January 30, 2025 • 35 mins
One of the primary drivers of elevated inflation — and the high cost of living in general — is the price of shelter. Whether you're buying or renting, housing is very expensive. Thankfully, over the last year, some of the increases we've seen in rent prices have slowed significantly, and we're not too far away from the pre-Covid pace. The bad news is that this might not last. A confluence of factors is coming together that may cause yet another shock to housing affordability. On this episode of the podcast, we speak with Lee Everett, the head of research and strategy at the multi-family operator Cortland. He talks about how the increase in interest rates caused new development of apartment buildings to plunge, meaning supply will be increasingly scarce again in 2026. Then add in deportations of construction labor, soaring insurance costs, plus industry consolidation, and you have the recipe for another big shock to housing affordability coming quickly down the pike.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lags podcast.
Speaker 3 (00:22):
I'm Joe Wisenthal.
Speaker 4 (00:23):
And I'm Tracy Alloway.
Speaker 2 (00:25):
Tracy, you know, one of the big themes obviously in
American life and the most recent election, was inflation. And
there are a lot of things that people think of
when they think of inflation. Maybe they think of egg prices,
it's in the news these days. Maybe they think of
gasoline prices. But a big story is like the cost.
Speaker 3 (00:43):
Of living, is the cost of housing?
Speaker 4 (00:45):
Yes, Actually, it's kind of funny. Everyone has their own
personal benchmarks for inflation, and mine is probably the cost
of mayonnaise, because I've been tracking that for a long time.
Not because I eat that much of it, but I
just find it interesting because it contains eggs and oil
and packaging and labor and all that stuff. And rent.
And guess what, Joe, my rent's going up again.
Speaker 2 (01:07):
What about your mayonnaise consumption? It's funny to be sorry
when you said mayonnaise. I have to admit the first
thing that came to my head was like just like
imagining you in your apartment with the gar storing buckets
or gigantic tub of Costco mayonnaise iatiot with a spoon.
I'm sorry, you're really consuming a lot of mayonnaise. If
this is what comes to your mind when you think
(01:28):
about the cost of living.
Speaker 4 (01:29):
Well, as part of my research for this, I can
tell you you can buy buckets of extra heavy mayo
off of Amazon.
Speaker 3 (01:35):
Sounds good.
Speaker 2 (01:36):
We're actually not doing a mayonnaise episode. We're talking about
the other one we're talking about.
Speaker 4 (01:41):
I tried to throw in my rent stat Yeah, I know,
to keep you on topic, but you wanted to talk
about Mayo.
Speaker 2 (01:46):
We'll do a Mayo episode at some point. But rent
is really interesting. Actually, in the government's measure there's so
many moving parts with anything housing, but most recently actually
the government's measure of rent price growth, which has been
a key contributor to overall inflation, et cetera. Actually it's
been moderating lately. We're sort of getting back to the
point where we're like at pre COVID levels of rent
(02:08):
price growth, right.
Speaker 4 (02:09):
So it's still going up, but just not as much
as it was before.
Speaker 2 (02:13):
But the perversity, perhaps it's a perversity, is that obviously
the FED jacked up interest rates quite aggressively to fight inflation.
Inflation has come down, tis a little longer than people expected,
but you know, it has come down. But one of
the things that we do know that happens is that
when the FED jacks of interest rates, that really has
an effect on housing development, which of course requires a
(02:35):
lot of capital and leverage, et cetera. And if you
look at a chart of say multifamily housing starts, buildings
five units or more, that's come way down since its peak,
like in twenty twenty two.
Speaker 4 (02:47):
Yeah, so we had this huge wave of supply in
sort of late twenty twenty one twenty twenty two. As
you said, it's fallen quite a lot. The interesting thing
that I see here is like yields on bonds are
still going up. So we're at four point five five
percent or so on the ten year and that is
higher than when the Fed started cutting rates. So the
(03:09):
cost of financing these projects is still going up and
there's not that much activity.
Speaker 2 (03:15):
Well, we did an episode in November twenty twenty three,
and our guests said something really interesting to me that
I've repeated probably many times, which is that for a
lot of multifamily developers, they might prefer a hard landing
in the economy, because sure, that might mean demand for
rent goes down or some of their tenants can't pay
their rent, But if it means that you get a
(03:36):
dramatic drop in interest rates because of howlever they are
at the cost of money, that might actually work out
better for them, which is sort of still blows my mind,
but it is what it is. And so one of
the other things that we're thinking about is like, well,
what's going on with all these multifamily developers carrying a
big debt and so forth, given the fact that rates
(03:57):
have not come.
Speaker 4 (03:58):
Down, Yeah, let's talk about it.
Speaker 2 (03:59):
Well, we are going to be speaking with the same
guests who commented that in twenty twenty three, we're going
to be talking about all of these dynamics. Really the
perfect guest. Thrilled to welcome back onto the show. Lee Everett,
head of research and strategy at Cortland, which is a
multi family owner operator roughly eighty thousand units nationwidely, Thank
you so much for coming back on the podcast.
Speaker 5 (04:21):
Thank you for having me.
Speaker 2 (04:22):
I've actually just wanted to have you back on to
talk about this specific that there's a lot we're going
to talk about but as Tracy mentioned, rates haven't come down.
I know people were like, all the fens guests are right,
this is relief, is insight. How stressed out are a
lot of these entities by the fact that after all
this time we haven't seen any rate relief.
Speaker 5 (04:44):
It's interesting. I think stress is hitting sort of all
sides of the market. You have your bigger, more well
established shops that have been managing through this, able to
handle the higher rate environment, but have obviously taken a
very real valuation hit on their existing portfolios, like to
thirty percent, depending upon the portfolio composition. At the same time,
(05:05):
you've had record demand hitting the sector because cost to
buy housing is exceptionally unattainable today. And then on the
other side, you're having a very material impact on the
supply side. And I think that's what's really unique. If
you think back to September, the tenure was around a
three six. I think the day chair pal cut us
by fifty basis points. Well, we're at almost a four
(05:28):
to six today, and I remember that night you heard
reports about developers out at like local dinners. Yeah, they
were calling it fed day and getting ready to put
shovels in the chip exactly, and what you've seen instead
is increased stress on both the short end and the
long end of the curve. That's given you trouble on
the short end to start new housing and trouble on
(05:50):
the long end to afford longer term for ownership housing.
Speaker 4 (05:54):
You mentioned that some of the bigger players are better
able to deal with higher rates. Can you talk about
how people try to offset some of these higher rates
and is it the case that there is still an
ability to refinance and turn out your debt or is
that starting to go away now?
Speaker 5 (06:11):
I think extend and pretend what you're referring to and
the always popular looming maturity wall discussion is what you're
hitting on. And what we're seeing there is the established
owners that have strong relationships throughout either Fanny and Freddy,
balance sheet lenders, etc. They're able to continue to negotiate
(06:35):
and work out loans and delays. The people that got
out really far over their skis the syndicators, the new
entrance to the place, and a lot of what we
talked about last time. Those players are sort of hitting
the end of their window here. And what we've seen
in the financing space actually, as we delve into this
a bit more is there's so much liquidity on the
(06:56):
debt side that wants to come back to work. They
want to be rid of the these sort of balance
sheet hindrances that are these unproven players in the market,
and they want to get back to work with the
sponsors they appreciate. And we've generally seen spreads come in
about one hundred basis points from their peak, so that
has helped limit some of sort of the financing pressures,
(07:17):
but it's certainly a far cry from a one percent
tenure to a four or five ten uere. So it
depends a lot on who you are in the space
and how this has impacted you today.
Speaker 2 (07:28):
Right because twenty twenty one, probably part of twenty twenty two,
we were like in that era where Instagram influencers we're
posting about to get in. You know, rent prices always.
