While the longest government shutdown in U.S. history may be over, the commercial real estate industry will be feeling its impact for some time. From HUD halting originations and approvals to hotel demand drying up and data going away, the pain has been widespread.
And it will continue to impact underwriting and kill deals, especially in the multifamily realm, Origin Investments co-CEO Michael Episcope said.
Roughly 2,000 multifamily starts were delayed as HUD went dark, he said. That doesn’t get resolved immediately and will impact rent growth.
“You have to assume that there’s going to be lower demand as a result of this government shutdown,” Episcope said on this week’s show.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mark Bonner (00:09):
Okay. Welcome to First Draft Live. I'm Mark
Bonner, business house editor inchief coming to you live from
New York. It's Friday, November14, coming to you just days
after the federal governmentfinally powered back on. And no,
this is not a victory lap today.
This is the hangover show. Afterforty three days of paralysis,
the longest shutdown in UShistory, the lights are once
(00:31):
again back on in Washington. Butthe economy isn't the one we
switched off in early October.Up to $14,000,000,000 in output
have been permanently erased.The country has sustained a
major GDP hit, basicallydeleting a mid sized US city
from the map.
6,700,000 empty hotel roomnights, 42,000,000 Americans
(00:55):
still waiting on snap dollars atanchor half the country's most
resilient retail, and 1,250,000federal workers tightening belts
heading into the holidays. So,yes, technically, the shutdown
is over, but emotionally,politically, economically, well,
the system designed to stabilizethe country just reminded
(01:16):
everyone how quickly it candestabilize it. And don't look
now, but Sabres are alreadyrattling about another shutdown
in January. HUD's multifamilypipeline is jammed. GSA leasing
is weeks from full speed.
Federal contractors are triagingcash flow. And the statistical
(01:37):
blackout has left underwritingand valuations drifting in what
PAL calls fog. That's the realstory. Not that Washington
reopened, but that it reopenedback into uncertainty. Something
CRE has been battling all year.
So how's survive to '25 goingy'all? How about bliss in '26?
(01:59):
Well, we're gonna see. Andthat's exactly why we asked
today's guest to join us. Fewpeople see the interplay between
macro shock and real estatereality more clearly than
Michael Episcope, co CEO ofOrigin Investments, a firm
that's built an investmentstrategy around discipline,
downside protection, and readingmarkets when they're at their
(02:21):
murkiest.
He's one of the sharpest voicesI know on how capital behaves
when this political system goesoff the rails and where
opportunity emerges wheneveryone else pulls back.
Michael, welcome to First DraftLive.
Michael Episcope (02:34):
Thank you for having me Mark. And I was just
thinking as you were talking,last time I was on here was, the
big shutdown during COVID andhere I am back in another
shutdown about 40% of thecountry. So it's kind of poetic.
Mark Bonner (02:48):
It is poetic. And by the way, just for our
listeners and our viewers whodon't know, Michael is referring
to the pandemic and Michael wasour first guest ever on BizNows
first webinar ever. Anothermoment where we found the
economy in dire straits and yethere we are again. So Michael,
let's get into it. What does asix week federal freeze reveal
(03:09):
about the fragility of The USeconomy right now?
And how are you navigating itfrom your perspective?
Michael Episcope (03:14):
Yeah, it's a great question. I mean, I think
what it reveals more thananything is the dysfunctionality
of our political environment andthat is kind of the elephant in
the room. I think what'shappened over the last forty
three days as you put it, it'sthe longest shutdown in history.
It's somewhere between annoyingand tragic. And if you look at
(03:35):
the 800,000 federal workers thatwere furloughed, the food lines
have never been more jammed foodpantries.
You have people who can't payrent living paycheck to
paycheck, having to pick upother work. That's tragic.
That's absolutely tragic. Andit's 100% in control of the
politicians, This should havenever happened. And then you
(03:55):
have companies like ours.
We were launching our intervalfund and we were at the one inch
line with the SEC and that'sdelayed. We don't know now that
we're going to be opening backup whether we're going to start
at the one inch line or be backat the 50 yard line, but we will
be open. So that's moreannoying. But it is impacting
(04:16):
permanently what's going on inthe economy And it's just wiping
out growth that we just don'tneed to. And so like this
political dysfunction isunsettling.
I think the elephant in the roomis really the government debt,
the government dysfunctionality,the things that we're not
addressing. This is like asideshow to everything going on.
And so like, there's a lot ofripple effect. I think you named
(04:39):
a lot of them, but for us it's aspeed bump. It's certainly not
like it was in COVID, butthere's a lot of ripple effects
that are happening and it's it'skind of similar to COVID in the
sense that you have a shutdownand you had you're going to have
a permanent loss to the economy,but then some of that is going
to show up in early twentytwenty six.
