Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lags podcast.
Speaker 3: I'm Joe Wisenthal.
Speaker 4: And I'm Tracy Alloway.
Speaker 2: Tracy, you know, one of the big themes obviously in
Speaker 2: American life and the most recent election, was inflation. And
Speaker 2: there are a lot of things that people think of
Speaker 2: when they think of inflation. Maybe they think of egg prices,
Speaker 2: it's in the news these days. Maybe they think of
Speaker 2: gasoline prices. But a big story is like the cost.
Speaker 3: Of living, is the cost of housing?
Speaker 4: Yes, Actually, it's kind of funny. Everyone has their own
Speaker 4: personal benchmarks for inflation, and mine is probably the cost
Speaker 4: of mayonnaise, because I've been tracking that for a long time.
Speaker 4: Not because I eat that much of it, but I
Speaker 4: just find it interesting because it contains eggs and oil
Speaker 4: and packaging and labor and all that stuff. And rent.
Speaker 4: And guess what, Joe, my rent's going up again.
Speaker 2: What about your mayonnaise consumption? It's funny to be sorry
Speaker 2: when you said mayonnaise. I have to admit the first
Speaker 2: thing that came to my head was like just like
Speaker 2: imagining you in your apartment with the gar storing buckets
Speaker 2: or gigantic tub of Costco mayonnaise iatiot with a spoon.
Speaker 2: I'm sorry, you're really consuming a lot of mayonnaise. If
Speaker 2: this is what comes to your mind when you think
Speaker 2: about the cost of living.
Speaker 4: Well, as part of my research for this, I can
Speaker 4: tell you you can buy buckets of extra heavy mayo
Speaker 4: off of Amazon.
Speaker 3: Sounds good.
Speaker 2: We're actually not doing a mayonnaise episode. We're talking about
Speaker 2: the other one we're talking about.
Speaker 4: I tried to throw in my rent stat Yeah, I know,
Speaker 4: to keep you on topic, but you wanted to talk
Speaker 4: about Mayo.
Speaker 2: We'll do a Mayo episode at some point. But rent
Speaker 2: is really interesting. Actually, in the government's measure there's so
Speaker 2: many moving parts with anything housing, but most recently actually
Speaker 2: the government's measure of rent price growth, which has been
Speaker 2: a key contributor to overall inflation, et cetera. Actually it's
Speaker 2: been moderating lately. We're sort of getting back to the
Speaker 2: point where we're like at pre COVID levels of rent
Speaker 2: price growth, right.
Speaker 4: So it's still going up, but just not as much
Speaker 4: as it was before.
Speaker 2: But the perversity, perhaps it's a perversity, is that obviously
Speaker 2: the FED jacked up interest rates quite aggressively to fight inflation.
Speaker 2: Inflation has come down, tis a little longer than people expected,
Speaker 2: but you know, it has come down. But one of
Speaker 2: the things that we do know that happens is that
Speaker 2: when the FED jacks of interest rates, that really has
Speaker 2: an effect on housing development, which of course requires a
Speaker 2: lot of capital and leverage, et cetera. And if you
Speaker 2: look at a chart of say multifamily housing starts, buildings
Speaker 2: five units or more, that's come way down since its peak,
Speaker 2: like in twenty twenty two.
Speaker 4: Yeah, so we had this huge wave of supply in
Speaker 4: sort of late twenty twenty one twenty twenty two. As
Speaker 4: you said, it's fallen quite a lot. The interesting thing
Speaker 4: that I see here is like yields on bonds are
Speaker 4: still going up. So we're at four point five five
Speaker 4: percent or so on the ten year and that is
Speaker 4: higher than when the Fed started cutting rates. So the
Speaker 4: cost of financing these projects is still going up and
Speaker 4: there's not that much activity.
Speaker 2: Well, we did an episode in November twenty twenty three,
Speaker 2: and our guests said something really interesting to me that
Speaker 2: I've repeated probably many times, which is that for a
Speaker 2: lot of multifamily developers, they might prefer a hard landing
Speaker 2: in the economy, because sure, that might mean demand for
Speaker 2: rent goes down or some of their tenants can't pay
Speaker 2: their rent, But if it means that you get a
Speaker 2: dramatic drop in interest rates because of howlever they are
Speaker 2: at the cost of money, that might actually work out
Speaker 2: better for them, which is sort of still blows my mind,
Speaker 2: but it is what it is. And so one of
Speaker 2: the other things that we're thinking about is like, well,
Speaker 2: what's going on with all these multifamily developers carrying a
Speaker 2: big debt and so forth, given the fact that rates
Speaker 2: have not come.
Speaker 4: Down, Yeah, let's talk about it.