Speaker 4 (07:40):
Go to talk multifamily landlord.
Speaker 2 (07:42):
Yeah, TikTok, multi family landlords. Rent always goes up. We
have a new project is probably called the Reserve. It's
in the suburbs of Houston and has a pool table
and there's no kids allowed to pool table. And you're
guarantee me and a bunch of them got wiped out.
What happened to them since we talked? And then how
talk about it from the more established operators, and how
(08:03):
much of a relief has it been that some of
this I don't know, new money, whatever you want, TikTok
money has maybe gotten washed out.
Speaker 3 (08:09):
Tell us how that story ended.
Speaker 5 (08:11):
I would call it a thinning of the herd that
we're still going through. I don't want to necessarily call
up people by name, but sure you can see in
the news there is a certain prominent syndicator that basically
doubled their positions and became a top thirty owner in
twenty twenty one or so, and banks are personally suing
the founders of that company on carry guarantees. Today, you've
(08:33):
seen potential investigations and some of the debt funds being
talked about in the space, and that relates specifically to
valuations on some of these assets that weren't maintained or
taken care of by certain owner operators. So you're seeing
a high level of delinquency. A lot of these properties
that were these new money and TikTok landlords have a
(08:55):
ton of leans against them because they weren't paying their
contractors they weren't executing their value add and ultimately they're
going to be in a world of pain. Would be
my sort of outcome at the end of all of this, because,
as I said before, the banks are just getting tired
of carrying this on their balance sheets, same with the
debt funds, Like you can't make money with this much
(09:16):
bad money hogging your book.
Speaker 4 (09:18):
I have a really basic question, which I feel kind
of bad asking because I used to cover commercial real
estate and I should know this since multifamily is the
forgotten commercial real estate as I sometimes call it. But
what's the best thing to look at if you want
to just get a gauge of multifamily markets health, So
(09:38):
you know, I can look at like permits or something
like that, But that number is really volatile. I'm not
sure how much it's actually telling me.
Speaker 5 (09:45):
Yeah, I think there's sort of two high level factors.
One is going to be your rent growth, because that's
going to feed your NI growth. The other factor is
going to be your cap rate, which we talked about
this a little bit last time. Your cap rate is
essentially your yield your income over your price. As money
is entering the space, prices go up, so you get
healthier cap spaces, and that's on the sort of for
(10:08):
sale side. And as NOI goes up, you also can
get tightening of cap rates because you get a higher
value in the NI and that also would be sort
of your high level indicator. And what we've seen in
cap rates is they've just started to flatten in the
last few months, but they're up roughly one hundred bases
points across the board and that's where sort of that
(10:28):
twenty to thirty percent hitten valuations I mentioned has come
into play.
Speaker 2 (10:33):
All right, let's talk about from the perspective of a renter.
So I have some familiarity with the Austin, Texas housing market.
Supply and demand apparently has worked very beautifully. There are
a lot of people wanted to move there, and then
there's just towers up everywhere, including deep into the suburbs.
And then actually rent price I believe it's actually negative
(10:53):
for many years in Austin, which you know, seems like
good news overall. That's a rare story though, but we've
had this big fall and anyone can just go on
Fred and search do privately owned housing units started units
and buildings with five units or more and see that
we've had this big drop over the last two years
roughly since the peak of all these developments. What's going
(11:15):
to happen play this out a little.
Speaker 3 (11:17):
Bit over the next two years.
Speaker 2 (11:19):
Were supply needs demand here, and you know we already
have these affordability rent is already basically expensive everywhere, even
in Austin with the declines.
Speaker 3 (11:27):
Is it going to get worse?
Speaker 4 (11:29):
Yes?
Speaker 5 (11:29):
I think frankly, we're about to transition from what has
been a very renter friendly market to again a landlord
friendly market over the course of the next two to
three years. And that's going to be particularly driven by
what we're seeing on the supply side. We're going to
have over a million units come to market over a
two year period here in twenty four and twenty five. Okay,
(11:50):
but peak supply is hitting in the next six months.
And if you look at relative time from a peak
supply and then b to getting to a level of
low supply than you saw last cycle, every major market
in the country will be there by the end of
twenty twenty six where delivering less housing units than they
(12:10):
did on average from seventeen to nineteen in apartment buildings.
So you're going to go below prior cycle supply very quickly.
At the same time, we do have it exceptionally strong
labor markets here, and the demand story has been outstanding.
So twenty twenty four is going to end the year,
depending upon the data provider you use, as the first
(12:30):
or third highest year for rental demand. Ever, twenty twenty
one was the prior record, So we're seeing people form
rental households at unprecedented rate in the US, and as
that supply comes down, you're going to see that demand
struggle to frankly, find high quality, well located assets to
move in, and you're likely to see that relationship flip
(12:52):
at that point.
Speaker 4 (13:08):
So the other thing that affects multifamily housing construction other
than interest rates has to be just general confidence, I guess,
in the direction of the economy, the direction of the world.
And certainly there's a lot going on right now. We're
recording this on January twenty eighth, and there's news that
the Trump administration is freezing a whole bunch of federal spending.
(13:32):
I think it's something like twenty percent of federal spending
that includes presumably stuff like Section eight and other affordable
housing measures. Would that be expected to hit multifamily as well.
Speaker 5 (13:46):
Yeah, and I think it's probably easiest to sort of
start at the top. Right When you're building multifamily, you're
generally trying to build to an acceptable return on cost. Frankly,
what we're doing is putting an investor's money together in
generating returns for them. Multifamily isn't built for free, and
it can't be in this sort of economic world. And
(14:07):
a general rule of thumb is a six plus percent
return on cost. So cost to build, you want to
yield over six percent of that to get a building
to pencil that tracks up closer to seven depending upon
the institution. Because you need to build to that yield
on cost, you have to have rents that are high
enough to generate enough rental revenue to drive that return.
(14:29):
So in order to build today, you have to build
it exceptionally high rent levels. Because of the cost to build,
because of the cost of interest rates. The only way
to drop that is to drop the cost, and that
cost drop typically comes for affordable housing from the federal government,
be it HUD grants that are then deployed through the
local housing agency, be it lie tech, be it any
(14:51):
sort of an ensemblage of ways to cut cost.
Speaker 3 (14:54):
That's how you can get.
Speaker 5 (14:55):
To affordable rents on the supply side, and then on
the demand side you can and cut rents by literally
giving people a rent check, which is what Section eight is,
and that again comes from the federal government via grant
given to the local housing agencies to deploy. And if
that money dries up, you have immense problems in terms
(15:17):
of a feeling the demand for these people because you're
cutting rent on the Section eight side and b encouraging
future construction of affordable apartment buildings.
Speaker 2 (15:27):
Just to be clear though, because there are projects that
have their market rate rent and then they have some
allocation to what people call affordable units right in different
cities or whatever, I have different rules about how much
you need to allocate. Is that Section eight housing two
or is Section eight housing like how much does it commingle?
(15:48):
Does this also affect development of buildings that people don't
think of as quote affordable housing projects.
Speaker 5 (15:55):
So in those sort of mixed buildings, you're going to
see more of a price lock, going to see a
supply side affordable building, be it tax credit, be it
a locked price on x percentage of AMI, which is
ultimately what you're going to say, say area median income,
which is how Fanny Freddy all of them essentially set
what's affordable through HUT, so that won't be destroyed or eliminated. Frankly,
(16:20):
usually when people are building, they understand in Massachusetts you
need x percentage of the building to be affordable, so
they need the building to pencil around that. Honestly, typically
it just means higher rents in the rest of the
building to fund those units. So I don't expect that
to dry up. What I expect our larger scale community
investment projects to revive an area within a town like
(16:43):
a Pilson. We looked at buildings with one of the
states prior at a prior job, and that was looking
at doing a massive housing development that would be entirely
affordable for the community there. And this is in Chicago,
So stuff like that's going to disappear. Purpose built is
going to disappear. Was planning to build an entirely voucher
building through Section eight, that's going to disappear, So you're
(17:06):
going to have real pain in that stuff, at least
in the short term. I mean, in theory, this could
be a quick turnaround and it's just a big wave
of disruption that goes away in four weeks, but there
is a world where it severely impacts housing construction at
the lower level.