Mark Bonner (05:00):
I mean, it's not just a speed bump though,
Michael. It's another speedbump. There have been a lot of
speed bumps this year in The USeconomy for a whole variety of
reasons. Is this just anothermoment that commercial real
estate has to absorb? Is thispar for the course at this
point, this deep in the year nowlooking into 2026 or is this
(05:21):
permanent structural dent insentiment and pricing from your
perspective?
Michael Episcope (05:26):
I think it's a little bit of both. I think for
some you just have to roll withpunches and do it. And you're
right, there's lot of speedbumps, especially over the last
few years. It feels like we'vebeen operating on a street with
nothing but speed bumps andwe're waiting for kind of a
clear road ahead of us so we canput the pedal to the metal. And
we all are looking at 2026, someof the multifamily supply
(05:49):
getting cleaned up growth comingback into the market and some
normalcy.
So I do think thoughstructurally we're not in the DC
or Metro or Northeast or, andwe're not as impacted by a lot
of these government shutdowns,but some of the delinquencies, I
mean, you're talking about 10 to15% delinquencies, vacancies
rising. You sort of have torethink your strategy if you're
(06:13):
in those markets and you'rebuilding and you have a large
presence there because thisisn't going to stop. They're not
taking care of the debt to GDPproblem. Mean, this whole
shutdown was aboutappropriations, but next year
we're going to have to deal withthis debt ceiling again. And
when you look at that, if thisbecomes another stalemate, if
(06:34):
the government shuts down,they're talking about this
happening again in January.
It's going to be very hard to bean owner of multifamily real
estate in any of the EasternSeaboard because it's so
connected to what's happeningwith the government.
Mark Bonner (06:48):
And, yeah, we're seeing multifamily REIT
suffering right now on thatfront. And so that that's a
leading indicator of some painthat's either there right now or
coming to a theater near you.Let's talk about capital markets
for a second. Already wary. Nowthey're second guessing
everything all over again.
Transaction volume did pop inSeptember, but confidence, not
(07:08):
comps, I think is the realcurrency here. Liquidity
typically lags a shock like thisby one or two quarters. So now
we're in the 2026. And this onewasn't just a shock. It was a
statistical blackout.
Right? The White House saidyesterday that the jobs data
from, I believe, Octoberpermanently gone. We'll never
see it. Poof. Right?
(07:29):
How do you deal with thatblackout? I mean, can you
rebuild it in the aggregate withwith private private sources?
Can you can you sustain ablackout like that, Michael?
Like, what's your visibilityinto this? And how is this
affecting your decision making?
Michael Episcope (07:44):
So we're not as impacted by the monthly
release of government databecause in real estate you're
making three, five, ten year,twenty year bets on real estate.
So you really have to look atthe macro. That's why I was
talking about. If you're in DCand you're in Maryland, you
really you have to rethink yourstrategy because ultimately what
matters in investing is thatyou're A, you're in a good asset
(08:07):
class B, you're in a good marketand C, you have a great micro
location as well a good asset.And so like we think about it in
terms of that.
So missing one or two orders ofBLS data doesn't make a
difference to us. When we'relooking at more of the global
picture, if the governmentcontinues to operate at a
dysfunctional level and we seeunemployment start to rise and
(08:28):
delinquencies and they start toleak into other cities wherein
then we're going to have tostart rethinking our sort of
macro thesis here. With realestate, it's very different than
if you're looking stocks, bonds,liquid assets, because you're
making long term bets here. Soagain, it's more annoying not
having the BLS data, but it'sless impactful for groups like
(08:50):
ours. We're just we're notlooking at the month to month,
we're looking out on thehorizon.
Mark Bonner (08:54):
Right. But you know, you're making decisions
now or next week or next monthor in January, right? We just
went through this speed bump,which we're gonna call the
longest shutdown in Americanhistory. We've had the other
speed bumps that we've talkedabout. Do you make and then you
got this other thing happeninghere, which is another shutdown
maybe in January.
Right? And if you didn't believethat it couldn't happen, we're
(09:16):
now forty three days into thelongest one that we that has
ever happened in this country.So it could happen again in
January. Both Democrats andRepublicans are unafraid to test
each other on these fronts. Soall of a sudden, 2026 is even
murkier.
What's the real timeline herebefore deal flow normalizes in
your mind, Michael? And when doyou make the decision? Do you
(09:36):
are you now making decisiontoday between now and the end of
the year? Or are you going towait for January and see what
happens on Capitol Hill?
