WEBVTT - Get Ready For Another Shock to Housing Affordability 0:00:02.720 --> 0:00:16.400 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.560 --> 0:00:22.320 Hello and welcome to another episode of the Odd Lags podcast. 0:00:22.440 --> 0:00:24.320 I'm Joe Wisenthal. 0:00:23.840 --> 0:00:24.960 And I'm Tracy Alloway. 0:00:25.360 --> 0:00:28.440 Tracy, you know, one of the big themes obviously in 0:00:28.480 --> 0:00:32.519 American life and the most recent election, was inflation. And 0:00:32.560 --> 0:00:34.640 there are a lot of things that people think of 0:00:34.760 --> 0:00:38.240 when they think of inflation. Maybe they think of egg prices, 0:00:38.560 --> 0:00:40.080 it's in the news these days. Maybe they think of 0:00:40.080 --> 0:00:43.720 gasoline prices. But a big story is like the cost. 0:00:43.479 --> 0:00:45.080 Of living, is the cost of housing? 0:00:45.479 --> 0:00:48.400 Yes, Actually, it's kind of funny. Everyone has their own 0:00:48.440 --> 0:00:53.360 personal benchmarks for inflation, and mine is probably the cost 0:00:53.360 --> 0:00:56.040 of mayonnaise, because I've been tracking that for a long time. 0:00:56.080 --> 0:00:57.880 Not because I eat that much of it, but I 0:00:57.960 --> 0:01:01.280 just find it interesting because it contains eggs and oil 0:01:01.560 --> 0:01:04.840 and packaging and labor and all that stuff. And rent. 0:01:05.000 --> 0:01:07.360 And guess what, Joe, my rent's going up again. 0:01:07.880 --> 0:01:11.320 What about your mayonnaise consumption? It's funny to be sorry 0:01:11.360 --> 0:01:14.080 when you said mayonnaise. I have to admit the first 0:01:14.080 --> 0:01:15.480 thing that came to my head was like just like 0:01:15.560 --> 0:01:18.679 imagining you in your apartment with the gar storing buckets 0:01:18.800 --> 0:01:22.440 or gigantic tub of Costco mayonnaise iatiot with a spoon. 0:01:22.600 --> 0:01:26.080 I'm sorry, you're really consuming a lot of mayonnaise. If 0:01:26.080 --> 0:01:27.960 this is what comes to your mind when you think 0:01:28.000 --> 0:01:29.240 about the cost of living. 0:01:29.080 --> 0:01:31.520 Well, as part of my research for this, I can 0:01:31.560 --> 0:01:34.640 tell you you can buy buckets of extra heavy mayo 0:01:34.880 --> 0:01:35.720 off of Amazon. 0:01:35.959 --> 0:01:36.520 Sounds good. 0:01:36.920 --> 0:01:39.600 We're actually not doing a mayonnaise episode. We're talking about 0:01:39.600 --> 0:01:40.840 the other one we're talking about. 0:01:41.080 --> 0:01:43.800 I tried to throw in my rent stat Yeah, I know, 0:01:44.120 --> 0:01:45.959 to keep you on topic, but you wanted to talk 0:01:45.959 --> 0:01:46.479 about Mayo. 0:01:46.720 --> 0:01:48.880 We'll do a Mayo episode at some point. But rent 0:01:48.960 --> 0:01:52.760 is really interesting. Actually, in the government's measure there's so 0:01:52.800 --> 0:01:56.400 many moving parts with anything housing, but most recently actually 0:01:56.440 --> 0:01:59.600 the government's measure of rent price growth, which has been 0:01:59.600 --> 0:02:02.760 a key contributor to overall inflation, et cetera. Actually it's 0:02:02.800 --> 0:02:05.480 been moderating lately. We're sort of getting back to the 0:02:05.520 --> 0:02:08.960 point where we're like at pre COVID levels of rent 0:02:08.960 --> 0:02:10.040 price growth, right. 0:02:09.960 --> 0:02:12.079 So it's still going up, but just not as much 0:02:12.080 --> 0:02:13.000 as it was before. 0:02:13.320 --> 0:02:17.040 But the perversity, perhaps it's a perversity, is that obviously 0:02:17.120 --> 0:02:21.200 the FED jacked up interest rates quite aggressively to fight inflation. 