Speaker 4 (17:21):
What are people in the market saying about it right now?
Or is everyone just sort of in weight and see mode.
Speaker 5 (17:27):
I think, like most things, it's weight and see mode.
I think that's been the general markets approach to this
entire administration transition, just because you need so much clarity
to start figuring out real world impacts here, and that
very much trickles into the cost to build stuff, with
the tariffs, with the deportation impacts on labor and things
along those lines.
Speaker 2 (17:47):
Let's talk about deportation impacts on labor. What are the
estimates for what percentage of the multifamily workforce, whether it's
construction and or maintenance, whatever else, is undocumented labor.
Speaker 5 (18:01):
It's estimated twenty percent of construction workers in this country
are undocumented labor. I'd venture to guess it's similar for
the whole multifamily industry when you look at staffing and
things along those lines. And I think when you look
at a combination of deportation of construction workers as well
as the sheer amount of labor it's going to require
to rebuild huge swaths of California. I think you could
(18:25):
be looking at a massive deficit in labor within the
construction space. And when you think about that, that's going
to be your strongest lever. That's going to hit your
cost to build, and that's what's going to drive up
those rents that are necessary. Is all of this immense
pressure you're going to see in the labor costs.
Speaker 2 (18:42):
Tracey, I hadn't even thought about the huge demand for
construction labor that's going to come out of California.
Speaker 4 (18:48):
But yeah, because of the fire.
Speaker 2 (18:50):
So we have the fires, we have deportations, we have
the end of a lot of affordable housing projects at
least temporarily, and the intro straight shock all coming together
so far, this is what we've covered so far. At
the same time to sort of like constrain the supply
of new housing in the coming years.
Speaker 4 (19:09):
Well, the irony is like everyone's building at the same
time after the wildfire's right, so like everything is just
going to go up. Actually, that reminds me we should
talk about insurance rates because I think this is another
source of pressure on multifamily, which is that insurance rates
for a lot of these operators have also been going
up quite a lot, and there aren't that many levers
(19:29):
they can pull in order to reduce that particular cost.
Speaker 5 (19:33):
Yeah, I think this is another situation of kind of
the haves and have nots. At Cortland, we ensure our
entire portfolio, and when you're able to sort of spread
risk over eighty thousand apartment units, you can get far
more beneficial rates if you're a small owner in La.
(19:54):
If you're a small owner in California, Florida and Texas,
I don't know what you do today. Rates had hit
an estimate of three hundred per unit at one point
in Florida to ensure some buildings. Well, there's been some
normalization since then and costs have generally stopped with the
massive spikes again pre wildfires, but it's just a huge,
(20:15):
huge cost that hits everyone, and it's tough at this
point in time to enact in certain markets, and that
includes also Texas. Tornado Alley's had as much of an
increase as you've seen in Florida in California to date.
Speaker 3 (20:30):
So where's the rubber beat the road?
Speaker 2 (20:32):
We're going to have you back on sometime in twenty
twenty six, maybe somewhere twenty twenty six, if the pattern
goes what are we talking about?
Speaker 5 (20:39):
I think what you're looking at in twenty twenty six
is a very investor friendly rental market again, and we
sort of have returned to where we were last cycle.
What I think is really interesting in what I see
in the housing market today is almost a displacement of
people living where they want rather than people not being
able to afford housing. And it's Art's at the top.
(21:00):
The baby boomers have the vast majority of three plus
bedroom homes in this country, and they aren't giving those
up despite plummeting bedroom utilization rates, so the millennials can't
really push into the housing they want. Some millennials continue
to rent or buy first time homes things along those
lines gen Z at the same time as the richest
earning young generation on record. Because of Frankly, the baby
(21:23):
boomers exiting the.
Speaker 3 (21:24):
Labor force feel it that way, though from what I.
Speaker 5 (21:27):
Now they do not, But the FED strongly disagrees with
their feelings.
Speaker 3 (21:32):
So when you live, FED doesn't care about your feeling.
Oh sorry, no, it's fine.
Speaker 5 (21:36):
When you look at this confluence of factors. What you've
seen is really higher earning people living lower down what
used to be considered the quality spectrum. So in our portfolio,
we've seen incomes jump to almost one hundred thousand dollars
per unit on average. Our credit scores have spiked to
around seven hundred, and our ages in the low thirties.
(21:57):
That's a well earning, strong young America worker, and that's
a cross our portfolio that's primarily in the Sun Belt
with some mid Atlantic and Western exposure. So you're seeing
an exceptionally high quality, credit worthy tenant and you're seeing
huge demand for that housing. And that's because nobody's building
in the well located areas. You can't build single family
(22:17):
homes in good school districts today. The local builders are
entirely out of the market. They've been absorbed by the
big boys since the Great Financial Crisis, and you're seeing
starts in those high quality locations plummet at a greater
rate than you're seeing them in the further out locations.
So you're going to have this tight labor force. Everybody
is going to need to work preventing some kind of
(22:38):
crazy AI situation, and you're going to have these high incomes,
and everyone's going to want to live in the same
well connected, good areas, and you're likely to see rents
in those areas begin to pop because that's where this
supply wave is winding down the quickest, and that's where
it starts. Aren't going to backfill the current supply.
Speaker 4 (22:57):
Just to be clear, though, the expect increase in rents,
is that enough to offset all of the pressures from
higher interest rates.
Speaker 5 (23:07):
I think you're likely to see what's happened in the
single family sector after the GFC happened a little bit
in the multifamily sector, where there is a thinning of
the herd. I don't think it'll get to the point
where I think four home builders have fifty percent of
new homeless things today or some crazy number like that.
But you're likely to see the small developers end up
(23:28):
consumed by the bigger developers that can handle it better.
And you're likely to see continued pressure in the multifamily
space where smaller funds, smaller operators, people that can afford
interest rate caps, that can't ride out long term higher
for longer are going to have to exit or ultimately
be absorbed into a larger player. So to answer your question,
(23:48):
it would be much easier for the industry on the
whole to have lower rates. I think a three to
a three five the industry is just fine three to
three five on the tenure. To be clear, I don't
know how soon we can get there. I think in
the meantime we're going to see a calling of the herd,
if you will.
Speaker 2 (24:04):
I'm very bullish on driverless cars, but assuming that they're
not in mass production or mass deployment in the next
couple of years, talk to us about like how far
people are going to be having to commute. If it
sounds like the desirable places there's no building, people are
having to build further and further out, what do we
talk about. What are some of the places, What are
the hotspots, you know, three hours outside of Charlotte or whatever.
Speaker 4 (24:27):
You're literally describing my house in connection.
Speaker 5 (24:29):
Yeah, right, I mean that's really what you're seeing. The
places right now getting the highest out migration from Atlanta,
where I relocated for Courtland are Gainesville, which is a
separate msa an hour and a half outside of the city.
You're seeing it in all of these sort of tertiary
markets because that's where people can afford to build, and
(24:50):
that's home builders and apartment developers chasing cheaper land basis
and cheaper.
Speaker 3 (24:55):
People don't commute from Gainesville to Atlanta.
Speaker 5 (24:58):
If you have a hybrid job, you might commute to
North at Lanta wants some time, or you work remote
but driverless cars. That's a place you could see benefit
from that. It's a place trying to grow because it's
exceptionally difficult to get a home in North Buckhead today
or even in some of the closer in suburbs. It's
exceptionally expensive. So I think you're going to see people
(25:19):
commuting further and further out because that's the accessible product.