Michael Episcope (09:45):
We'll continue to make decisions. We're not
going put any big bets on rightnow because you're right. I
mean, likelihood is that thereis another government stalemate
that there's a shutdown at somepoint. I mean, I don't know why
we would think otherwise. And Ithink the real issue here can be
just a loss of confidence in TheUS economy.
(10:07):
We're starting to see that showup in interest rates. Again, it
comes back to debtdysfunctionality and we've seen
a lot of selling of USTreasuries. The new normal seems
to be 4.1, 4.2. We briefly 104%.We were cheering for about a
week and then all of a sudden wecreep back up.
And some of this, who knows ifthis is accurate is attributable
(10:29):
to this government shutdown thatwe saw kind of 15 basis point
spike in the interest rates. SoI think we have to be wary about
the things that really impactmultifamily real estate and the
variables there, which is thegrowth of rent vacancy, the job
market, interest rates, to thatextent, we will get through this
(10:51):
like we have everything else,but it is impacting. I mean,
developers have to carryproperties for another month,
two months, three months, fourmonths, you're talking about
another five, six, seven percentin carry costs. And some people
are better equipped, betterbalance sheets, not using a lot
of leverage to withstand some ofthese issues. Then other people
(11:13):
have business plans that aremore price perfection and
they're going be on the edge.
And so like we always look atkind of the dystopian view when
things are happening here. Thiscould lead to other
opportunities, certainly buyingopportunities next year for the
market and people would justlike abandoned projects don't
want to get in, can't continueto float their projects in the
(11:36):
wake of a government shutdown orjust say uncle I'm not going to
deal with this kind of unknownin my life.
Mark Bonner (11:42):
How important is this next Fed meeting to you in
your world?
Michael Episcope (11:47):
Not as important as you think because
there's two things. The Fed onlyhas control over the short end
of the curve and we've seen along end is going do what it
wants. And the long end isreally, priced based on supply
and demand of our treasuries,our risk as the U. S. Government
are and there's not much theycan do.
(12:09):
So they can lower rates even 2%and the long end could go to 5%
or 6%. You didn't really see ahuge impact on the long end when
the Fed lowered rates. I thinkif anything it does from an
investor perspective, if they'reno longer earning an interest
rate, because there's so muchmoney caught up right now in
money market accounts. And aslong as investors are getting
(12:33):
4%, 4.5% on a pre tax basis inthose accounts, they're pretty
happy. If they start earning oneor two, they're going to start
looking at risk assets more andmore.
So the biggest thing we saw,especially in COVID when rates
went to zero is money floodedin, right? And it also helped
that the government wrote$7,000,000,000,000 worth of
checks. But that flow has reallyceased in multifamily real
(12:54):
estate and across real estatebecause the cost of capital is
just so much higher that if youcan't deliver returns in kind of
the high teens, you're not goingto be able to attract capital to
your deals.
Mark Bonner (13:09):
Why does the industry obsess over interest
rates? I mean, is this mediahype? No. Where this has gotten
Not
Michael Episcope (13:17):
at all. I mean, real estate is a leverage
game and everybody uses realestate and leverage is a good
thing, right? Used inmoderation. And so like it
impacts your your cost of debt.It impacts your ultimate cash
flow, right?
And deals and then it impactsyour valuation methodology
because there is a correlationbetween your interest rates and
cap rates. You know, at timesthey become disassociated with
(13:41):
one another, but it's one of theleading indicators. When you
look at cap rates to Treasuries,that's a great forward looking
indicator to the investmentperformance of real estate going
forward. So when that spreadwidens, meaning your cap rates
are much, much higher than yourinterest rates, that's actually
a good sign. So you see thatduring distressed times where
(14:03):
cap rates might be six-sevenpercent, but your borrowing
costs are four percent.
That is a phenomenal time Today,you've got 100, maybe 120 basis
point spread between cap ratesand treasuries. I would say it's
good. It's not like you're notrunning away from it and you're
not running to it right now.It's probably going to achieve
(14:24):
historical decent averages goingforward. I think '26 is going to
be a good vintage.
Mark Bonner (14:31):
If you're just joining us, this is First Draft
Live. We're here with ourorigins Michael Episcope
unpacking where the longestshutdown in US history leaves
real estate investors andoperators after six weeks in the
dark. So for the past month, aswe've talked about a bit, BLS
hasn't published the data theentire market depends on. No
CPI, no jobs reports. It's leftit without a compass of sorts.
(14:54):
Even the Fed is squinting.Investors had to navigate the
most opaque macro environmentyears while all this political
dysfunction that we're talkingabout is hung over every
assumption. At Origin, how doyou price risk when the
government's data streamdisappears? And Michael, I want
to frame this as we have a lotof people that are watching this
(15:14):
right now who are in the dark.Like, what do you do in these
moments when you've got a littlebit of lack of visibility into
what's happening in The USeconomy?