Speaker 2: Well, we are going to be speaking with the same
Speaker 2: guests who commented that in twenty twenty three, we're going
Speaker 2: to be talking about all of these dynamics. Really the
Speaker 2: perfect guest. Thrilled to welcome back onto the show. Lee Everett,
Speaker 2: head of research and strategy at Cortland, which is a
Speaker 2: multi family owner operator roughly eighty thousand units nationwidely, Thank
Speaker 2: you so much for coming back on the podcast.
Speaker 5: Thank you for having me.
Speaker 2: I've actually just wanted to have you back on to
Speaker 2: talk about this specific that there's a lot we're going
Speaker 2: to talk about but as Tracy mentioned, rates haven't come down.
Speaker 2: I know people were like, all the fens guests are right,
Speaker 2: this is relief, is insight. How stressed out are a
Speaker 2: lot of these entities by the fact that after all
Speaker 2: this time we haven't seen any rate relief.
Speaker 5: It's interesting. I think stress is hitting sort of all
Speaker 5: sides of the market. You have your bigger, more well
Speaker 5: established shops that have been managing through this, able to
Speaker 5: handle the higher rate environment, but have obviously taken a
Speaker 5: very real valuation hit on their existing portfolios, like to
Speaker 5: thirty percent, depending upon the portfolio composition. At the same time,
Speaker 5: you've had record demand hitting the sector because cost to
Speaker 5: buy housing is exceptionally unattainable today. And then on the
Speaker 5: other side, you're having a very material impact on the
Speaker 5: supply side. And I think that's what's really unique. If
Speaker 5: you think back to September, the tenure was around a
Speaker 5: three six. I think the day chair pal cut us
Speaker 5: by fifty basis points. Well, we're at almost a four
Speaker 5: to six today, and I remember that night you heard
Speaker 5: reports about developers out at like local dinners. Yeah, they
Speaker 5: were calling it fed day and getting ready to put
Speaker 5: shovels in the chip exactly, and what you've seen instead
Speaker 5: is increased stress on both the short end and the
Speaker 5: long end of the curve. That's given you trouble on
Speaker 5: the short end to start new housing and trouble on
Speaker 5: the long end to afford longer term for ownership housing.
Speaker 4: You mentioned that some of the bigger players are better
Speaker 4: able to deal with higher rates. Can you talk about
Speaker 4: how people try to offset some of these higher rates
Speaker 4: and is it the case that there is still an
Speaker 4: ability to refinance and turn out your debt or is
Speaker 4: that starting to go away now?
Speaker 5: I think extend and pretend what you're referring to and
Speaker 5: the always popular looming maturity wall discussion is what you're
Speaker 5: hitting on. And what we're seeing there is the established
Speaker 5: owners that have strong relationships throughout either Fanny and Freddy,
Speaker 5: balance sheet lenders, etc. They're able to continue to negotiate
Speaker 5: and work out loans and delays. The people that got
Speaker 5: out really far over their skis the syndicators, the new
Speaker 5: entrance to the place, and a lot of what we
Speaker 5: talked about last time. Those players are sort of hitting
Speaker 5: the end of their window here. And what we've seen
Speaker 5: in the financing space actually, as we delve into this
Speaker 5: a bit more is there's so much liquidity on the
Speaker 5: debt side that wants to come back to work. They
Speaker 5: want to be rid of the these sort of balance
Speaker 5: sheet hindrances that are these unproven players in the market,
Speaker 5: and they want to get back to work with the
Speaker 5: sponsors they appreciate. And we've generally seen spreads come in
Speaker 5: about one hundred basis points from their peak, so that
Speaker 5: has helped limit some of sort of the financing pressures,
Speaker 5: but it's certainly a far cry from a one percent
Speaker 5: tenure to a four or five ten uere. So it
Speaker 5: depends a lot on who you are in the space
Speaker 5: and how this has impacted you today.
Speaker 2: Right because twenty twenty one, probably part of twenty twenty two,
Speaker 2: we were like in that era where Instagram influencers we're
Speaker 2: posting about to get in. You know, rent prices always.
Speaker 4: Go to talk multifamily landlord.
Speaker 2: Yeah, TikTok, multi family landlords. Rent always goes up. We
Speaker 2: have a new project is probably called the Reserve. It's
Speaker 2: in the suburbs of Houston and has a pool table
Speaker 2: and there's no kids allowed to pool table. And you're
Speaker 2: guarantee me and a bunch of them got wiped out.
Speaker 2: What happened to them since we talked? And then how
Speaker 2: talk about it from the more established operators, and how
Speaker 2: much of a relief has it been that some of
Speaker 2: this I don't know, new money, whatever you want, TikTok
Speaker 2: money has maybe gotten washed out.