But also I don't know if demand for that product
is frankly as high as it is for the better
located product. We run independent renter surveys things along those lines,
and it seems location matters more to people today than
space to a degree, and I do think that favors
(25:40):
multi family investment in the longer term.
Speaker 3 (25:57):
Trady.
Speaker 2 (25:58):
I just want to be clear that if you have
to commute even part time from Gainesville to Atlanta, or
if you have to live in some small multifamily development,
I do not blame gen Z for thinking things aren't great,
even if nominally on paper their incomes are high.
Speaker 4 (26:15):
Well, yeah, that, thank you. I'm sure they'll appreciate that.
Speaker 3 (26:19):
I just want to be.
Speaker 5 (26:20):
Clear on one point I do want to put on
that though, our internal rent to income ratios today are
actually thirty basis points lower than they were in twenty eighteen. Okay,
so our apartment buildings today, despite thirty percent post COVID
rent gains, it's interesting, are more affordable because since COVID
we've had a thirty four percent increase in our new
(26:40):
renter incomes.
Speaker 3 (26:42):
But it's a different cohort anyway, Sorry, Tracy Goo.
Speaker 4 (26:45):
So we're talking about the desirability of cities and everyone
wants to live there, but you can't really build. One
of the other things that Trump promised, in addition to,
you know, mass deportation and things like that, a reduction
in federal spending was perform and I guess I'm curious, like,
have you seen any action on that or is there
an expectation that maybe the federal government will in some
(27:08):
way be able to ease up the bureaucracy around building
new construction.
Speaker 5 (27:13):
I don't know how he has any impact there it's
just they're so local driven. He can't touch impact fees
on local areas. You can't start touching fire and safety fees.
So I don't know how in a federal system the
federal government can control local impact fees, and I just
(27:36):
I can't connect the dots there.
Speaker 2 (27:38):
Well, setting aside what the federal government can do. Do
you see there's the MBIA movement all around. Do you
see them having an effect as the dial being turned
anywhere in a meaningful way.
Speaker 3 (27:49):
Outside of Austin.
Speaker 5 (27:51):
I think it's unfortunate. They've gained the most traction and
possibly the hardest turn and to build environment possible in theory.
You've seen some government elected officials change, You've seen some
positions change. I think there's probably some more momentum in
San Francisco than there's ever been before. You obviously, of
the South, it's just build, build, build, But it's hard
(28:13):
to put pen to paper on if they're actually achieving
things when you can't pencil new buildings in high quality
locations today.
Speaker 4 (28:21):
So a lot of multifamily loans have found their way
into either CMBs so commercial mortgage backed securities or colos
collateralized loan obligations, but the defaults on those have I
think the last numbers I saw, they're still pretty low.
Like on colos, I'm pretty sure it's in the low
single figures for US colos. Why haven't we seen like
(28:45):
greater waves of distress make their way into the end
product of multifamily.
Speaker 5 (28:52):
I think people are doing everything they can to protect
their warehouse lines in the CLO and CMBs market. You
don't want to lose access to capital if you're a
debt fund today by having toxic assets, so people are
picking them off the COLO book. They're internalizing them. If
you're one of the debt funds that has a housing
(29:14):
operator wing, you can start operating properties on your own.
I mean it's I think it's protect credit at all costs,
So people are doing everything they can to protect that credit.
The distress is there. You see every week on the
pipeline report of what's on market, the same syndicators looking
for bailouts. You see the same people that hit the
(29:34):
over built nodes and overpaid in twenty one looking for help,
and you see them not getting the prices that even
hit the debt levels they need. So it's working out.
But I think Ultimately, nobody's willing to sacrifice their credit
levels to work it out.
Speaker 2 (29:49):
Quicker, Can you just say anything more about the impact
of Los Angeles. I hadn't thought about that fires in
terms of like estimates for how much resources that's good
going to suck up, so to speak, for construction and development.
Speaker 5 (30:04):
Yeah, it's interesting. I think our CEO made an off
the cuff comment last week. We were looking at a
building in a location in Atlanta that is where heavily
heavily populated by construction workers, and his remark was, I'm
going to have trouble getting rent growth there for the
next year and a half because I expect all those
people to end up in California in the short term.
(30:25):
And it's another actually to sort of wrap one other
question you asked, and there's the HUD side of things.
HUT is typically vital in these rebuilding efforts, and that's
a funding channel that if the government turns off, is
going to have severe impacts there as well. So A,
I think you could see demand move within communities because
(30:46):
of LA I think it's going to have a material
impact on cost to build in our country. And B
you could see it dampened by some of the recent
movements by the administration.
Speaker 4 (30:54):
Well, FEMA is also a really big protection layer for
like Fanny May and entities like that.
Speaker 3 (31:00):
So fun times, Lee Everett.
Speaker 2 (31:03):
Looking forward to having you back again in twenty twenty
six when we talk about how badly constrained the market is.
Really appreciate your coming back on odlock.
Speaker 5 (31:13):
Thank you for having me. It's always great.
Speaker 2 (31:27):
So it's funny we got like ten minutes of housing
supply relief over and then we're just heading right back
to constraints and shortages, and it sounds like rent growth
and investor friendly environments and so forth.
Speaker 4 (31:42):
We got a glimpse of what could be.
Speaker 3 (31:43):
Yeah.
Speaker 2 (31:44):
The other thing I was it's also funny and tracy
thing is like, oh, this was the renter friendly market.
Speaker 4 (31:49):
I missed it right, Yeah, seriously. Well, I also thought
his characterization of like people are living in houses, it's
just a lot of them are not living in the
houses in the places that they would prefer to be.
Speaker 3 (32:01):
Yeah.
Speaker 4 (32:01):
I mean, that's certainly part of my experience and one
reason why I don't own a house in New York,
but I own one elsewhere. The other thing I was
thinking about is his characterization of I guess the haves
and the have nots in the market. And I think
this is really important because this is like you could
say this about the entire corporate world. Yes, like, if
(32:24):
you are a big company that can access the bond market,
the past few years probably have not been that bad
for you. If you are a smaller player and you
have to take out bank loans, it's been a lot
more constrained. So a lot of the financing environment has
just led to a situation where the big get bigger.
And Lee was talking about how you might see more
(32:46):
consolidation in multi family operators, and that's just an extension
of that trend.
Speaker 2 (32:51):
And of course we've talked about this in the past,
the Great Financial Crisis and what it did to the
single family home builders, and they're just a lot fewer
single family homebuilders today than there were several years ago.
You know, I always think back to last year when
we traveled to Mount Area, North Carolina.
Speaker 3 (33:10):
The idea that the community.
Speaker 2 (33:11):
Has to put together a road show to pitch the homebuilder. Yeah, right,
because the power exists in the consolidation of the homebuilder
such that the community is like, please build here. You know,
it's the sort of exact opposite in the way of
the mb problem. It's like, no, we have plenty of land.
We just need to convince you. But this idea, that's like, Okay,
we had the great financial shock that consolidated the single
(33:33):
family homebuilders. Now we have this sort of financial shock
in the form of higher interest rates, higher insurance, and
that's consolidating the multifamily developers.
Speaker 4 (33:44):
Yeah, all right, shall we leave it there.
Speaker 3 (33:45):
Let's leave it there.
Speaker 4 (33:46):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (33:52):
I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Erman Dash, Ol
Bennett at dashbott Kill Brooks at Kilbrooks. From our Oddlots content,
go to Bloomberg dot com slash odd Lots. We have transcripts,
a blog, and a newsletter and you can chat about
all of these topics twenty four to seven in our
discord Discord dot gg slash out Lots And.