Michael Episcope (15:23):
Yeah, it's not quite risk off for us. I would
say we do have an advantagebecause we have our own data
science team and a lot of thethings you're talking about the
CPI data, the BLS data, thingslike that. We're not pricing
those exactly into our model.Certainly we're keeping an eye
on the macro. A lot of times inreal estate it comes down to the
micro location to the deal, thedeal economics.
(15:45):
So we're tying something uptoday. We can sit on that deal
for three, four, five, sixmonths until that information
comes up. I think the challengeis and we talked about this just
a few minutes ago when you don'thave this data when you start to
get a kind of a loss inconfidence in the market for
what people don't know andunderstand they start filling in
(16:06):
with their own ideas, right? Andso you've seen an uptick in the
treasuries and the treasuriesare still functioning, they're
still operating. And what I'mmore concerned about is, is this
a micro cosm of what we sawcoming out of COVID where you've
had 800,000 workers furloughedfor forty three days.
They haven't gotten paid. It'staken out. They're going to come
back into the economy. They'regoing to get paid. Are we going
(16:28):
to suddenly see this inflationspike and have this whole
conversation about is ittransitory again?
And so like these are just thisis volatility we don't need in
the market. So we're not againcompletely risk off, but I would
say that our parameters fordoing deals, and this is really
true over the last year, yearand a half, two years is that
our margins and our cost ofcapital has grown much, much
(16:50):
higher. And something like thisdoesn't help even we're glad
interest rates are coming downor have come down to where they
were a year ago, but they'restill not where we need them to
be. And the government has toget their crap together so we
can see some normalcy in themarket.
Mark Bonner (17:08):
Yeah, I don't want be a Debbie Downer, but it seems
unlikely, right? I mean, itseems like for at least the next
few years, political dysfunctionin some shape or form is going
to continue. And so that initself is predictable, right?
And I wonder from your end ofthings, can political
dysfunction itself become aquantifiable input in
underwriting?
Michael Episcope (17:30):
It's a good question. Mark, the way I would
answer that is it is an input inthe sense that it's the status
quo. And we could have a wholeconversation about politics and
you can give me riled up, but Imean, it's one of my sort of hot
buttons and looking at thedysfunctionality of Congress
right now in the Senate andwhat's going on. And these are
(17:50):
just things that we shouldn't bedealing with, The government is
supposed to be there to quoteunquote, you know, help The US
economy and that's just nothappening. And I understand each
side has their positions and isdigging their heels in that they
think they're right, But there'sreal people being impacted with
these decisions.
You can go back. We could havehad this conversation five years
(18:10):
ago, ten years ago, fifteenyears ago. I think one thing we
can count on is that there willbe a dysfunctional government,
right? I think the differencetoday is our debt to GDP is at
125%. We're looking at hittingthe debt ceiling of
$41,000,000,000,000 next year.
There's going to be anotherconversation about that. We
raised the debt ceiling a fewyears ago to $41,000,000,000,000
(18:31):
We just, you know, through thestroke of a pen by
$5,000,000,000,000 So it doesfeel like there's a lot more
political discourse that we haveto deal with. But in terms of
underwriting, that to me feelslike a lot of noise because
ultimately your real estate,especially in multifamily, it's
going to be rely on jobs andpopulation growth. And that's
(18:52):
what we need to think about. Andthe government needs to be a
supporter of those things, not adetractor of those things.
And certainly what they've donein this last kind of two months
has not helped that, but it'snot spread equally because it's
certainly going to be felt moreon the Eastern Coast, the
Maryland's, the DCs, places likethat than it is when you're
talking about Sunbelt markets,but there's so much of the
(19:14):
economy that's tied to thegovernment that nobody's immune
right now.
Mark Bonner (19:18):
Yeah, and look, on the consumer level, Americans
have been on a roller coasterride. You know? This forty three
day shutdown, you know, itexposed some new challenges on
that front. Snap payments, thathave been delayed, straining
grocery and discount chains, alot of other retail, unpaid
federal workers, and it cutsdiscretionary spending. Tourism
(19:39):
has weakened.
Maybe it balances back. Maybe itwon't. You know, in CRE, the
demand side, you know, wobblesshow up fast in collections,
occupancy, and tenant health.Right? So how do you think
investors should be viewingconsumer risk in this political
landscape going into early nextyear?
Michael Episcope (20:01):
One thing I was reading recently is you have
to assume that there's going belower demand as a result of this
government shutdown. You hadmentioned SNAP program, yes, and
the HUD shutting down. I mean,that also impacted 50,000
families, Section eightvouchers, things like that. It
also pushed out 2,000multifamily starts a lot. It's
going to impact your rentgrowth.