Speaker 3: Tell us how that story ended.
Speaker 5: I would call it a thinning of the herd that
Speaker 5: we're still going through. I don't want to necessarily call
Speaker 5: up people by name, but sure you can see in
Speaker 5: the news there is a certain prominent syndicator that basically
Speaker 5: doubled their positions and became a top thirty owner in
Speaker 5: twenty twenty one or so, and banks are personally suing
Speaker 5: the founders of that company on carry guarantees. Today, you've
Speaker 5: seen potential investigations and some of the debt funds being
Speaker 5: talked about in the space, and that relates specifically to
Speaker 5: valuations on some of these assets that weren't maintained or
Speaker 5: taken care of by certain owner operators. So you're seeing
Speaker 5: a high level of delinquency. A lot of these properties
Speaker 5: that were these new money and TikTok landlords have a
Speaker 5: ton of leans against them because they weren't paying their
Speaker 5: contractors they weren't executing their value add and ultimately they're
Speaker 5: going to be in a world of pain. Would be
Speaker 5: my sort of outcome at the end of all of this, because,
Speaker 5: as I said before, the banks are just getting tired
Speaker 5: of carrying this on their balance sheets, same with the
Speaker 5: debt funds, Like you can't make money with this much
Speaker 5: bad money hogging your book.
Speaker 4: I have a really basic question, which I feel kind
Speaker 4: of bad asking because I used to cover commercial real
Speaker 4: estate and I should know this since multifamily is the
Speaker 4: forgotten commercial real estate as I sometimes call it. But
Speaker 4: what's the best thing to look at if you want
Speaker 4: to just get a gauge of multifamily markets health, So
Speaker 4: you know, I can look at like permits or something
Speaker 4: like that, But that number is really volatile. I'm not
Speaker 4: sure how much it's actually telling me.
Speaker 5: Yeah, I think there's sort of two high level factors.
Speaker 5: One is going to be your rent growth, because that's
Speaker 5: going to feed your NI growth. The other factor is
Speaker 5: going to be your cap rate, which we talked about
Speaker 5: this a little bit last time. Your cap rate is
Speaker 5: essentially your yield your income over your price. As money
Speaker 5: is entering the space, prices go up, so you get
Speaker 5: healthier cap spaces, and that's on the sort of for
Speaker 5: sale side. And as NOI goes up, you also can
Speaker 5: get tightening of cap rates because you get a higher
Speaker 5: value in the NI and that also would be sort
Speaker 5: of your high level indicator. And what we've seen in
Speaker 5: cap rates is they've just started to flatten in the
Speaker 5: last few months, but they're up roughly one hundred bases
Speaker 5: points across the board and that's where sort of that
Speaker 5: twenty to thirty percent hitten valuations I mentioned has come
Speaker 5: into play.
Speaker 2: All right, let's talk about from the perspective of a renter.
Speaker 2: So I have some familiarity with the Austin, Texas housing market.
Speaker 2: Supply and demand apparently has worked very beautifully. There are
Speaker 2: a lot of people wanted to move there, and then
Speaker 2: there's just towers up everywhere, including deep into the suburbs.
Speaker 2: And then actually rent price I believe it's actually negative
Speaker 2: for many years in Austin, which you know, seems like
Speaker 2: good news overall. That's a rare story though, but we've
Speaker 2: had this big fall and anyone can just go on
Speaker 2: Fred and search do privately owned housing units started units
Speaker 2: and buildings with five units or more and see that
Speaker 2: we've had this big drop over the last two years
Speaker 2: roughly since the peak of all these developments. What's going
Speaker 2: to happen play this out a little.
Speaker 3: Bit over the next two years.
Speaker 2: Were supply needs demand here, and you know we already
Speaker 2: have these affordability rent is already basically expensive everywhere, even
Speaker 2: in Austin with the declines.
Speaker 3: Is it going to get worse?
Speaker 4: Yes?
Speaker 5: I think frankly, we're about to transition from what has
Speaker 5: been a very renter friendly market to again a landlord
Speaker 5: friendly market over the course of the next two to
Speaker 5: three years. And that's going to be particularly driven by
Speaker 5: what we're seeing on the supply side. We're going to
Speaker 5: have over a million units come to market over a
Speaker 5: two year period here in twenty four and twenty five. Okay,
Speaker 5: but peak supply is hitting in the next six months.
Speaker 5: And if you look at relative time from a peak
Speaker 5: supply and then b to getting to a level of
Speaker 5: low supply than you saw last cycle, every major market
Speaker 5: in the country will be there by the end of
Speaker 5: twenty twenty six where delivering less housing units than they
Speaker 5: did on average from seventeen to nineteen in apartment buildings.