0:02:21.760 --> 0:02:25.119 Inflation has come down, tis a little longer than people expected, 0:02:25.160 --> 0:02:27.079 but you know, it has come down. But one of 0:02:27.160 --> 0:02:29.240 the things that we do know that happens is that 0:02:29.320 --> 0:02:32.079 when the FED jacks of interest rates, that really has 0:02:32.120 --> 0:02:35.120 an effect on housing development, which of course requires a 0:02:35.160 --> 0:02:38.000 lot of capital and leverage, et cetera. And if you 0:02:38.040 --> 0:02:42.600 look at a chart of say multifamily housing starts, buildings 0:02:42.600 --> 0:02:45.640 five units or more, that's come way down since its peak, 0:02:45.720 --> 0:02:46.799 like in twenty twenty two. 0:02:47.000 --> 0:02:49.799 Yeah, so we had this huge wave of supply in 0:02:49.840 --> 0:02:52.079 sort of late twenty twenty one twenty twenty two. As 0:02:52.080 --> 0:02:55.440 you said, it's fallen quite a lot. The interesting thing 0:02:55.600 --> 0:02:59.320 that I see here is like yields on bonds are 0:02:59.360 --> 0:03:03.000 still going up. So we're at four point five five 0:03:03.120 --> 0:03:06.120 percent or so on the ten year and that is 0:03:06.240 --> 0:03:09.920 higher than when the Fed started cutting rates. So the 0:03:09.960 --> 0:03:13.840 cost of financing these projects is still going up and 0:03:14.040 --> 0:03:15.280 there's not that much activity. 0:03:15.440 --> 0:03:18.200 Well, we did an episode in November twenty twenty three, 0:03:18.280 --> 0:03:20.880 and our guests said something really interesting to me that 0:03:21.040 --> 0:03:24.120 I've repeated probably many times, which is that for a 0:03:24.120 --> 0:03:28.360 lot of multifamily developers, they might prefer a hard landing 0:03:28.880 --> 0:03:31.480 in the economy, because sure, that might mean demand for 0:03:31.520 --> 0:03:34.040 rent goes down or some of their tenants can't pay 0:03:34.080 --> 0:03:36.640 their rent, But if it means that you get a 0:03:36.720 --> 0:03:39.840 dramatic drop in interest rates because of howlever they are 0:03:39.960 --> 0:03:42.520 at the cost of money, that might actually work out 0:03:42.600 --> 0:03:45.560 better for them, which is sort of still blows my mind, 0:03:45.600 --> 0:03:48.000 but it is what it is. And so one of 0:03:48.040 --> 0:03:50.440 the other things that we're thinking about is like, well, 0:03:50.440 --> 0:03:53.680 what's going on with all these multifamily developers carrying a 0:03:54.040 --> 0:03:57.840 big debt and so forth, given the fact that rates 0:03:57.840 --> 0:03:58.600 have not come. 0:03:58.440 --> 0:03:59.720 Down, Yeah, let's talk about it. 0:03:59.840 --> 0:04:01.760 Well, we are going to be speaking with the same 0:04:01.960 --> 0:04:04.200 guests who commented that in twenty twenty three, we're going 0:04:04.240 --> 0:04:06.840 to be talking about all of these dynamics. Really the 0:04:06.840 --> 0:04:10.320 perfect guest. Thrilled to welcome back onto the show. Lee Everett, 0:04:10.360 --> 0:04:13.680 head of research and strategy at Cortland, which is a 0:04:13.760 --> 0:04:19.040 multi family owner operator roughly eighty thousand units nationwidely, Thank 0:04:19.080 --> 0:04:21.240 you so much for coming back on the podcast. 0:04:21.600 --> 0:04:22.560 Thank you for having me. 0:04:22.800 --> 0:04:25.120 I've actually just wanted to have you back on to 0:04:25.240 --> 0:04:27.479 talk about this specific that there's a lot we're going 0:04:27.560 --> 0:04:32.200 to talk about but as Tracy mentioned, rates haven't come down. 0:04:32.440 --> 0:04:34.360 I know people were like, all the fens guests are right, 0:04:34.680 --> 0:04:38.039 this is relief, is insight. How stressed out are a 0:04:38.080 --> 0:04:41.360 lot of these entities by the fact that after all 0:04:41.400 --> 0:04:43.520 this time we haven't seen any rate relief. 