(20:22):
I read that it went from 3.5 tonow 2%. That's going to impact
underwriting and it's just goingto kill a lot of deals when you
look at that because one of themost important variables when
you're underwriting theseinvestments is rent growth. When
you go from 3.5, which is sortof a little bit above your
normal average down to 2% andlook, not every city is created
(20:42):
equally. Some are going to growat zero and some are going to
grow at five still, But thatwill come into the calculus and
decide which deals get done andwhich deals that don't. And if
you're on the margin, you'regoing to have to scrap your deal
or find some cost cuttingsavings, things like that.
But there's trickle effects tothis. So that's kind of how we
think about it. I mean, it'sagain, these things, this too
(21:06):
shall pass. I don't think wesaid that. I don't know when we
were talking about COVID wayback when it didn't feel like it
was going to pass in the moment.
This too shall pass and we'regoing to have to deal with it
again. But I think we're prettyinsulated because of our
diversification, Southeast,Central and Southwest. So that's
what we do feel good about. Andmultifamily is an asset class
(21:30):
that is essential. People needshelter.
They need a place to live.However, as we've seen, you can
always overbuild. We'll be outof this in a few years. And I go
back and I reminisce about'eight when we were completely
overbuilt on the for sale sideAnd then five or six years
later, all of sudden theheadlines were we have a housing
shortage. This is cyclical.
We'll get through it. We'll getto the other side. And we'll be
(21:52):
talking about this in two years.Hey, look at all this rent
growth. We're on the other side.
Look at where multifamily startsare, demand is outpaced. And so
like, you can have me back onwhen those are the headlines.
Mark Bonner (22:02):
I can't wait. I can't wait. And just going back
to the pandemic, like I'm reallyglad you brought this up because
I think there are somecorollaries here. But on the
other hand, I could say we'renot past the pandemic yet. We're
still dealing with the aftereffects of the pandemic.
I don't the pandemic was waymore profound than a forty three
day shutdown. Right? I mean, soit's an unfair comparison. But,
(22:22):
you know, the pandemicpermanently altered all sorts of
things in society and commerce,and we're still dealing with
that shift. And a lot of thosethings that we took for granted
pre 2020 are never gonna ever bethe same again.
Right? But to come back down tothis moment for a second, like,
what do you think are someunderappreciated after effects
of the longest shutdown inhistory from a commercial real
(22:45):
estate perspective, at leastover the next couple of months?
Michael Episcope (22:50):
The after effects, what always happens
anytime something gets shut downas you create pent up demand in
the future. So a lot of thesethings are going to show up in
2026 and we're going to seecertainly lower GDP this year as
a result of it. That's going toprobably knock 50 to 100 basis
points off of our GDP growth.And next year, some of that will
(23:13):
actually show up and you'll seehopefully a lot of starts coming
in Q1. But I think when I lookat some of the key features,
actually I have this list, itwas interesting, like what are
the most impactful things.
And some of these things, likeThe US debt ceiling, what's
going to happen next year. Ithink that's the next thing that
(23:35):
we have to look towards. Thatwas raised by $5,000,000,000,000
in July 2025. And you thinkabout the magnitude of that,
that's the size of Japan's GDP.It's actually more than that,
right?
800,000 federal workers, that'smore people than live in San
Francisco. The 43, the longestshutdown ever. Before that was
twenty two days. So there's alot of, I think after effects
(23:59):
that are going to happen andpeople are going to really have
to rethink their investmentstrategy and how these
government shutdowns, how thedebt, how the government,
because there is a possibilityand I wouldn't say it's a
possibility. It's a when, not anif.
When does the government reallyhave to get the debt under
control? We don't know whenthat's going to happen. We're
(24:20):
growing the debt at 6% per yearGDP. We know that sustainable is
3%, but if you cut 3% off ofthat number and you get to that
3%, that is going to have aripple effect. And where is that
going to impact the most?
I think as our debt grows, wehave to be cognizant that there
will be a reckoning. I don'tknow if it's austerity, if
(24:40):
there's like a healthy reset orif we're just going to
absolutely run off the tracks.But when people ask me, what do
I worry about the most? Yes, itis government dysfunction, but
it's it's the government debtjust running running a ride. It
doesn't seem like anybody inCongress, anybody you know who's
in DC right now wants to reallydo anything about it.
(25:00):
And you hear these senators,these congressmen who raised red
flags, and they're just met withdeaf ears. You're like, actually
like what he's saying. Why doesnobody else see this? And I know
many people and I'm sure thepeople listening today agree
with me. We see the problem, wesee the situation, it's a simple
solution.