Speaker 5: So you're going to go below prior cycle supply very quickly.
Speaker 5: At the same time, we do have it exceptionally strong
Speaker 5: labor markets here, and the demand story has been outstanding.
Speaker 5: So twenty twenty four is going to end the year,
Speaker 5: depending upon the data provider you use, as the first
Speaker 5: or third highest year for rental demand. Ever, twenty twenty
Speaker 5: one was the prior record, So we're seeing people form
Speaker 5: rental households at unprecedented rate in the US, and as
Speaker 5: that supply comes down, you're going to see that demand
Speaker 5: struggle to frankly, find high quality, well located assets to
Speaker 5: move in, and you're likely to see that relationship flip
Speaker 5: at that point.
Speaker 4: So the other thing that affects multifamily housing construction other
Speaker 4: than interest rates has to be just general confidence, I guess,
Speaker 4: in the direction of the economy, the direction of the world.
Speaker 4: And certainly there's a lot going on right now. We're
Speaker 4: recording this on January twenty eighth, and there's news that
Speaker 4: the Trump administration is freezing a whole bunch of federal spending.
Speaker 4: I think it's something like twenty percent of federal spending
Speaker 4: that includes presumably stuff like Section eight and other affordable
Speaker 4: housing measures. Would that be expected to hit multifamily as well.
Speaker 5: Yeah, and I think it's probably easiest to sort of
Speaker 5: start at the top. Right When you're building multifamily, you're
Speaker 5: generally trying to build to an acceptable return on cost. Frankly,
Speaker 5: what we're doing is putting an investor's money together in
Speaker 5: generating returns for them. Multifamily isn't built for free, and
Speaker 5: it can't be in this sort of economic world. And
Speaker 5: a general rule of thumb is a six plus percent
Speaker 5: return on cost. So cost to build, you want to
Speaker 5: yield over six percent of that to get a building
Speaker 5: to pencil that tracks up closer to seven depending upon
Speaker 5: the institution. Because you need to build to that yield
Speaker 5: on cost, you have to have rents that are high
Speaker 5: enough to generate enough rental revenue to drive that return.
Speaker 5: So in order to build today, you have to build
Speaker 5: it exceptionally high rent levels. Because of the cost to build,
Speaker 5: because of the cost of interest rates. The only way
Speaker 5: to drop that is to drop the cost, and that
Speaker 5: cost drop typically comes for affordable housing from the federal government,
Speaker 5: be it HUD grants that are then deployed through the
Speaker 5: local housing agency, be it lie tech, be it any
Speaker 5: sort of an ensemblage of ways to cut cost.
Speaker 3: That's how you can get.
Speaker 5: To affordable rents on the supply side, and then on
Speaker 5: the demand side you can and cut rents by literally
Speaker 5: giving people a rent check, which is what Section eight is,
Speaker 5: and that again comes from the federal government via grant
Speaker 5: given to the local housing agencies to deploy. And if
Speaker 5: that money dries up, you have immense problems in terms
Speaker 5: of a feeling the demand for these people because you're
Speaker 5: cutting rent on the Section eight side and b encouraging
Speaker 5: future construction of affordable apartment buildings.
Speaker 2: Just to be clear though, because there are projects that
Speaker 2: have their market rate rent and then they have some
Speaker 2: allocation to what people call affordable units right in different
Speaker 2: cities or whatever, I have different rules about how much
Speaker 2: you need to allocate. Is that Section eight housing two
Speaker 2: or is Section eight housing like how much does it commingle?
Speaker 2: Does this also affect development of buildings that people don't
Speaker 2: think of as quote affordable housing projects.
Speaker 5: So in those sort of mixed buildings, you're going to
Speaker 5: see more of a price lock, going to see a
Speaker 5: supply side affordable building, be it tax credit, be it
Speaker 5: a locked price on x percentage of AMI, which is
Speaker 5: ultimately what you're going to say, say area median income,
Speaker 5: which is how Fanny Freddy all of them essentially set
Speaker 5: what's affordable through HUT, so that won't be destroyed or eliminated. Frankly,
Speaker 5: usually when people are building, they understand in Massachusetts you
Speaker 5: need x percentage of the building to be affordable, so
Speaker 5: they need the building to pencil around that. Honestly, typically
Speaker 5: it just means higher rents in the rest of the
Speaker 5: building to fund those units. So I don't expect that
Speaker 5: to dry up. What I expect our larger scale community
Speaker 5: investment projects to revive an area within a town like
Speaker 5: a Pilson. We looked at buildings with one of the
Speaker 5: states prior at a prior job, and that was looking
Speaker 5: at doing a massive housing development that would be entirely
Speaker 5: affordable for the community there. And this is in Chicago,
Speaker 5: So stuff like that's going to disappear. Purpose built is
Speaker 5: going to disappear. Was planning to build an entirely voucher
Speaker 5: building through Section eight, that's going to disappear, So you're
Speaker 5: going to have real pain in that stuff, at least
Speaker 5: in the short term. I mean, in theory, this could
Speaker 5: be a quick turnaround and it's just a big wave
Speaker 5: of disruption that goes away in four weeks, but there
Speaker 5: is a world where it severely impacts housing construction at
Speaker 5: the lower level.