0:04:44.160 --> 0:04:46.920 It's interesting. I think stress is hitting sort of all 0:04:47.000 --> 0:04:50.080 sides of the market. You have your bigger, more well 0:04:50.200 --> 0:04:53.279 established shops that have been managing through this, able to 0:04:53.320 --> 0:04:56.640 handle the higher rate environment, but have obviously taken a 0:04:56.760 --> 0:05:00.400 very real valuation hit on their existing portfolios, like to 0:05:00.480 --> 0:05:05.240 thirty percent, depending upon the portfolio composition. At the same time, 0:05:05.279 --> 0:05:08.200 you've had record demand hitting the sector because cost to 0:05:08.279 --> 0:05:12.440 buy housing is exceptionally unattainable today. And then on the 0:05:12.480 --> 0:05:15.560 other side, you're having a very material impact on the 0:05:15.600 --> 0:05:19.040 supply side. And I think that's what's really unique. If 0:05:19.040 --> 0:05:21.919 you think back to September, the tenure was around a 0:05:22.160 --> 0:05:24.640 three six. I think the day chair pal cut us 0:05:24.680 --> 0:05:28.200 by fifty basis points. Well, we're at almost a four 0:05:28.200 --> 0:05:31.120 to six today, and I remember that night you heard 0:05:31.160 --> 0:05:34.480 reports about developers out at like local dinners. Yeah, they 0:05:34.480 --> 0:05:36.920 were calling it fed day and getting ready to put 0:05:36.960 --> 0:05:41.679 shovels in the chip exactly, and what you've seen instead 0:05:41.839 --> 0:05:44.800 is increased stress on both the short end and the 0:05:44.839 --> 0:05:47.800 long end of the curve. That's given you trouble on 0:05:47.839 --> 0:05:50.320 the short end to start new housing and trouble on 0:05:50.360 --> 0:05:53.880 the long end to afford longer term for ownership housing. 0:05:54.360 --> 0:05:57.599 You mentioned that some of the bigger players are better 0:05:57.640 --> 0:06:00.320 able to deal with higher rates. Can you talk about 0:06:00.320 --> 0:06:03.480 how people try to offset some of these higher rates 0:06:03.520 --> 0:06:05.880 and is it the case that there is still an 0:06:05.920 --> 0:06:09.200 ability to refinance and turn out your debt or is 0:06:09.200 --> 0:06:10.520 that starting to go away now? 0:06:11.440 --> 0:06:14.040 I think extend and pretend what you're referring to and 0:06:14.080 --> 0:06:19.880 the always popular looming maturity wall discussion is what you're 0:06:19.960 --> 0:06:25.160 hitting on. And what we're seeing there is the established 0:06:25.320 --> 0:06:29.560 owners that have strong relationships throughout either Fanny and Freddy, 0:06:29.800 --> 0:06:34.960 balance sheet lenders, etc. They're able to continue to negotiate 0:06:35.000 --> 0:06:38.000 and work out loans and delays. The people that got 0:06:38.000 --> 0:06:41.320 out really far over their skis the syndicators, the new 0:06:41.480 --> 0:06:43.120 entrance to the place, and a lot of what we 0:06:43.160 --> 0:06:47.000 talked about last time. Those players are sort of hitting 0:06:47.040 --> 0:06:49.680 the end of their window here. And what we've seen 0:06:49.720 --> 0:06:52.960 in the financing space actually, as we delve into this 0:06:53.000 --> 0:06:56.200 a bit more is there's so much liquidity on the 0:06:56.240 --> 0:06:58.760 debt side that wants to come back to work. They 0:06:58.800 --> 0:07:01.040 want to be rid of the these sort of balance 0:07:01.120 --> 0:07:04.520 sheet hindrances that are these unproven players in the market, 0:07:04.800 --> 0:07:06.320 and they want to get back to work with the 0:07:06.320 --> 0:07:10.320 sponsors they appreciate. And we've generally seen spreads come in 0:07:10.320 --> 0:07:13.520 about one hundred basis points from their peak, so that 0:07:13.600 --> 0:07:17.120 has helped limit some of sort of the financing pressures, 0:07:17.120 --> 0:07:20.720 but it's certainly a far cry from a one percent 0:07:20.800 --> 0:07:24.000 tenure to a four or five ten uere. So it 0:07:24.080 --> 0:07:26.040 depends a lot on who you are in the space 0:07:26.080 --> 0:07:27.720 and how this has impacted you today. 0:07:28.160 --> 0:07:32.720 Right because twenty twenty one, probably part of twenty twenty two, 0:07:33.280 --> 0:07:37.720 we were like in that era where Instagram influencers we're 0:07:37.760 --> 0:07:40.880 posting about to get in. You know, rent prices always. 0:07:40.680 --> 0:07:42.760 Go to talk multifamily landlord. 