Speaker 4 (34:14):
If you enjoy All Thoughts, if you like it when
we talk what's next in multifamily, then please leave us
a positive review on your favorite podcast platform, and remember,
if you are a Bloomberg subscriber, you can listen to
all of our episodes absolutely ad free. All you need
to do is find the Bloomberg channel on Apple Podcasts
and follow the instructions there. Thanks for listening. Eight
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lags podcast.
Speaker 3 (00:22):
I'm Joe Wisenthal.
Speaker 4 (00:23):
And I'm Tracy Alloway.
Speaker 2 (00:25):
Tracy, you know, one of the big themes obviously in
American life and the most recent election, was inflation. And
there are a lot of things that people think of
when they think of inflation. Maybe they think of egg prices,
it's in the news these days. Maybe they think of
gasoline prices. But a big story is like the cost.
Speaker 3 (00:43):
Of living, is the cost of housing?
Speaker 4 (00:45):
Yes, Actually, it's kind of funny. Everyone has their own
personal benchmarks for inflation, and mine is probably the cost
of mayonnaise, because I've been tracking that for a long time.
Not because I eat that much of it, but I
just find it interesting because it contains eggs and oil
and packaging and labor and all that stuff. And rent.
And guess what, Joe, my rent's going up again.
Speaker 2 (01:07):
What about your mayonnaise consumption? It's funny to be sorry
when you said mayonnaise. I have to admit the first
thing that came to my head was like just like
imagining you in your apartment with the gar storing buckets
or gigantic tub of Costco mayonnaise iatiot with a spoon.
I'm sorry, you're really consuming a lot of mayonnaise. If
this is what comes to your mind when you think
(01:28):
about the cost of living.
Speaker 4 (01:29):
Well, as part of my research for this, I can
tell you you can buy buckets of extra heavy mayo
off of Amazon.
Speaker 3 (01:35):
Sounds good.
Speaker 2 (01:36):
We're actually not doing a mayonnaise episode. We're talking about
the other one we're talking about.
Speaker 4 (01:41):
I tried to throw in my rent stat Yeah, I know,
to keep you on topic, but you wanted to talk
about Mayo.
Speaker 2 (01:46):
We'll do a Mayo episode at some point. But rent
is really interesting. Actually, in the government's measure there's so
many moving parts with anything housing, but most recently actually
the government's measure of rent price growth, which has been
a key contributor to overall inflation, et cetera. Actually it's
been moderating lately. We're sort of getting back to the
point where we're like at pre COVID levels of rent
(02:08):
price growth, right.
Speaker 4 (02:09):
So it's still going up, but just not as much
as it was before.
Speaker 2 (02:13):
But the perversity, perhaps it's a perversity, is that obviously
the FED jacked up interest rates quite aggressively to fight inflation.
Inflation has come down, tis a little longer than people expected,
but you know, it has come down. But one of
the things that we do know that happens is that
when the FED jacks of interest rates, that really has
an effect on housing development, which of course requires a
(02:35):
lot of capital and leverage, et cetera. And if you
look at a chart of say multifamily housing starts, buildings
five units or more, that's come way down since its peak,
like in twenty twenty two.
Speaker 4 (02:47):
Yeah, so we had this huge wave of supply in
sort of late twenty twenty one twenty twenty two. As
you said, it's fallen quite a lot. The interesting thing
that I see here is like yields on bonds are
still going up. So we're at four point five five
percent or so on the ten year and that is
higher than when the Fed started cutting rates. So the
(03:09):
cost of financing these projects is still going up and
there's not that much activity.
Speaker 2 (03:15):
Well, we did an episode in November twenty twenty three,
and our guests said something really interesting to me that
I've repeated probably many times, which is that for a
lot of multifamily developers, they might prefer a hard landing
in the economy, because sure, that might mean demand for
rent goes down or some of their tenants can't pay
their rent, But if it means that you get a
(03:36):
dramatic drop in interest rates because of howlever they are
at the cost of money, that might actually work out
better for them, which is sort of still blows my mind,
but it is what it is. And so one of
the other things that we're thinking about is like, well,
what's going on with all these multifamily developers carrying a
big debt and so forth, given the fact that rates
(03:57):
have not come.
Speaker 4 (03:58):
Down, Yeah, let's talk about it.
Speaker 2 (03:59):
Well, we are going to be speaking with the same
guests who commented that in twenty twenty three, we're going
to be talking about all of these dynamics. Really the
perfect guest. Thrilled to welcome back onto the show. Lee Everett,
head of research and strategy at Cortland, which is a
multi family owner operator roughly eighty thousand units nationwidely, Thank
you so much for coming back on the podcast.
Speaker 5 (04:21):
Thank you for having me.
Speaker 2 (04:22):
I've actually just wanted to have you back on to
talk about this specific that there's a lot we're going
to talk about but as Tracy mentioned, rates haven't come down.
I know people were like, all the fens guests are right,
this is relief, is insight. How stressed out are a
lot of these entities by the fact that after all
this time we haven't seen any rate relief.
Speaker 5 (04:44):
It's interesting. I think stress is hitting sort of all
sides of the market. You have your bigger, more well
established shops that have been managing through this, able to
handle the higher rate environment, but have obviously taken a
very real valuation hit on their existing portfolios, like to
thirty percent, depending upon the portfolio composition. At the same time,
(05:05):
you've had record demand hitting the sector because cost to
buy housing is exceptionally unattainable today. And then on the
other side, you're having a very material impact on the
supply side. And I think that's what's really unique. If
you think back to September, the tenure was around a
three six. I think the day chair pal cut us
by fifty basis points. Well, we're at almost a four
(05:28):
to six today, and I remember that night you heard
reports about developers out at like local dinners. Yeah, they
were calling it fed day and getting ready to put
shovels in the chip exactly, and what you've seen instead
is increased stress on both the short end and the
long end of the curve. That's given you trouble on
the short end to start new housing and trouble on
(05:50):
the long end to afford longer term for ownership housing.
Speaker 4 (05:54):
You mentioned that some of the bigger players are better
able to deal with higher rates. Can you talk about
how people try to offset some of these higher rates
and is it the case that there is still an
ability to refinance and turn out your debt or is
that starting to go away now?
Speaker 5 (06:11):
I think extend and pretend what you're referring to and
the always popular looming maturity wall discussion is what you're
hitting on. And what we're seeing there is the established
owners that have strong relationships throughout either Fanny and Freddy,
balance sheet lenders, etc. They're able to continue to negotiate
(06:35):
and work out loans and delays. The people that got
out really far over their skis the syndicators, the new
entrance to the place, and a lot of what we
talked about last time. Those players are sort of hitting
the end of their window here. And what we've seen
in the financing space actually, as we delve into this
a bit more is there's so much liquidity on the
(06:56):
debt side that wants to come back to work. They
want to be rid of the these sort of balance
sheet hindrances that are these unproven players in the market,
and they want to get back to work with the
sponsors they appreciate. And we've generally seen spreads come in
about one hundred basis points from their peak, so that
has helped limit some of sort of the financing pressures,
(07:17):
but it's certainly a far cry from a one percent
tenure to a four or five ten uere. So it
depends a lot on who you are in the space
and how this has impacted you today.
Speaker 2 (07:28):
Right because twenty twenty one, probably part of twenty twenty two,
we were like in that era where Instagram influencers we're
posting about to get in. You know, rent prices always.
Speaker 4 (07:40):
Go to talk multifamily landlord.
Speaker 2 (07:42):
Yeah, TikTok, multi family landlords. Rent always goes up. We
have a new project is probably called the Reserve. It's
in the suburbs of Houston and has a pool table
and there's no kids allowed to pool table. And you're
guarantee me and a bunch of them got wiped out.