Speaker 4: What are people in the market saying about it right now?
Speaker 4: Or is everyone just sort of in weight and see mode.
Speaker 5: I think, like most things, it's weight and see mode.
Speaker 5: I think that's been the general markets approach to this
Speaker 5: entire administration transition, just because you need so much clarity
Speaker 5: to start figuring out real world impacts here, and that
Speaker 5: very much trickles into the cost to build stuff, with
Speaker 5: the tariffs, with the deportation impacts on labor and things
Speaker 5: along those lines.
Speaker 2: Let's talk about deportation impacts on labor. What are the
Speaker 2: estimates for what percentage of the multifamily workforce, whether it's
Speaker 2: construction and or maintenance, whatever else, is undocumented labor.
Speaker 5: It's estimated twenty percent of construction workers in this country
Speaker 5: are undocumented labor. I'd venture to guess it's similar for
Speaker 5: the whole multifamily industry when you look at staffing and
Speaker 5: things along those lines. And I think when you look
Speaker 5: at a combination of deportation of construction workers as well
Speaker 5: as the sheer amount of labor it's going to require
Speaker 5: to rebuild huge swaths of California. I think you could
Speaker 5: be looking at a massive deficit in labor within the
Speaker 5: construction space. And when you think about that, that's going
Speaker 5: to be your strongest lever. That's going to hit your
Speaker 5: cost to build, and that's what's going to drive up
Speaker 5: those rents that are necessary. Is all of this immense
Speaker 5: pressure you're going to see in the labor costs.
Speaker 2: Tracey, I hadn't even thought about the huge demand for
Speaker 2: construction labor that's going to come out of California.
Speaker 4: But yeah, because of the fire.
Speaker 2: So we have the fires, we have deportations, we have
Speaker 2: the end of a lot of affordable housing projects at
Speaker 2: least temporarily, and the intro straight shock all coming together
Speaker 2: so far, this is what we've covered so far. At
Speaker 2: the same time to sort of like constrain the supply
Speaker 2: of new housing in the coming years.
Speaker 4: Well, the irony is like everyone's building at the same
Speaker 4: time after the wildfire's right, so like everything is just
Speaker 4: going to go up. Actually, that reminds me we should
Speaker 4: talk about insurance rates because I think this is another
Speaker 4: source of pressure on multifamily, which is that insurance rates
Speaker 4: for a lot of these operators have also been going
Speaker 4: up quite a lot, and there aren't that many levers
Speaker 4: they can pull in order to reduce that particular cost.
Speaker 5: Yeah, I think this is another situation of kind of
Speaker 5: the haves and have nots. At Cortland, we ensure our
Speaker 5: entire portfolio, and when you're able to sort of spread
Speaker 5: risk over eighty thousand apartment units, you can get far
Speaker 5: more beneficial rates if you're a small owner in La.
Speaker 5: If you're a small owner in California, Florida and Texas,
Speaker 5: I don't know what you do today. Rates had hit
Speaker 5: an estimate of three hundred per unit at one point
Speaker 5: in Florida to ensure some buildings. Well, there's been some
Speaker 5: normalization since then and costs have generally stopped with the
Speaker 5: massive spikes again pre wildfires, but it's just a huge,
Speaker 5: huge cost that hits everyone, and it's tough at this
Speaker 5: point in time to enact in certain markets, and that
Speaker 5: includes also Texas. Tornado Alley's had as much of an
Speaker 5: increase as you've seen in Florida in California to date.
Speaker 3: So where's the rubber beat the road?
Speaker 2: We're going to have you back on sometime in twenty
Speaker 2: twenty six, maybe somewhere twenty twenty six, if the pattern
Speaker 2: goes what are we talking about?
Speaker 5: I think what you're looking at in twenty twenty six
Speaker 5: is a very investor friendly rental market again, and we
Speaker 5: sort of have returned to where we were last cycle.
Speaker 5: What I think is really interesting in what I see
Speaker 5: in the housing market today is almost a displacement of
Speaker 5: people living where they want rather than people not being
Speaker 5: able to afford housing. And it's Art's at the top.