0:07:42.560 --> 0:07:46.760 Yeah, TikTok, multi family landlords. Rent always goes up. We 0:07:46.840 --> 0:07:49.360 have a new project is probably called the Reserve. It's 0:07:49.360 --> 0:07:52.080 in the suburbs of Houston and has a pool table 0:07:52.400 --> 0:07:54.880 and there's no kids allowed to pool table. And you're 0:07:54.880 --> 0:07:56.880 guarantee me and a bunch of them got wiped out. 0:07:56.960 --> 0:07:59.600 What happened to them since we talked? And then how 0:07:59.720 --> 0:08:03.040 talk about it from the more established operators, and how 0:08:03.080 --> 0:08:05.480 much of a relief has it been that some of 0:08:05.520 --> 0:08:08.120 this I don't know, new money, whatever you want, TikTok 0:08:08.160 --> 0:08:09.680 money has maybe gotten washed out. 0:08:09.720 --> 0:08:11.040 Tell us how that story ended. 0:08:11.200 --> 0:08:13.080 I would call it a thinning of the herd that 0:08:13.120 --> 0:08:16.440 we're still going through. I don't want to necessarily call 0:08:16.520 --> 0:08:18.440 up people by name, but sure you can see in 0:08:18.480 --> 0:08:22.560 the news there is a certain prominent syndicator that basically 0:08:22.600 --> 0:08:25.880 doubled their positions and became a top thirty owner in 0:08:26.360 --> 0:08:29.560 twenty twenty one or so, and banks are personally suing 0:08:30.040 --> 0:08:33.640 the founders of that company on carry guarantees. Today, you've 0:08:33.679 --> 0:08:37.800 seen potential investigations and some of the debt funds being 0:08:37.920 --> 0:08:41.400 talked about in the space, and that relates specifically to 0:08:41.559 --> 0:08:44.719 valuations on some of these assets that weren't maintained or 0:08:44.760 --> 0:08:48.439 taken care of by certain owner operators. So you're seeing 0:08:48.480 --> 0:08:51.720 a high level of delinquency. A lot of these properties 0:08:51.800 --> 0:08:55.080 that were these new money and TikTok landlords have a 0:08:55.120 --> 0:08:57.400 ton of leans against them because they weren't paying their 0:08:57.440 --> 0:09:02.080 contractors they weren't executing their value add and ultimately they're 0:09:02.280 --> 0:09:04.600 going to be in a world of pain. Would be 0:09:04.920 --> 0:09:08.040 my sort of outcome at the end of all of this, because, 0:09:08.480 --> 0:09:11.400 as I said before, the banks are just getting tired 0:09:11.440 --> 0:09:13.680 of carrying this on their balance sheets, same with the 0:09:13.720 --> 0:09:15.960 debt funds, Like you can't make money with this much 0:09:16.000 --> 0:09:17.600 bad money hogging your book. 0:09:18.440 --> 0:09:21.120 I have a really basic question, which I feel kind 0:09:21.120 --> 0:09:23.760 of bad asking because I used to cover commercial real 0:09:23.880 --> 0:09:26.920 estate and I should know this since multifamily is the 0:09:27.120 --> 0:09:30.240 forgotten commercial real estate as I sometimes call it. But 0:09:30.840 --> 0:09:33.720 what's the best thing to look at if you want 0:09:33.760 --> 0:09:38.240 to just get a gauge of multifamily markets health, So 0:09:38.520 --> 0:09:40.400 you know, I can look at like permits or something 0:09:40.440 --> 0:09:43.080 like that, But that number is really volatile. I'm not 0:09:43.080 --> 0:09:44.800 sure how much it's actually telling me. 0:09:45.760 --> 0:09:49.640 Yeah, I think there's sort of two high level factors. 0:09:49.720 --> 0:09:51.880 One is going to be your rent growth, because that's 0:09:51.920 --> 0:09:54.880 going to feed your NI growth. The other factor is 0:09:54.880 --> 0:09:57.480 going to be your cap rate, which we talked about 0:09:57.520 --> 0:09:59.440 this a little bit last time. Your cap rate is 0:09:59.559 --> 0:10:03.200 essentially your yield your income over your price. As money 0:10:03.280 --> 0:10:05.760 is entering the space, prices go up, so you get 0:10:05.760 --> 0:10:08.040 healthier cap spaces, and that's on the sort of for 0:10:08.240 --> 0:10:11.480 sale side. And as NOI goes up, you also can 0:10:11.520 --> 0:10:14.280 get tightening of cap rates because you get a higher 0:10:14.320 --> 0:10:16.600 value in the NI and that also would be sort 0:10:16.600 --> 0:10:19.440 of your high level indicator. And what we've seen in 0:10:19.440 --> 0:10:22.360 cap rates is they've just started to flatten in the 0:10:22.400 --> 0:10:25.880 last few months, but they're up roughly one hundred bases 0:10:25.920 --> 0:10:28.520 points across the board and that's where sort of that 0:10:28.640 --> 0:10:32.120 twenty to thirty percent hitten valuations I mentioned has come 0:10:32.160 --> 0:10:32.720 into play. 0:10:33.280 --> 0:10:37.000 All right, let's talk about from the perspective of a renter. 