And yet there are so many kindof hands in the cookie jar and
(25:24):
so many conflicts here that arejust not letting us address the
problem. And it might have tobe, just go off the tracks and
then address it. And hopefullyRay Dalio is not right in his
predictions.
Mark Bonner (25:37):
If you had to call it right now, what does 2026
look like for the real estateinvestor who keeps their head
while everyone else panics?
Michael Episcope (25:47):
I think 2026 is going to be better than 2025.
The fundamentals are setting up.I think this is regardless of
what happens to the government.There's always an X factor, but
a shutdown isn't going to bebecause and it's going to be
better than 2024 and it'scertainly going to be better
than 2023. So the market isstarting to show signs of
(26:10):
recovery.
Have the supply starting todwindle. You still have one of
the biggest challenges in theeconomy, which is owning is
incredibly expensive. Renting isway, way cheaper. That rent to
own gap is fueling demand forrent, for rentals. I mean, you
go to Nashville right now, Tomand you're renting down there,
(26:32):
you're going get three months offree rent, walk into any
multifamily property down therethat will slowly disappear.
And I think that when you lookat the demand side, when you
look at the supply side, thingswill start to clear up. Market
and the economy has a selfregulating mechanism and it's
the profit incentive. So peoplehave not put a shovel in the
(26:52):
ground in two years. They seethis probably two and a half,
maybe even three years now. Andall that supply cliff is going
to happen.
It's going to take a while toclean up the existing supply,
get that rented, get rid of thisfree rent, get back to some
normalcy. But I'm optimistic. Idon't think this is going be a V
shaped recovery, but I thinkyou're going to see us, like
(27:12):
we've been skipping on thebottom and I think we're going
to start to leave the bottomhere. And I think the first
place and for anybody watching,just start to watch the public
REITs. And I think you're goingto see them start to go up over
the next year.
Mark Bonner (27:27):
Okay, Michael, I'm getting the hook from my
producers here. That's our showfor today. Thank you so much for
taking the time.
Michael Episcope (27:33):
Thank you for having me, Mark. It's been a
pleasure.
Mark Bonner (27:36):
If you missed any part of this conversation or
wanna catch earlier episodes,you'll find every show on
biznow.com or in your favoritepodcast feed. Just search First
Draft Live. We'll be back nextweek. Until then, this is First
Draft Live. Have a greatweekend, y'all.
Okay. Welcome to First Draft Live. I'm Mark
Bonner, business house editor inchief coming to you live from
New York. It's Friday, November14, coming to you just days
after the federal governmentfinally powered back on. And no,
this is not a victory lap today.
This is the hangover show. Afterforty three days of paralysis,
the longest shutdown in UShistory, the lights are once
(00:31):
again back on in Washington. Butthe economy isn't the one we
switched off in early October.Up to $14,000,000,000 in output
have been permanently erased.The country has sustained a
major GDP hit, basicallydeleting a mid sized US city
from the map.
6,700,000 empty hotel roomnights, 42,000,000 Americans
(00:55):
still waiting on snap dollars atanchor half the country's most
resilient retail, and 1,250,000federal workers tightening belts
heading into the holidays. So,yes, technically, the shutdown
is over, but emotionally,politically, economically, well,
the system designed to stabilizethe country just reminded
(01:16):
everyone how quickly it candestabilize it. And don't look
now, but Sabres are alreadyrattling about another shutdown
in January. HUD's multifamilypipeline is jammed. GSA leasing
is weeks from full speed.
Federal contractors are triagingcash flow. And the statistical
(01:37):
blackout has left underwritingand valuations drifting in what
PAL calls fog. That's the realstory. Not that Washington
reopened, but that it reopenedback into uncertainty. Something
CRE has been battling all year.
So how's survive to '25 goingy'all? How about bliss in '26?
(01:59):
Well, we're gonna see. Andthat's exactly why we asked
today's guest to join us. Fewpeople see the interplay between
macro shock and real estatereality more clearly than
Michael Episcope, co CEO ofOrigin Investments, a firm
that's built an investmentstrategy around discipline,
downside protection, and readingmarkets when they're at their
(02:21):
murkiest.
He's one of the sharpest voicesI know on how capital behaves
when this political system goesoff the rails and where
opportunity emerges wheneveryone else pulls back.
Michael, welcome to First DraftLive.
Michael Episcope (02:34):
Thank you for having me Mark. And I was just
thinking as you were talking,last time I was on here was, the
big shutdown during COVID andhere I am back in another
shutdown about 40% of thecountry. So it's kind of poetic.