Speaker 5: The baby boomers have the vast majority of three plus
Speaker 5: bedroom homes in this country, and they aren't giving those
Speaker 5: up despite plummeting bedroom utilization rates, so the millennials can't
Speaker 5: really push into the housing they want. Some millennials continue
Speaker 5: to rent or buy first time homes things along those
Speaker 5: lines gen Z at the same time as the richest
Speaker 5: earning young generation on record. Because of Frankly, the baby
Speaker 5: boomers exiting the.
Speaker 3: Labor force feel it that way, though from what I.
Speaker 5: Now they do not, But the FED strongly disagrees with
Speaker 5: their feelings.
Speaker 3: So when you live, FED doesn't care about your feeling.
Speaker 3: Oh sorry, no, it's fine.
Speaker 5: When you look at this confluence of factors. What you've
Speaker 5: seen is really higher earning people living lower down what
Speaker 5: used to be considered the quality spectrum. So in our portfolio,
Speaker 5: we've seen incomes jump to almost one hundred thousand dollars
Speaker 5: per unit on average. Our credit scores have spiked to
Speaker 5: around seven hundred, and our ages in the low thirties.
Speaker 5: That's a well earning, strong young America worker, and that's
Speaker 5: a cross our portfolio that's primarily in the Sun Belt
Speaker 5: with some mid Atlantic and Western exposure. So you're seeing
Speaker 5: an exceptionally high quality, credit worthy tenant and you're seeing
Speaker 5: huge demand for that housing. And that's because nobody's building
Speaker 5: in the well located areas. You can't build single family
Speaker 5: homes in good school districts today. The local builders are
Speaker 5: entirely out of the market. They've been absorbed by the
Speaker 5: big boys since the Great Financial Crisis, and you're seeing
Speaker 5: starts in those high quality locations plummet at a greater
Speaker 5: rate than you're seeing them in the further out locations.
Speaker 5: So you're going to have this tight labor force. Everybody
Speaker 5: is going to need to work preventing some kind of
Speaker 5: crazy AI situation, and you're going to have these high incomes,
Speaker 5: and everyone's going to want to live in the same
Speaker 5: well connected, good areas, and you're likely to see rents
Speaker 5: in those areas begin to pop because that's where this
Speaker 5: supply wave is winding down the quickest, and that's where
Speaker 5: it starts. Aren't going to backfill the current supply.
Speaker 4: Just to be clear, though, the expect increase in rents,
Speaker 4: is that enough to offset all of the pressures from
Speaker 4: higher interest rates.
Speaker 5: I think you're likely to see what's happened in the
Speaker 5: single family sector after the GFC happened a little bit
Speaker 5: in the multifamily sector, where there is a thinning of
Speaker 5: the herd. I don't think it'll get to the point
Speaker 5: where I think four home builders have fifty percent of
Speaker 5: new homeless things today or some crazy number like that.
Speaker 5: But you're likely to see the small developers end up
Speaker 5: consumed by the bigger developers that can handle it better.
Speaker 5: And you're likely to see continued pressure in the multifamily
Speaker 5: space where smaller funds, smaller operators, people that can afford
Speaker 5: interest rate caps, that can't ride out long term higher
Speaker 5: for longer are going to have to exit or ultimately
Speaker 5: be absorbed into a larger player. So to answer your question,
Speaker 5: it would be much easier for the industry on the
Speaker 5: whole to have lower rates. I think a three to
Speaker 5: a three five the industry is just fine three to
Speaker 5: three five on the tenure. To be clear, I don't
Speaker 5: know how soon we can get there. I think in
Speaker 5: the meantime we're going to see a calling of the herd,
Speaker 5: if you will.
Speaker 2: I'm very bullish on driverless cars, but assuming that they're
Speaker 2: not in mass production or mass deployment in the next
Speaker 2: couple of years, talk to us about like how far
Speaker 2: people are going to be having to commute. If it
Speaker 2: sounds like the desirable places there's no building, people are
Speaker 2: having to build further and further out, what do we
Speaker 2: talk about. What are some of the places, What are
Speaker 2: the hotspots, you know, three hours outside of Charlotte or whatever.
Speaker 4: You're literally describing my house in connection.
Speaker 5: Yeah, right, I mean that's really what you're seeing. The
Speaker 5: places right now getting the highest out migration from Atlanta,
Speaker 5: where I relocated for Courtland are Gainesville, which is a
Speaker 5: separate msa an hour and a half outside of the city.
Speaker 5: You're seeing it in all of these sort of tertiary
Speaker 5: markets because that's where people can afford to build, and
Speaker 5: that's home builders and apartment developers chasing cheaper land basis
Speaker 5: and cheaper.
