: collateralized loan obligations, but the defaults on those have I

539
00:28:34,840 --> 00:28:37,400
Speaker 4: think the last numbers I saw, they're still pretty low.

540
00:28:37,560 --> 00:28:40,400
Speaker 4: Like on colos, I'm pretty sure it's in the low

541
00:28:40,520 --> 00:28:44,800
Speaker 4: single figures for US colos. Why haven't we seen like

542
00:28:45,240 --> 00:28:49,160
Speaker 4: greater waves of distress make their way into the end

543
00:28:49,320 --> 00:28:51,280
Speaker 4: product of multifamily.

544
00:28:52,600 --> 00:28:55,479
Speaker 5: I think people are doing everything they can to protect

545
00:28:55,520 --> 00:28:59,120
Speaker 5: their warehouse lines in the CLO and CMBs market. You

546
00:28:59,160 --> 00:29:02,480
Speaker 5: don't want to lose access to capital if you're a

547
00:29:02,520 --> 00:29:06,720
Speaker 5: debt fund today by having toxic assets, so people are

548
00:29:06,720 --> 00:29:11,440
Speaker 5: picking them off the COLO book. They're internalizing them. If

549
00:29:11,480 --> 00:29:14,280
Speaker 5: you're one of the debt funds that has a housing

550
00:29:14,360 --> 00:29:17,800
Speaker 5: operator wing, you can start operating properties on your own.

551
00:29:17,880 --> 00:29:21,520
Speaker 5: I mean it's I think it's protect credit at all costs,

552
00:29:21,600 --> 00:29:24,600
Speaker 5: So people are doing everything they can to protect that credit.

553
00:29:24,960 --> 00:29:28,120
Speaker 5: The distress is there. You see every week on the

554
00:29:28,120 --> 00:29:31,400
Speaker 5: pipeline report of what's on market, the same syndicators looking

555
00:29:31,400 --> 00:29:34,600
Speaker 5: for bailouts. You see the same people that hit the

556
00:29:34,920 --> 00:29:38,480
Speaker 5: over built nodes and overpaid in twenty one looking for help,

557
00:29:38,520 --> 00:29:40,720
Speaker 5: and you see them not getting the prices that even

558
00:29:40,760 --> 00:29:44,480
Speaker 5: hit the debt levels they need. So it's working out.

559
00:29:44,520 --> 00:29:47,800
Speaker 5: But I think Ultimately, nobody's willing to sacrifice their credit

560
00:29:47,880 --> 00:29:48,960
Speaker 5: levels to work it out.

561
00:29:49,040 --> 00:29:52,840
Speaker 2: Quicker, Can you just say anything more about the impact

562
00:29:53,080 --> 00:29:55,680
Speaker 2: of Los Angeles. I hadn't thought about that fires in

563
00:29:55,760 --> 00:29:59,960
Speaker 2: terms of like estimates for how much resources that's good

564
00:30:00,000 --> 00:30:03,440
Speaker 2: going to suck up, so to speak, for construction and development.

565
00:30:04,480 --> 00:30:08,040
Speaker 5: Yeah, it's interesting. I think our CEO made an off

566
00:30:08,080 --> 00:30:10,520
Speaker 5: the cuff comment last week. We were looking at a

567
00:30:10,520 --> 00:30:14,400
Speaker 5: building in a location in Atlanta that is where heavily

568
00:30:14,520 --> 00:30:18,800
Speaker 5: heavily populated by construction workers, and his remark was, I'm

569
00:30:18,800 --> 00:30:20,560
Speaker 5: going to have trouble getting rent growth there for the

570
00:30:20,560 --> 00:30:22,640
Speaker 5: next year and a half because I expect all those

571
00:30:22,640 --> 00:30:25,760
Speaker 5: people to end up in California in the short term.

572
00:30:25,840 --> 00:30:29,640
Speaker 5: And it's another actually to sort of wrap one other

573
00:30:29,720 --> 00:30:31,840
Speaker 5: question you asked, and there's the HUD side of things.