0:10:37.720 --> 0:10:41.720 So I have some familiarity with the Austin, Texas housing market. 0:10:42.200 --> 0:10:45.360 Supply and demand apparently has worked very beautifully. There are 0:10:45.360 --> 0:10:47.880 a lot of people wanted to move there, and then 0:10:47.920 --> 0:10:50.720 there's just towers up everywhere, including deep into the suburbs. 0:10:50.720 --> 0:10:53.040 And then actually rent price I believe it's actually negative 0:10:53.720 --> 0:10:57.120 for many years in Austin, which you know, seems like 0:10:57.200 --> 0:11:01.160 good news overall. That's a rare story though, but we've 0:11:01.200 --> 0:11:03.640 had this big fall and anyone can just go on 0:11:03.760 --> 0:11:06.880 Fred and search do privately owned housing units started units 0:11:06.880 --> 0:11:09.200 and buildings with five units or more and see that 0:11:09.240 --> 0:11:12.160 we've had this big drop over the last two years 0:11:12.240 --> 0:11:15.760 roughly since the peak of all these developments. What's going 0:11:15.840 --> 0:11:17.840 to happen play this out a little. 0:11:17.640 --> 0:11:19.320 Bit over the next two years. 0:11:19.760 --> 0:11:22.000 Were supply needs demand here, and you know we already 0:11:22.000 --> 0:11:25.280 have these affordability rent is already basically expensive everywhere, even 0:11:25.320 --> 0:11:26.559 in Austin with the declines. 0:11:27.040 --> 0:11:28.079 Is it going to get worse? 0:11:29.160 --> 0:11:29.400 Yes? 0:11:29.960 --> 0:11:33.000 I think frankly, we're about to transition from what has 0:11:33.040 --> 0:11:37.160 been a very renter friendly market to again a landlord 0:11:37.200 --> 0:11:39.320 friendly market over the course of the next two to 0:11:39.360 --> 0:11:42.480 three years. And that's going to be particularly driven by 0:11:42.480 --> 0:11:44.439 what we're seeing on the supply side. We're going to 0:11:44.520 --> 0:11:47.160 have over a million units come to market over a 0:11:47.200 --> 0:11:50.080 two year period here in twenty four and twenty five. Okay, 0:11:50.360 --> 0:11:52.760 but peak supply is hitting in the next six months. 0:11:53.440 --> 0:11:57.400 And if you look at relative time from a peak 0:11:57.440 --> 0:11:59.640 supply and then b to getting to a level of 0:11:59.679 --> 0:12:04.200 low supply than you saw last cycle, every major market 0:12:04.200 --> 0:12:06.320 in the country will be there by the end of 0:12:06.320 --> 0:12:10.679 twenty twenty six where delivering less housing units than they 0:12:10.720 --> 0:12:14.360 did on average from seventeen to nineteen in apartment buildings. 0:12:14.600 --> 0:12:19.240 So you're going to go below prior cycle supply very quickly. 0:12:19.760 --> 0:12:22.000 At the same time, we do have it exceptionally strong 0:12:22.080 --> 0:12:24.839 labor markets here, and the demand story has been outstanding. 0:12:25.240 --> 0:12:27.440 So twenty twenty four is going to end the year, 0:12:27.520 --> 0:12:30.640 depending upon the data provider you use, as the first 0:12:30.760 --> 0:12:34.040 or third highest year for rental demand. Ever, twenty twenty 0:12:34.080 --> 0:12:37.680 one was the prior record, So we're seeing people form 0:12:37.760 --> 0:12:41.840 rental households at unprecedented rate in the US, and as 0:12:41.880 --> 0:12:44.920 that supply comes down, you're going to see that demand 0:12:45.440 --> 0:12:49.240 struggle to frankly, find high quality, well located assets to 0:12:49.320 --> 0:12:52.600 move in, and you're likely to see that relationship flip 0:12:52.640 --> 0:12:53.240 at that point. 