Speaker 3: People don't commute from Gainesville to Atlanta.
Speaker 5: If you have a hybrid job, you might commute to
Speaker 5: North at Lanta wants some time, or you work remote
Speaker 5: but driverless cars. That's a place you could see benefit
Speaker 5: from that. It's a place trying to grow because it's
Speaker 5: exceptionally difficult to get a home in North Buckhead today
Speaker 5: or even in some of the closer in suburbs. It's
Speaker 5: exceptionally expensive. So I think you're going to see people
Speaker 5: commuting further and further out because that's the accessible product.
Speaker 5: But also I don't know if demand for that product
Speaker 5: is frankly as high as it is for the better
Speaker 5: located product. We run independent renter surveys things along those lines,
Speaker 5: and it seems location matters more to people today than
Speaker 5: space to a degree, and I do think that favors
Speaker 5: multi family investment in the longer term.
Speaker 3: Trady.
Speaker 2: I just want to be clear that if you have
Speaker 2: to commute even part time from Gainesville to Atlanta, or
Speaker 2: if you have to live in some small multifamily development,
Speaker 2: I do not blame gen Z for thinking things aren't great,
Speaker 2: even if nominally on paper their incomes are high.
Speaker 4: Well, yeah, that, thank you. I'm sure they'll appreciate that.
Speaker 3: I just want to be.
Speaker 5: Clear on one point I do want to put on
Speaker 5: that though, our internal rent to income ratios today are
Speaker 5: actually thirty basis points lower than they were in twenty eighteen. Okay,
Speaker 5: so our apartment buildings today, despite thirty percent post COVID
Speaker 5: rent gains, it's interesting, are more affordable because since COVID
Speaker 5: we've had a thirty four percent increase in our new
Speaker 5: renter incomes.
Speaker 3: But it's a different cohort anyway, Sorry, Tracy Goo.
Speaker 4: So we're talking about the desirability of cities and everyone
Speaker 4: wants to live there, but you can't really build. One
Speaker 4: of the other things that Trump promised, in addition to,
Speaker 4: you know, mass deportation and things like that, a reduction
Speaker 4: in federal spending was perform and I guess I'm curious, like,
Speaker 4: have you seen any action on that or is there
Speaker 4: an expectation that maybe the federal government will in some
Speaker 4: way be able to ease up the bureaucracy around building
Speaker 4: new construction.
Speaker 5: I don't know how he has any impact there it's
Speaker 5: just they're so local driven. He can't touch impact fees
Speaker 5: on local areas. You can't start touching fire and safety fees.
Speaker 5: So I don't know how in a federal system the
Speaker 5: federal government can control local impact fees, and I just
Speaker 5: I can't connect the dots there.
Speaker 2: Well, setting aside what the federal government can do. Do
Speaker 2: you see there's the MBIA movement all around. Do you
Speaker 2: see them having an effect as the dial being turned
Speaker 2: anywhere in a meaningful way.
Speaker 3: Outside of Austin.
Speaker 5: I think it's unfortunate. They've gained the most traction and
Speaker 5: possibly the hardest turn and to build environment possible in theory.
Speaker 5: You've seen some government elected officials change, You've seen some
Speaker 5: positions change. I think there's probably some more momentum in
Speaker 5: San Francisco than there's ever been before. You obviously, of
Speaker 5: the South, it's just build, build, build, But it's hard
Speaker 5: to put pen to paper on if they're actually achieving
Speaker 5: things when you can't pencil new buildings in high quality
Speaker 5: locations today.
Speaker 4: So a lot of multifamily loans have found their way
Speaker 4: into either CMBs so commercial mortgage backed securities or colos
Speaker 4: collateralized loan obligations, but the defaults on those have I
Speaker 4: think the last numbers I saw, they're still pretty low.
Speaker 4: Like on colos, I'm pretty sure it's in the low
Speaker 4: single figures for US colos. Why haven't we seen like
Speaker 4: greater waves of distress make their way into the end
Speaker 4: product of multifamily.
Speaker 5: I think people are doing everything they can to protect
Speaker 5: their warehouse lines in the CLO and CMBs market. You
Speaker 5: don't want to lose access to capital if you're a
Speaker 5: debt fund today by having toxic assets, so people are
Speaker 5: picking them off the COLO book. They're internalizing them. If
Speaker 5: you're one of the debt funds that has a housing
Speaker 5: operator wing, you can start operating properties on your own.
Speaker 5: I mean it's I think it's protect credit at all costs,
Speaker 5: So people are doing everything they can to protect that credit.