What happened to them since we talked? And then how
talk about it from the more established operators, and how
(08:03):
much of a relief has it been that some of
this I don't know, new money, whatever you want, TikTok
money has maybe gotten washed out.
Speaker 3 (08:09):
Tell us how that story ended.
Speaker 5 (08:11):
I would call it a thinning of the herd that
we're still going through. I don't want to necessarily call
up people by name, but sure you can see in
the news there is a certain prominent syndicator that basically
doubled their positions and became a top thirty owner in
twenty twenty one or so, and banks are personally suing
the founders of that company on carry guarantees. Today, you've
(08:33):
seen potential investigations and some of the debt funds being
talked about in the space, and that relates specifically to
valuations on some of these assets that weren't maintained or
taken care of by certain owner operators. So you're seeing
a high level of delinquency. A lot of these properties
that were these new money and TikTok landlords have a
(08:55):
ton of leans against them because they weren't paying their
contractors they weren't executing their value add and ultimately they're
going to be in a world of pain. Would be
my sort of outcome at the end of all of this, because,
as I said before, the banks are just getting tired
of carrying this on their balance sheets, same with the
debt funds, Like you can't make money with this much
(09:16):
bad money hogging your book.
Speaker 4 (09:18):
I have a really basic question, which I feel kind
of bad asking because I used to cover commercial real
estate and I should know this since multifamily is the
forgotten commercial real estate as I sometimes call it. But
what's the best thing to look at if you want
to just get a gauge of multifamily markets health, So
(09:38):
you know, I can look at like permits or something
like that, But that number is really volatile. I'm not
sure how much it's actually telling me.
Speaker 5 (09:45):
Yeah, I think there's sort of two high level factors.
One is going to be your rent growth, because that's
going to feed your NI growth. The other factor is
going to be your cap rate, which we talked about
this a little bit last time. Your cap rate is
essentially your yield your income over your price. As money
is entering the space, prices go up, so you get
healthier cap spaces, and that's on the sort of for
(10:08):
sale side. And as NOI goes up, you also can
get tightening of cap rates because you get a higher
value in the NI and that also would be sort
of your high level indicator. And what we've seen in
cap rates is they've just started to flatten in the
last few months, but they're up roughly one hundred bases
points across the board and that's where sort of that
(10:28):
twenty to thirty percent hitten valuations I mentioned has come
into play.
Speaker 2 (10:33):
All right, let's talk about from the perspective of a renter.
So I have some familiarity with the Austin, Texas housing market.
Supply and demand apparently has worked very beautifully. There are
a lot of people wanted to move there, and then
there's just towers up everywhere, including deep into the suburbs.
And then actually rent price I believe it's actually negative
(10:53):
for many years in Austin, which you know, seems like
good news overall. That's a rare story though, but we've
had this big fall and anyone can just go on
Fred and search do privately owned housing units started units
and buildings with five units or more and see that
we've had this big drop over the last two years
roughly since the peak of all these developments. What's going
(11:15):
to happen play this out a little.
Speaker 3 (11:17):
Bit over the next two years.
Speaker 2 (11:19):
Were supply needs demand here, and you know we already
have these affordability rent is already basically expensive everywhere, even
in Austin with the declines.
Speaker 3 (11:27):
Is it going to get worse?
Speaker 4 (11:29):
Yes?
Speaker 5 (11:29):
I think frankly, we're about to transition from what has
been a very renter friendly market to again a landlord
friendly market over the course of the next two to
three years. And that's going to be particularly driven by
what we're seeing on the supply side. We're going to
have over a million units come to market over a
two year period here in twenty four and twenty five. Okay,
(11:50):
but peak supply is hitting in the next six months.
And if you look at relative time from a peak
supply and then b to getting to a level of
low supply than you saw last cycle, every major market
in the country will be there by the end of
twenty twenty six where delivering less housing units than they
(12:10):
did on average from seventeen to nineteen in apartment buildings.
So you're going to go below prior cycle supply very quickly.
At the same time, we do have it exceptionally strong
labor markets here, and the demand story has been outstanding.
So twenty twenty four is going to end the year,
depending upon the data provider you use, as the first
(12:30):
or third highest year for rental demand. Ever, twenty twenty
one was the prior record, So we're seeing people form
rental households at unprecedented rate in the US, and as
that supply comes down, you're going to see that demand
struggle to frankly, find high quality, well located assets to
move in, and you're likely to see that relationship flip
(12:52):
at that point.
Speaker 4 (13:08):
So the other thing that affects multifamily housing construction other
than interest rates has to be just general confidence, I guess,
in the direction of the economy, the direction of the world.
And certainly there's a lot going on right now. We're
recording this on January twenty eighth, and there's news that
the Trump administration is freezing a whole bunch of federal spending.
(13:32):
I think it's something like twenty percent of federal spending
that includes presumably stuff like Section eight and other affordable
housing measures. Would that be expected to hit multifamily as well.
Speaker 5 (13:46):
Yeah, and I think it's probably easiest to sort of
start at the top. Right When you're building multifamily, you're
generally trying to build to an acceptable return on cost. Frankly,
what we're doing is putting an investor's money together in
generating returns for them. Multifamily isn't built for free, and
it can't be in this sort of economic world. And
(14:07):
a general rule of thumb is a six plus percent
return on cost. So cost to build, you want to
yield over six percent of that to get a building
to pencil that tracks up closer to seven depending upon
the institution. Because you need to build to that yield
on cost, you have to have rents that are high
enough to generate enough rental revenue to drive that return.
(14:29):
So in order to build today, you have to build
it exceptionally high rent levels. Because of the cost to build,
because of the cost of interest rates. The only way
to drop that is to drop the cost, and that
cost drop typically comes for affordable housing from the federal government,
be it HUD grants that are then deployed through the
local housing agency, be it lie tech, be it any
(14:51):
sort of an ensemblage of ways to cut cost.
Speaker 3 (14:54):
That's how you can get.
Speaker 5 (14:55):
To affordable rents on the supply side, and then on
the demand side you can and cut rents by literally
giving people a rent check, which is what Section eight is,
and that again comes from the federal government via grant
given to the local housing agencies to deploy. And if
that money dries up, you have immense problems in terms
(15:17):
of a feeling the demand for these people because you're
cutting rent on the Section eight side and b encouraging
future construction of affordable apartment buildings.
Speaker 2 (15:27):
Just to be clear though, because there are projects that
have their market rate rent and then they have some
allocation to what people call affordable units right in different
cities or whatever, I have different rules about how much
you need to allocate. Is that Section eight housing two
or is Section eight housing like how much does it commingle?
(15:48):
Does this also affect development of buildings that people don't
think of as quote affordable housing projects.
Speaker 5 (15:55):
So in those sort of mixed buildings, you're going to
see more of a price lock, going to see a
supply side affordable building, be it tax credit, be it
a locked price on x percentage of AMI, which is
ultimately what you're going to say, say area median income,
which is how Fanny Freddy all of them essentially set
what's affordable through HUT, so that won't be destroyed or eliminated. Frankly,
(16:20):
usually when people are building, they understand in Massachusetts you
need x percentage of the building to be affordable, so
they need the building to pencil around that. Honestly, typically
it just means higher rents in the rest of the
building to fund those units. So I don't expect that
to dry up. What I expect our larger scale community
investment projects to revive an area within a town like
(16:43):
a Pilson. We looked at buildings with one of the
states prior at a prior job, and that was looking
at doing a massive housing development that would be entirely
affordable for the community there. And this is in Chicago,
So stuff like that's going to disappear. Purpose built is
going to disappear. Was planning to build an entirely voucher
building through Section eight, that's going to disappear, So you're
(17:06):
going to have real pain in that stuff, at least
in the short term. I mean, in theory, this could
be a quick turnaround and it's just a big wave
of disruption that goes away in four weeks, but there
is a world where it severely impacts housing construction at
the lower level.