574
00:30:31,920 --> 00:30:35,840
Speaker 5: HUT is typically vital in these rebuilding efforts, and that's

575
00:30:35,880 --> 00:30:38,920
Speaker 5: a funding channel that if the government turns off, is

576
00:30:39,680 --> 00:30:43,200
Speaker 5: going to have severe impacts there as well. So A,

577
00:30:43,400 --> 00:30:46,000
Speaker 5: I think you could see demand move within communities because

578
00:30:46,040 --> 00:30:47,960
Speaker 5: of LA I think it's going to have a material

579
00:30:48,000 --> 00:30:50,520
Speaker 5: impact on cost to build in our country. And B

580
00:30:50,680 --> 00:30:52,840
Speaker 5: you could see it dampened by some of the recent

581
00:30:52,840 --> 00:30:54,200
Speaker 5: movements by the administration.

582
00:30:54,560 --> 00:30:57,400
Speaker 4: Well, FEMA is also a really big protection layer for

583
00:30:57,520 --> 00:30:59,880
Speaker 4: like Fanny May and entities like that.

584
00:31:00,120 --> 00:31:03,240
Speaker 3: So fun times, Lee Everett.

585
00:31:03,240 --> 00:31:06,480
Speaker 2: Looking forward to having you back again in twenty twenty

586
00:31:06,560 --> 00:31:10,600
Speaker 2: six when we talk about how badly constrained the market is.

587
00:31:10,720 --> 00:31:12,480
Speaker 2: Really appreciate your coming back on odlock.

588
00:31:13,040 --> 00:31:14,560
Speaker 5: Thank you for having me. It's always great.

589
00:31:27,760 --> 00:31:30,880
Speaker 2: So it's funny we got like ten minutes of housing

590
00:31:31,160 --> 00:31:34,960
Speaker 2: supply relief over and then we're just heading right back

591
00:31:35,000 --> 00:31:39,320
Speaker 2: to constraints and shortages, and it sounds like rent growth

592
00:31:39,360 --> 00:31:42,000
Speaker 2: and investor friendly environments and so forth.

593
00:31:42,160 --> 00:31:43,640
Speaker 4: We got a glimpse of what could be.

594
00:31:43,880 --> 00:31:44,520
Speaker 3: Yeah.

595
00:31:44,600 --> 00:31:46,680
Speaker 2: The other thing I was it's also funny and tracy

596
00:31:46,720 --> 00:31:49,040
Speaker 2: thing is like, oh, this was the renter friendly market.

597
00:31:49,120 --> 00:31:52,040
Speaker 4: I missed it right, Yeah, seriously. Well, I also thought

598
00:31:52,080 --> 00:31:56,120
Speaker 4: his characterization of like people are living in houses, it's

599
00:31:56,240 --> 00:31:58,080
Speaker 4: just a lot of them are not living in the

600
00:31:58,440 --> 00:32:01,000
Speaker 4: houses in the places that they would prefer to be.

601
00:32:01,320 --> 00:32:01,560
Speaker 3: Yeah.

602
00:32:01,600 --> 00:32:05,440
Speaker 4: I mean, that's certainly part of my experience and one

603
00:32:05,480 --> 00:32:07,720
Speaker 4: reason why I don't own a house in New York,

604
00:32:07,800 --> 00:32:10,480
Speaker 4: but I own one elsewhere. The other thing I was

605
00:32:10,520 --> 00:32:14,800
Speaker 4: thinking about is his characterization of I guess the haves

606
00:32:14,800 --> 00:32:17,520
Speaker 4: and the have nots in the market. And I think

607
00:32:17,560 --> 00:32:20,760
Speaker 4: this is really important because this is like you could

608
00:32:20,760 --> 00:32:24,520
Speaker 4: say this about the entire corporate world. Yes, like, if

609
00:32:24,560 --> 00:32:28,600
Speaker 4: you are a big company that can access the bond market,

610
00:32:29,120 --> 00:32:32,040
Speaker 4: the past few years probably have not been that bad

611
00:32:32,120 --> 00:32:35,280
Speaker 4: for you. If you are a smaller player and you

612
00:32:35,400 --> 00:32:37,840
Speaker 4: have to take out bank loans, it's been a lot

613
00:32:37,920 --> 00:32:41,440
Speaker 4: more constrained. So a lot of the financing environment has

614
00:32:41,520 --> 00:32:44,000
Speaker 4: just led to a situation where the big get bigger.