Speaker 5: The distress is there. You see every week on the
Speaker 5: pipeline report of what's on market, the same syndicators looking
Speaker 5: for bailouts. You see the same people that hit the
Speaker 5: over built nodes and overpaid in twenty one looking for help,
Speaker 5: and you see them not getting the prices that even
Speaker 5: hit the debt levels they need. So it's working out.
Speaker 5: But I think Ultimately, nobody's willing to sacrifice their credit
Speaker 5: levels to work it out.
Speaker 2: Quicker, Can you just say anything more about the impact
Speaker 2: of Los Angeles. I hadn't thought about that fires in
Speaker 2: terms of like estimates for how much resources that's good
Speaker 2: going to suck up, so to speak, for construction and development.
Speaker 5: Yeah, it's interesting. I think our CEO made an off
Speaker 5: the cuff comment last week. We were looking at a
Speaker 5: building in a location in Atlanta that is where heavily
Speaker 5: heavily populated by construction workers, and his remark was, I'm
Speaker 5: going to have trouble getting rent growth there for the
Speaker 5: next year and a half because I expect all those
Speaker 5: people to end up in California in the short term.
Speaker 5: And it's another actually to sort of wrap one other
Speaker 5: question you asked, and there's the HUD side of things.
Speaker 5: HUT is typically vital in these rebuilding efforts, and that's
Speaker 5: a funding channel that if the government turns off, is
Speaker 5: going to have severe impacts there as well. So A,
Speaker 5: I think you could see demand move within communities because
Speaker 5: of LA I think it's going to have a material
Speaker 5: impact on cost to build in our country. And B
Speaker 5: you could see it dampened by some of the recent
Speaker 5: movements by the administration.
Speaker 4: Well, FEMA is also a really big protection layer for
Speaker 4: like Fanny May and entities like that.
Speaker 3: So fun times, Lee Everett.
Speaker 2: Looking forward to having you back again in twenty twenty
Speaker 2: six when we talk about how badly constrained the market is.
Speaker 2: Really appreciate your coming back on odlock.
Speaker 5: Thank you for having me. It's always great.
Speaker 2: So it's funny we got like ten minutes of housing
Speaker 2: supply relief over and then we're just heading right back
Speaker 2: to constraints and shortages, and it sounds like rent growth
Speaker 2: and investor friendly environments and so forth.
Speaker 4: We got a glimpse of what could be.
Speaker 3: Yeah.
Speaker 2: The other thing I was it's also funny and tracy
Speaker 2: thing is like, oh, this was the renter friendly market.
Speaker 4: I missed it right, Yeah, seriously. Well, I also thought
Speaker 4: his characterization of like people are living in houses, it's
Speaker 4: just a lot of them are not living in the
Speaker 4: houses in the places that they would prefer to be.
Speaker 3: Yeah.
Speaker 4: I mean, that's certainly part of my experience and one
Speaker 4: reason why I don't own a house in New York,
Speaker 4: but I own one elsewhere. The other thing I was
Speaker 4: thinking about is his characterization of I guess the haves
Speaker 4: and the have nots in the market. And I think
Speaker 4: this is really important because this is like you could
Speaker 4: say this about the entire corporate world. Yes, like, if
Speaker 4: you are a big company that can access the bond market,
Speaker 4: the past few years probably have not been that bad
Speaker 4: for you. If you are a smaller player and you
Speaker 4: have to take out bank loans, it's been a lot
Speaker 4: more constrained. So a lot of the financing environment has
Speaker 4: just led to a situation where the big get bigger.
Speaker 4: And Lee was talking about how you might see more
Speaker 4: consolidation in multi family operators, and that's just an extension
Speaker 4: of that trend.
Speaker 2: And of course we've talked about this in the past,
Speaker 2: the Great Financial Crisis and what it did to the
Speaker 2: single family home builders, and they're just a lot fewer
Speaker 2: single family homebuilders today than there were several years ago.
Speaker 2: You know, I always think back to last year when
Speaker 2: we traveled to Mount Area, North Carolina.
Speaker 3: The idea that the community.
Speaker 2: Has to put together a road show to pitch the homebuilder. Yeah, right,
Speaker 2: because the power exists in the consolidation of the homebuilder
Speaker 2: such that the community is like, please build here. You know,
Speaker 2: it's the sort of exact opposite in the way of
Speaker 2: the mb problem. It's like, no, we have plenty of land.
Speaker 2: We just need to convince you. But this idea, that's like, Okay,
Speaker 2: we had the great financial shock that consolidated the single
Speaker 2: family homebuilders. Now we have this sort of financial shock
Speaker 2: in the form of higher interest rates, higher insurance, and
Speaker 2: that's consolidating the multifamily developers.
Speaker 4: Yeah, all right, shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 4: This has been another episode of the All Thoughts podcast.
Speaker 4: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
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