0:13:08.880 --> 0:13:12.760 So the other thing that affects multifamily housing construction other 0:13:12.800 --> 0:13:16.520 than interest rates has to be just general confidence, I guess, 0:13:16.559 --> 0:13:19.760 in the direction of the economy, the direction of the world. 0:13:20.160 --> 0:13:23.200 And certainly there's a lot going on right now. We're 0:13:23.200 --> 0:13:27.880 recording this on January twenty eighth, and there's news that 0:13:27.920 --> 0:13:32.640 the Trump administration is freezing a whole bunch of federal spending. 0:13:32.679 --> 0:13:35.040 I think it's something like twenty percent of federal spending 0:13:35.800 --> 0:13:40.920 that includes presumably stuff like Section eight and other affordable 0:13:41.080 --> 0:13:45.520 housing measures. Would that be expected to hit multifamily as well. 0:13:46.360 --> 0:13:49.480 Yeah, and I think it's probably easiest to sort of 0:13:49.480 --> 0:13:52.800 start at the top. Right When you're building multifamily, you're 0:13:52.800 --> 0:13:57.080 generally trying to build to an acceptable return on cost. Frankly, 0:13:57.800 --> 0:14:00.440 what we're doing is putting an investor's money together in 0:14:00.520 --> 0:14:04.120 generating returns for them. Multifamily isn't built for free, and 0:14:04.200 --> 0:14:06.800 it can't be in this sort of economic world. And 0:14:07.360 --> 0:14:09.880 a general rule of thumb is a six plus percent 0:14:09.960 --> 0:14:12.199 return on cost. So cost to build, you want to 0:14:12.240 --> 0:14:14.880 yield over six percent of that to get a building 0:14:14.880 --> 0:14:18.080 to pencil that tracks up closer to seven depending upon 0:14:18.120 --> 0:14:21.920 the institution. Because you need to build to that yield 0:14:21.960 --> 0:14:24.840 on cost, you have to have rents that are high 0:14:25.000 --> 0:14:29.400 enough to generate enough rental revenue to drive that return. 0:14:29.640 --> 0:14:31.520 So in order to build today, you have to build 0:14:31.520 --> 0:14:35.200 it exceptionally high rent levels. Because of the cost to build, 0:14:35.200 --> 0:14:38.040 because of the cost of interest rates. The only way 0:14:38.080 --> 0:14:40.560 to drop that is to drop the cost, and that 0:14:40.600 --> 0:14:44.720 cost drop typically comes for affordable housing from the federal government, 0:14:44.800 --> 0:14:47.520 be it HUD grants that are then deployed through the 0:14:47.560 --> 0:14:51.440 local housing agency, be it lie tech, be it any 0:14:51.480 --> 0:14:54.400 sort of an ensemblage of ways to cut cost. 0:14:54.760 --> 0:14:55.760 That's how you can get. 0:14:55.600 --> 0:14:58.360 To affordable rents on the supply side, and then on 0:14:58.400 --> 0:15:01.640 the demand side you can and cut rents by literally 0:15:01.680 --> 0:15:04.480 giving people a rent check, which is what Section eight is, 0:15:04.640 --> 0:15:08.560 and that again comes from the federal government via grant 0:15:08.600 --> 0:15:12.560 given to the local housing agencies to deploy. And if 0:15:12.600 --> 0:15:17.240 that money dries up, you have immense problems in terms 0:15:17.280 --> 0:15:20.120 of a feeling the demand for these people because you're 0:15:20.160 --> 0:15:23.160 cutting rent on the Section eight side and b encouraging 0:15:23.240 --> 0:15:26.560 future construction of affordable apartment buildings. 0:15:27.000 --> 0:15:30.280 Just to be clear though, because there are projects that 0:15:30.400 --> 0:15:33.880 have their market rate rent and then they have some 0:15:34.280 --> 0:15:38.440 allocation to what people call affordable units right in different 0:15:38.480 --> 0:15:40.760 cities or whatever, I have different rules about how much 0:15:40.760 --> 0:15:44.520 you need to allocate. Is that Section eight housing two 0:15:44.640 --> 0:15:47.880 or is Section eight housing like how much does it commingle? 0:15:48.040 --> 0:15:52.640 Does this also affect development of buildings that people don't 0:15:52.680 --> 0:15:55.320 think of as quote affordable housing projects. 