Mark Bonner (02:48):
It is poetic. And by the way, just for our
listeners and our viewers whodon't know, Michael is referring
to the pandemic and Michael wasour first guest ever on BizNows
first webinar ever. Anothermoment where we found the
economy in dire straits and yethere we are again. So Michael,
let's get into it. What does asix week federal freeze reveal
(03:09):
about the fragility of The USeconomy right now?
And how are you navigating itfrom your perspective?
Michael Episcope (03:14):
Yeah, it's a great question. I mean, I think
what it reveals more thananything is the dysfunctionality
of our political environment andthat is kind of the elephant in
the room. I think what'shappened over the last forty
three days as you put it, it'sthe longest shutdown in history.
It's somewhere between annoyingand tragic. And if you look at
(03:35):
the 800,000 federal workers thatwere furloughed, the food lines
have never been more jammed foodpantries.
You have people who can't payrent living paycheck to
paycheck, having to pick upother work. That's tragic.
That's absolutely tragic. Andit's 100% in control of the
politicians, This should havenever happened. And then you
(03:55):
have companies like ours.
We were launching our intervalfund and we were at the one inch
line with the SEC and that'sdelayed. We don't know now that
we're going to be opening backup whether we're going to start
at the one inch line or be backat the 50 yard line, but we will
be open. So that's moreannoying. But it is impacting
(04:16):
permanently what's going on inthe economy And it's just wiping
out growth that we just don'tneed to. And so like this
political dysfunction isunsettling.
I think the elephant in the roomis really the government debt,
the government dysfunctionality,the things that we're not
addressing. This is like asideshow to everything going on.
And so like, there's a lot ofripple effect. I think you named
(04:39):
a lot of them, but for us it's aspeed bump. It's certainly not
like it was in COVID, butthere's a lot of ripple effects
that are happening and it's it'skind of similar to COVID in the
sense that you have a shutdownand you had you're going to have
a permanent loss to the economy,but then some of that is going
to show up in early twentytwenty six.
Mark Bonner (05:00):
I mean, it's not just a speed bump though,
Michael. It's another speedbump. There have been a lot of
speed bumps this year in The USeconomy for a whole variety of
reasons. Is this just anothermoment that commercial real
estate has to absorb? Is thispar for the course at this
point, this deep in the year nowlooking into 2026 or is this
(05:21):
permanent structural dent insentiment and pricing from your
perspective?
Michael Episcope (05:26):
I think it's a little bit of both. I think for
some you just have to roll withpunches and do it. And you're
right, there's lot of speedbumps, especially over the last
few years. It feels like we'vebeen operating on a street with
nothing but speed bumps andwe're waiting for kind of a
clear road ahead of us so we canput the pedal to the metal. And
we all are looking at 2026, someof the multifamily supply
(05:49):
getting cleaned up growth comingback into the market and some
normalcy.
So I do think thoughstructurally we're not in the DC
or Metro or Northeast or, andwe're not as impacted by a lot
of these government shutdowns,but some of the delinquencies, I
mean, you're talking about 10 to15% delinquencies, vacancies
rising. You sort of have torethink your strategy if you're
(06:13):
in those markets and you'rebuilding and you have a large
presence there because thisisn't going to stop. They're not
taking care of the debt to GDPproblem. Mean, this whole
shutdown was aboutappropriations, but next year
we're going to have to deal withthis debt ceiling again. And
when you look at that, if thisbecomes another stalemate, if
(06:34):
the government shuts down,they're talking about this
happening again in January.
It's going to be very hard to bean owner of multifamily real
estate in any of the EasternSeaboard because it's so
connected to what's happeningwith the government.
Mark Bonner (06:48):
And, yeah, we're seeing multifamily REIT
suffering right now on thatfront. And so that that's a
leading indicator of some painthat's either there right now or
coming to a theater near you.Let's talk about capital markets
for a second. Already wary. Nowthey're second guessing
everything all over again.
Transaction volume did pop inSeptember, but confidence, not
(07:08):
comps, I think is the realcurrency here. Liquidity
typically lags a shock like thisby one or two quarters. So now
we're in the 2026. And this onewasn't just a shock. It was a
statistical blackout.
Right? The White House saidyesterday that the jobs data
from, I believe, Octoberpermanently gone. We'll never
see it. Poof. Right?
(07:29):
How do you deal with thatblackout? I mean, can you
rebuild it in the aggregate withwith private private sources?
Can you can you sustain ablackout like that, Michael?
Like, what's your visibilityinto this? And how is this
affecting your decision making?
Michael Episcope (07:44):
So we're not as impacted by the monthly
release of government databecause in real estate you're
making three, five, ten year,twenty year bets on real estate.