615
00:32:44,120 --> 00:32:46,640
Speaker 4: And Lee was talking about how you might see more

616
00:32:46,680 --> 00:32:50,840
Speaker 4: consolidation in multi family operators, and that's just an extension

617
00:32:50,880 --> 00:32:51,480
Speaker 4: of that trend.

618
00:32:51,560 --> 00:32:54,479
Speaker 2: And of course we've talked about this in the past,

619
00:32:54,520 --> 00:32:56,760
Speaker 2: the Great Financial Crisis and what it did to the

620
00:32:56,800 --> 00:33:00,840
Speaker 2: single family home builders, and they're just a lot fewer

621
00:33:01,000 --> 00:33:05,240
Speaker 2: single family homebuilders today than there were several years ago.

622
00:33:05,520 --> 00:33:07,840
Speaker 2: You know, I always think back to last year when

623
00:33:07,840 --> 00:33:10,560
Speaker 2: we traveled to Mount Area, North Carolina.

624
00:33:10,320 --> 00:33:12,280
Speaker 3: The idea that the community.

625
00:33:11,720 --> 00:33:16,120
Speaker 2: Has to put together a road show to pitch the homebuilder. Yeah, right,

626
00:33:16,160 --> 00:33:19,280
Speaker 2: because the power exists in the consolidation of the homebuilder

627
00:33:19,600 --> 00:33:22,959
Speaker 2: such that the community is like, please build here. You know,

628
00:33:23,040 --> 00:33:25,680
Speaker 2: it's the sort of exact opposite in the way of

629
00:33:25,720 --> 00:33:27,760
Speaker 2: the mb problem. It's like, no, we have plenty of land.

630
00:33:27,800 --> 00:33:30,320
Speaker 2: We just need to convince you. But this idea, that's like, Okay,

631
00:33:30,320 --> 00:33:33,640
Speaker 2: we had the great financial shock that consolidated the single

632
00:33:33,680 --> 00:33:37,400
Speaker 2: family homebuilders. Now we have this sort of financial shock

633
00:33:37,520 --> 00:33:40,560
Speaker 2: in the form of higher interest rates, higher insurance, and

634
00:33:40,640 --> 00:33:43,880
Speaker 2: that's consolidating the multifamily developers.

635
00:33:44,000 --> 00:33:45,760
Speaker 4: Yeah, all right, shall we leave it there.

636
00:33:45,840 --> 00:33:46,560
Speaker 3: Let's leave it there.

637
00:33:46,720 --> 00:33:49,400
Speaker 4: This has been another episode of the All Thoughts podcast.

638
00:33:49,520 --> 00:33:52,800
Speaker 4: I'm Tracy Alloway. You can follow me at Tracy Alloway and.

639
00:33:52,720 --> 00:33:55,280
Speaker 2: I'm Joe Wisenthal. You can follow me at the Stalwart.

640
00:33:55,520 --> 00:33:58,840
Speaker 2: Follow our producers Carmen Rodriguez at Carmen Erman Dash, Ol

641
00:33:58,840 --> 00:34:02,960
Speaker 2: Bennett at dashbott Kill Brooks at Kilbrooks. From our Oddlots content,

642
00:34:03,000 --> 00:34:05,840
Speaker 2: go to Bloomberg dot com slash odd Lots. We have transcripts,

643
00:34:05,880 --> 00:34:08,239
Speaker 2: a blog, and a newsletter and you can chat about

644
00:34:08,239 --> 00:34:10,480
Speaker 2: all of these topics twenty four to seven in our

645
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Speaker 2: discord Discord dot gg slash out Lots And.

646
00:34:14,040 --> 00:34:16,359
Speaker 4: If you enjoy All Thoughts, if you like it when

647
00:34:16,360 --> 00:34:19,560
Speaker 4: we talk what's next in multifamily, then please leave us

648
00:34:19,640 --> 00:34:23,360
Speaker 4: a positive review on your favorite podcast platform, and remember,

649
00:34:23,440 --> 00:34:26,040
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650
00:34:26,200 --> 00:34:29,359
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