Speaker 4 (17:21):
What are people in the market saying about it right now?
Or is everyone just sort of in weight and see mode.
Speaker 5 (17:27):
I think, like most things, it's weight and see mode.
I think that's been the general markets approach to this
entire administration transition, just because you need so much clarity
to start figuring out real world impacts here, and that
very much trickles into the cost to build stuff, with
the tariffs, with the deportation impacts on labor and things
along those lines.
Speaker 2 (17:47):
Let's talk about deportation impacts on labor. What are the
estimates for what percentage of the multifamily workforce, whether it's
construction and or maintenance, whatever else, is undocumented labor.
Speaker 5 (18:01):
It's estimated twenty percent of construction workers in this country
are undocumented labor. I'd venture to guess it's similar for
the whole multifamily industry when you look at staffing and
things along those lines. And I think when you look
at a combination of deportation of construction workers as well
as the sheer amount of labor it's going to require
to rebuild huge swaths of California. I think you could
(18:25):
be looking at a massive deficit in labor within the
construction space. And when you think about that, that's going
to be your strongest lever. That's going to hit your
cost to build, and that's what's going to drive up
those rents that are necessary. Is all of this immense
pressure you're going to see in the labor costs.
Speaker 2 (18:42):
Tracey, I hadn't even thought about the huge demand for
construction labor that's going to come out of California.
Speaker 4 (18:48):
But yeah, because of the fire.
Speaker 2 (18:50):
So we have the fires, we have deportations, we have
the end of a lot of affordable housing projects at
least temporarily, and the intro straight shock all coming together
so far, this is what we've covered so far. At
the same time to sort of like constrain the supply
of new housing in the coming years.
Speaker 4 (19:09):
Well, the irony is like everyone's building at the same
time after the wildfire's right, so like everything is just
going to go up. Actually, that reminds me we should
talk about insurance rates because I think this is another
source of pressure on multifamily, which is that insurance rates
for a lot of these operators have also been going
up quite a lot, and there aren't that many levers
(19:29):
they can pull in order to reduce that particular cost.
Speaker 5 (19:33):
Yeah, I think this is another situation of kind of
the haves and have nots. At Cortland, we ensure our
entire portfolio, and when you're able to sort of spread
risk over eighty thousand apartment units, you can get far
more beneficial rates if you're a small owner in La.
(19:54):
If you're a small owner in California, Florida and Texas,
I don't know what you do today. Rates had hit
an estimate of three hundred per unit at one point
in Florida to ensure some buildings. Well, there's been some
normalization since then and costs have generally stopped with the
massive spikes again pre wildfires, but it's just a huge,
(20:15):
huge cost that hits everyone, and it's tough at this
point in time to enact in certain markets, and that
includes also Texas. Tornado Alley's had as much of an
increase as you've seen in Florida in California to date.
Speaker 3 (20:30):
So where's the rubber beat the road?
Speaker 2 (20:32):
We're going to have you back on sometime in twenty
twenty six, maybe somewhere twenty twenty six, if the pattern
goes what are we talking about?
Speaker 5 (20:39):
I think what you're looking at in twenty twenty six
is a very investor friendly rental market again, and we
sort of have returned to where we were last cycle.
What I think is really interesting in what I see
in the housing market today is almost a displacement of
people living where they want rather than people not being
able to afford housing. And it's Art's at the top.
(21:00):
The baby boomers have the vast majority of three plus
bedroom homes in this country, and they aren't giving those
up despite plummeting bedroom utilization rates, so the millennials can't
really push into the housing they want. Some millennials continue
to rent or buy first time homes things along those
lines gen Z at the same time as the richest
earning young generation on record. Because of Frankly, the baby
(21:23):
boomers exiting the.
Speaker 3 (21:24):
Labor force feel it that way, though from what I.
Speaker 5 (21:27):
Now they do not, But the FED strongly disagrees with
their feelings.
Speaker 3 (21:32):
So when you live, FED doesn't care about your feeling.
Oh sorry, no, it's fine.
Speaker 5 (21:36):
When you look at this confluence of factors. What you've
seen is really higher earning people living lower down what
used to be considered the quality spectrum. So in our portfolio,
we've seen incomes jump to almost one hundred thousand dollars
per unit on average. Our credit scores have spiked to
around seven hundred, and our ages in the low thirties.
(21:57):
That's a well earning, strong young America worker, and that's
a cross our portfolio that's primarily in the Sun Belt
with some mid Atlantic and Western exposure. So you're seeing
an exceptionally high quality, credit worthy tenant and you're seeing
huge demand for that housing. And that's because nobody's building
in the well located areas. You can't build single family
(22:17):
homes in good school districts today. The local builders are
entirely out of the market. They've been absorbed by the
big boys since the Great Financial Crisis, and you're seeing
starts in those high quality locations plummet at a greater
rate than you're seeing them in the further out locations.
So you're going to have this tight labor force. Everybody
is going to need to work preventing some kind of
(22:38):
crazy AI situation, and you're going to have these high incomes,
and everyone's going to want to live in the same
well connected, good areas, and you're likely to see rents
in those areas begin to pop because that's where this
supply wave is winding down the quickest, and that's where
it starts. Aren't going to backfill the current supply.
Speaker 4 (22:57):
Just to be clear, though, the expect increase in rents,
is that enough to offset all of the pressures from
higher interest rates.
Speaker 5 (23:07):
I think you're likely to see what's happened in the
single family sector after the GFC happened a little bit
in the multifamily sector, where there is a thinning of
the herd. I don't think it'll get to the point
where I think four home builders have fifty percent of
new homeless things today or some crazy number like that.
But you're likely to see the small developers end up
(23:28):
consumed by the bigger developers that can handle it better.
And you're likely to see continued pressure in the multifamily
space where smaller funds, smaller operators, people that can afford
interest rate caps, that can't ride out long term higher
for longer are going to have to exit or ultimately
be absorbed into a larger player. So to answer your question,
(23:48):
it would be much easier for the industry on the
whole to have lower rates. I think a three to
a three five the industry is just fine three to
three five on the tenure. To be clear, I don't
know how soon we can get there. I think in
the meantime we're going to see a calling of the herd,
if you will.
Speaker 2 (24:04):
I'm very bullish on driverless cars, but assuming that they're
not in mass production or mass deployment in the next
couple of years, talk to us about like how far
people are going to be having to commute. If it
sounds like the desirable places there's no building, people are
having to build further and further out, what do we
talk about. What are some of the places, What are
the hotspots, you know, three hours outside of Charlotte or whatever.
Speaker 4 (24:27):
You're literally describing my house in connection.
Speaker 5 (24:29):
Yeah, right, I mean that's really what you're seeing. The
places right now getting the highest out migration from Atlanta,
where I relocated for Courtland are Gainesville, which is a
separate msa an hour and a half outside of the city.
You're seeing it in all of these sort of tertiary
markets because that's where people can afford to build, and
(24:50):
that's home builders and apartment developers chasing cheaper land basis
and cheaper.
Speaker 3 (24:55):
People don't commute from Gainesville to Atlanta.
Speaker 5 (24:58):
If you have a hybrid job, you might commute to
North at Lanta wants some time, or you work remote
but driverless cars. That's a place you could see benefit
from that. It's a place trying to grow because it's
exceptionally difficult to get a home in North Buckhead today
or even in some of the closer in suburbs. It's
exceptionally expensive. So I think you're going to see people
(25:19):
commuting further and further out because that's the accessible product.
But also I don't know if demand for that product
is frankly as high as it is for the better
located product. We run independent renter surveys things along those lines,
and it seems location matters more to people today than
space to a degree, and I do think that favors
(25:40):
multi family investment in the longer term.