0:15:55.960 --> 0:15:58.520 So in those sort of mixed buildings, you're going to 0:15:58.560 --> 0:16:00.440 see more of a price lock, going to see a 0:16:00.440 --> 0:16:04.080 supply side affordable building, be it tax credit, be it 0:16:04.160 --> 0:16:06.840 a locked price on x percentage of AMI, which is 0:16:06.960 --> 0:16:10.480 ultimately what you're going to say, say area median income, 0:16:10.520 --> 0:16:15.080 which is how Fanny Freddy all of them essentially set 0:16:15.080 --> 0:16:20.040 what's affordable through HUT, so that won't be destroyed or eliminated. Frankly, 0:16:20.160 --> 0:16:24.280 usually when people are building, they understand in Massachusetts you 0:16:24.320 --> 0:16:26.520 need x percentage of the building to be affordable, so 0:16:26.560 --> 0:16:29.600 they need the building to pencil around that. Honestly, typically 0:16:29.640 --> 0:16:31.400 it just means higher rents in the rest of the 0:16:31.440 --> 0:16:34.680 building to fund those units. So I don't expect that 0:16:34.800 --> 0:16:38.560 to dry up. What I expect our larger scale community 0:16:38.600 --> 0:16:43.280 investment projects to revive an area within a town like 0:16:43.320 --> 0:16:46.080 a Pilson. We looked at buildings with one of the 0:16:46.120 --> 0:16:48.680 states prior at a prior job, and that was looking 0:16:48.720 --> 0:16:51.760 at doing a massive housing development that would be entirely 0:16:51.800 --> 0:16:54.440 affordable for the community there. And this is in Chicago, 0:16:55.040 --> 0:16:58.400 So stuff like that's going to disappear. Purpose built is 0:16:58.440 --> 0:17:02.560 going to disappear. Was planning to build an entirely voucher 0:17:02.920 --> 0:17:06.240 building through Section eight, that's going to disappear, So you're 0:17:06.240 --> 0:17:08.280 going to have real pain in that stuff, at least 0:17:08.280 --> 0:17:10.880 in the short term. I mean, in theory, this could 0:17:10.880 --> 0:17:13.040 be a quick turnaround and it's just a big wave 0:17:13.119 --> 0:17:17.040 of disruption that goes away in four weeks, but there 0:17:17.160 --> 0:17:20.240 is a world where it severely impacts housing construction at 0:17:20.280 --> 0:17:21.000 the lower level. 0:17:21.560 --> 0:17:23.960 What are people in the market saying about it right now? 0:17:24.080 --> 0:17:26.840 Or is everyone just sort of in weight and see mode. 0:17:27.320 --> 0:17:29.639 I think, like most things, it's weight and see mode. 0:17:29.800 --> 0:17:31.919 I think that's been the general markets approach to this 0:17:32.160 --> 0:17:36.480 entire administration transition, just because you need so much clarity 0:17:36.560 --> 0:17:40.400 to start figuring out real world impacts here, and that 0:17:40.840 --> 0:17:43.040 very much trickles into the cost to build stuff, with 0:17:43.119 --> 0:17:46.480 the tariffs, with the deportation impacts on labor and things 0:17:46.480 --> 0:17:47.320 along those lines. 0:17:47.440 --> 0:17:50.760 Let's talk about deportation impacts on labor. What are the 0:17:51.000 --> 0:17:57.160 estimates for what percentage of the multifamily workforce, whether it's 0:17:57.200 --> 0:18:01.040 construction and or maintenance, whatever else, is undocumented labor. 0:18:01.359 --> 0:18:04.600 It's estimated twenty percent of construction workers in this country 0:18:04.640 --> 0:18:09.119 are undocumented labor. I'd venture to guess it's similar for 0:18:09.200 --> 0:18:11.879 the whole multifamily industry when you look at staffing and 0:18:11.920 --> 0:18:14.840 things along those lines. And I think when you look 0:18:14.880 --> 0:18:18.480 at a combination of deportation of construction workers as well 0:18:18.520 --> 0:18:21.240 as the sheer amount of labor it's going to require 0:18:21.320 --> 0:18:25.040 to rebuild huge swaths of California. I think you could 0:18:25.040 --> 0:18:28.840 be looking at a massive deficit in labor within the 0:18:28.880 --> 0:18:32.040 construction space. And when you think about that, that's going 0:18:32.119 --> 0:18:34.480 to be your strongest lever. That's going to hit your 0:18:34.480 --> 0:18:36.680 cost to build, and that's what's going to drive up 0:18:36.680 --> 0:18:40.200 those rents that are necessary. Is all of this immense 0:18:40.320 --> 0:18:42.640 pressure you're going to see in the labor costs. 0:18:42.400 --> 0:18:46.359 Tracey, I hadn't even thought about the huge demand for 0:18:46.440 --> 0:18:48.480 construction labor that's going to come out of California. 0:18:48.480 --> 0:18:50.200 But yeah, because of the fire. 0:18:50.320 --> 0:18:54.240 So we have the fires, we have deportations, we have 0:18:54.440 --> 0:18:57.679 the end of a lot of affordable housing projects at 0:18:57.760 --> 0:19:02.199 least temporarily, and the intro straight shock all coming together 0:19:02.560 --> 0:19:04.800 so far, this is what we've covered so far. At 0:19:04.800 --> 0:19:07.479 the same time to sort of like constrain the supply 0:19:07.720 --> 0:19:09.119 of new housing in the coming years. 0:19:09.160 --> 0:19:11.760 Well, the irony is like everyone's building at the same 0:19:11.840 --> 0:19:15.520 time after the wildfire's right, so like everything is just 0:19:15.560 --> 0:19:18.280 going to go up. Actually, that reminds me we should 0:19:18.280 --> 0:19:20.520 talk about insurance rates because I think this is another 0:19:20.600 --> 0:19:24.680 source of pressure on multifamily, which is that insurance rates 0:19:24.720 --> 0:19:27.160 for a lot of these operators have also been going 0:19:27.240 --> 0:19:29.480 up quite a lot, and there aren't that many levers 0:19:29.520 --> 0:19:32.600 they can pull in order to reduce that particular cost. 0:19:33.760 --> 0:19:37.800 Yeah, I think this is another situation of kind of 0:19:37.800 --> 0:19:41.240 the haves and have nots. At Cortland, we ensure our 0:19:41.359 --> 0:19:43.919 entire portfolio, and when you're able to sort of spread 0:19:44.000 --> 0:19:47.960 risk over eighty thousand apartment units, you can get far 0:19:48.359 --> 0:19:53.720 more beneficial rates if you're a small owner in La. 0:19:54.200 --> 0:19:57.760 If you're a small owner in California, Florida and Texas, 0:19:58.320 --> 0:20:01.640 I don't know what you do today. Rates had hit 0:20:01.760 --> 0:20:04.119 an estimate of three hundred per unit at one point 0:20:04.160 --> 0:20:07.280 in Florida to ensure some buildings. Well, there's been some 0:20:07.400 --> 0:20:10.560 normalization since then and costs have generally stopped with the 0:20:10.600 --> 0:20:15.240 massive spikes again pre wildfires, but it's just a huge, 0:20:15.400 --> 0:20:19.280 huge cost that hits everyone, and it's tough at this 0:20:19.400 --> 0:20:23.280 point in time to enact in certain markets, and that 0:20:23.359 --> 0:20:26.239 includes also Texas. Tornado Alley's had as much of an 0:20:26.280 --> 0:20:28.720 increase as you've seen in Florida in California to date. 0:20:30.280 --> 0:20:32.280 So where's the rubber beat the road? 0:20:32.400 --> 0:20:34.520 We're going to have you back on sometime in twenty 0:20:34.560 --> 0:20:37.720 twenty six, maybe somewhere twenty twenty six, if the pattern 0:20:37.760 --> 0:20:38.879 goes what are we talking about? 0:20:39.840 --> 0:20:41.920 I think what you're looking at in twenty twenty six 0:20:42.040 --> 0:20:45.040 is a very investor friendly rental market again, and we 0:20:45.119 --> 0:20:48.240 sort of have returned to where we were last cycle. 0:20:48.800 --> 0:20:51.040 What I think is really interesting in what I see 0:20:51.080 --> 0:20:54.760 in the housing market today is almost a displacement of 0:20:54.760 --> 0:20:57.480 people living where they want rather than people not being 0:20:57.520 --> 0:21:00.720 able to afford housing. And it's Art's at the top. 0:21:00.800 --> 0:21:03.320 The baby boomers have the vast majority of three plus 0:21:03.320 --> 0:21:05.920 bedroom homes in this country, and they aren't giving those 0:21:06.000 --> 0:21:10.400 up despite plummeting bedroom utilization rates, so the millennials can't 0:21:10.440 --> 0:21:14.120