Speaker 3 (25:57):
Trady.
Speaker 2 (25:58):
I just want to be clear that if you have
to commute even part time from Gainesville to Atlanta, or
if you have to live in some small multifamily development,
I do not blame gen Z for thinking things aren't great,
even if nominally on paper their incomes are high.
Speaker 4 (26:15):
Well, yeah, that, thank you. I'm sure they'll appreciate that.
Speaker 3 (26:19):
I just want to be.
Speaker 5 (26:20):
Clear on one point I do want to put on
that though, our internal rent to income ratios today are
actually thirty basis points lower than they were in twenty eighteen. Okay,
so our apartment buildings today, despite thirty percent post COVID
rent gains, it's interesting, are more affordable because since COVID
we've had a thirty four percent increase in our new
(26:40):
renter incomes.
Speaker 3 (26:42):
But it's a different cohort anyway, Sorry, Tracy Goo.
Speaker 4 (26:45):
So we're talking about the desirability of cities and everyone
wants to live there, but you can't really build. One
of the other things that Trump promised, in addition to,
you know, mass deportation and things like that, a reduction
in federal spending was perform and I guess I'm curious, like,
have you seen any action on that or is there
an expectation that maybe the federal government will in some
(27:08):
way be able to ease up the bureaucracy around building
new construction.
Speaker 5 (27:13):
I don't know how he has any impact there it's
just they're so local driven. He can't touch impact fees
on local areas. You can't start touching fire and safety fees.
So I don't know how in a federal system the
federal government can control local impact fees, and I just
(27:36):
I can't connect the dots there.
Speaker 2 (27:38):
Well, setting aside what the federal government can do. Do
you see there's the MBIA movement all around. Do you
see them having an effect as the dial being turned
anywhere in a meaningful way.
Speaker 3 (27:49):
Outside of Austin.
Speaker 5 (27:51):
I think it's unfortunate. They've gained the most traction and
possibly the hardest turn and to build environment possible in theory.
You've seen some government elected officials change, You've seen some
positions change. I think there's probably some more momentum in
San Francisco than there's ever been before. You obviously, of
the South, it's just build, build, build, But it's hard
(28:13):
to put pen to paper on if they're actually achieving
things when you can't pencil new buildings in high quality
locations today.
Speaker 4 (28:21):
So a lot of multifamily loans have found their way
into either CMBs so commercial mortgage backed securities or colos
collateralized loan obligations, but the defaults on those have I
think the last numbers I saw, they're still pretty low.
Like on colos, I'm pretty sure it's in the low
single figures for US colos. Why haven't we seen like
(28:45):
greater waves of distress make their way into the end
product of multifamily.
Speaker 5 (28:52):
I think people are doing everything they can to protect
their warehouse lines in the CLO and CMBs market. You
don't want to lose access to capital if you're a
debt fund today by having toxic assets, so people are
picking them off the COLO book. They're internalizing them. If
you're one of the debt funds that has a housing
(29:14):
operator wing, you can start operating properties on your own.
I mean it's I think it's protect credit at all costs,
So people are doing everything they can to protect that credit.
The distress is there. You see every week on the
pipeline report of what's on market, the same syndicators looking
for bailouts. You see the same people that hit the
(29:34):
over built nodes and overpaid in twenty one looking for help,
and you see them not getting the prices that even
hit the debt levels they need. So it's working out.
But I think Ultimately, nobody's willing to sacrifice their credit
levels to work it out.
Speaker 2 (29:49):
Quicker, Can you just say anything more about the impact
of Los Angeles. I hadn't thought about that fires in
terms of like estimates for how much resources that's good
going to suck up, so to speak, for construction and development.
Speaker 5 (30:04):
Yeah, it's interesting. I think our CEO made an off
the cuff comment last week. We were looking at a
building in a location in Atlanta that is where heavily
heavily populated by construction workers, and his remark was, I'm
going to have trouble getting rent growth there for the
next year and a half because I expect all those
people to end up in California in the short term.
(30:25):
And it's another actually to sort of wrap one other
question you asked, and there's the HUD side of things.
HUT is typically vital in these rebuilding efforts, and that's
a funding channel that if the government turns off, is
going to have severe impacts there as well. So A,
I think you could see demand move within communities because
(30:46):
of LA I think it's going to have a material
impact on cost to build in our country. And B
you could see it dampened by some of the recent
movements by the administration.
Speaker 4 (30:54):
Well, FEMA is also a really big protection layer for
like Fanny May and entities like that.
Speaker 3 (31:00):
So fun times, Lee Everett.
Speaker 2 (31:03):
Looking forward to having you back again in twenty twenty
six when we talk about how badly constrained the market is.
Really appreciate your coming back on odlock.
Speaker 5 (31:13):
Thank you for having me. It's always great.
Speaker 2 (31:27):
So it's funny we got like ten minutes of housing
supply relief over and then we're just heading right back
to constraints and shortages, and it sounds like rent growth
and investor friendly environments and so forth.
Speaker 4 (31:42):
We got a glimpse of what could be.
Speaker 3 (31:43):
Yeah.
Speaker 2 (31:44):
The other thing I was it's also funny and tracy
thing is like, oh, this was the renter friendly market.
Speaker 4 (31:49):
I missed it right, Yeah, seriously. Well, I also thought
his characterization of like people are living in houses, it's
just a lot of them are not living in the
houses in the places that they would prefer to be.
Speaker 3 (32:01):
Yeah.
Speaker 4 (32:01):
I mean, that's certainly part of my experience and one
reason why I don't own a house in New York,
but I own one elsewhere. The other thing I was
thinking about is his characterization of I guess the haves
and the have nots in the market. And I think
this is really important because this is like you could
say this about the entire corporate world. Yes, like, if
(32:24):
you are a big company that can access the bond market,
the past few years probably have not been that bad
for you. If you are a smaller player and you
have to take out bank loans, it's been a lot
more constrained. So a lot of the financing environment has
just led to a situation where the big get bigger.
And Lee was talking about how you might see more
(32:46):
consolidation in multi family operators, and that's just an extension
of that trend.
Speaker 2 (32:51):
And of course we've talked about this in the past,
the Great Financial Crisis and what it did to the
single family home builders, and they're just a lot fewer
single family homebuilders today than there were several years ago.
You know, I always think back to last year when
we traveled to Mount Area, North Carolina.
Speaker 3 (33:10):
The idea that the community.
Speaker 2 (33:11):
Has to put together a road show to pitch the homebuilder. Yeah, right,
because the power exists in the consolidation of the homebuilder
such that the community is like, please build here. You know,
it's the sort of exact opposite in the way of
the mb problem. It's like, no, we have plenty of land.
We just need to convince you. But this idea, that's like, Okay,
we had the great financial shock that consolidated the single
(33:33):
family homebuilders. Now we have this sort of financial shock
in the form of higher interest rates, higher insurance, and
that's consolidating the multifamily developers.
Speaker 4 (33:44):
Yeah, all right, shall we leave it there.
Speaker 3 (33:45):
Let's leave it there.
Speaker 4 (33:46):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (33:52):
I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Erman Dash, Ol
Bennett at dashbott Kill Brooks at Kilbrooks. From our Oddlots content,
go to Bloomberg dot com slash odd Lots. We have transcripts,
a blog, and a newsletter and you can chat about
all of these topics twenty four to seven in our
discord Discord dot gg slash out Lots And.
Speaker 4 (34:14):
If you enjoy All Thoughts, if you like it when
we talk what's next in multifamily, then please leave us
a positive review on your favorite podcast platform, and remember,
if you are a Bloomberg subscriber, you can listen to
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and follow the instructions there. Thanks for listening. Eight
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Joe Weisenthal
Tracy Alloway
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