So you really have to look atthe macro. That's why I was
talking about. If you're in DCand you're in Maryland, you
really you have to rethink yourstrategy because ultimately what
matters in investing is thatyou're A, you're in a good asset
(08:07):
class B, you're in a good marketand C, you have a great micro
location as well a good asset.And so like we think about it in
terms of that.
So missing one or two orders ofBLS data doesn't make a
difference to us. When we'relooking at more of the global
picture, if the governmentcontinues to operate at a
dysfunctional level and we seeunemployment start to rise and
(08:28):
delinquencies and they start toleak into other cities wherein
then we're going to have tostart rethinking our sort of
macro thesis here. With realestate, it's very different than
if you're looking stocks, bonds,liquid assets, because you're
making long term bets here. Soagain, it's more annoying not
having the BLS data, but it'sless impactful for groups like
(08:50):
ours. We're just we're notlooking at the month to month,
we're looking out on thehorizon.
Mark Bonner (08:54):
Right. But you know, you're making decisions
now or next week or next monthor in January, right? We just
went through this speed bump,which we're gonna call the
longest shutdown in Americanhistory. We've had the other
speed bumps that we've talkedabout. Do you make and then you
got this other thing happeninghere, which is another shutdown
maybe in January.
Right? And if you didn't believethat it couldn't happen, we're
(09:16):
now forty three days into thelongest one that we that has
ever happened in this country.So it could happen again in
January. Both Democrats andRepublicans are unafraid to test
each other on these fronts. Soall of a sudden, 2026 is even
murkier.
What's the real timeline herebefore deal flow normalizes in
your mind, Michael? And when doyou make the decision? Do you
(09:36):
are you now making decisiontoday between now and the end of
the year? Or are you going towait for January and see what
happens on Capitol Hill?
Michael Episcope (09:45):
We'll continue to make decisions. We're not
going put any big bets on rightnow because you're right. I
mean, likelihood is that thereis another government stalemate
that there's a shutdown at somepoint. I mean, I don't know why
we would think otherwise. And Ithink the real issue here can be
just a loss of confidence in TheUS economy.
(10:07):
We're starting to see that showup in interest rates. Again, it
comes back to debtdysfunctionality and we've seen
a lot of selling of USTreasuries. The new normal seems
to be 4.1, 4.2. We briefly 104%.We were cheering for about a
week and then all of a sudden wecreep back up.
And some of this, who knows ifthis is accurate is attributable
(10:29):
to this government shutdown thatwe saw kind of 15 basis point
spike in the interest rates. SoI think we have to be wary about
the things that really impactmultifamily real estate and the
variables there, which is thegrowth of rent vacancy, the job
market, interest rates, to thatextent, we will get through this
(10:51):
like we have everything else,but it is impacting. I mean,
developers have to carryproperties for another month,
two months, three months, fourmonths, you're talking about
another five, six, seven percentin carry costs. And some people
are better equipped, betterbalance sheets, not using a lot
of leverage to withstand some ofthese issues. Then other people
(11:13):
have business plans that aremore price perfection and
they're going be on the edge.
And so like we always look atkind of the dystopian view when
things are happening here. Thiscould lead to other
opportunities, certainly buyingopportunities next year for the
market and people would justlike abandoned projects don't
want to get in, can't continueto float their projects in the
(11:36):
wake of a government shutdown orjust say uncle I'm not going to
deal with this kind of unknownin my life.
Mark Bonner (11:42):
How important is this next Fed meeting to you in
your world?
Michael Episcope (11:47):
Not as important as you think because
there's two things. The Fed onlyhas control over the short end
of the curve and we've seen along end is going do what it
wants. And the long end isreally, priced based on supply
and demand of our treasuries,our risk as the U. S. Government
are and there's not much theycan do.
(12:09):
So they can lower rates even 2%and the long end could go to 5%
or 6%. You didn't really see ahuge impact on the long end when
the Fed lowered rates. I thinkif anything it does from an
investor perspective, if they'reno longer earning an interest
rate, because there's so muchmoney caught up right now in
money market accounts. And aslong as investors are getting
(12:33):
4%, 4.5% on a pre tax basis inthose accounts, they're pretty
happy. If they start earning oneor two, they're going to start
looking at risk assets more andmore.
So the biggest thing we saw,especially in COVID when rates
went to zero is money floodedin, right? And it also helped
that the government wrote$7,000,000,000,000 worth of
checks. But that flow has reallyceased in multifamily real
(12:54):
estate and across real estatebecause the cost of capital is
just so much higher that if youcan't deliver returns in kind of
the high teens, you're not goingto be able to attract capital to
your deals.
Mark Bonner (13:09):
Why does the industry obsess over interest
rates? I mean, is this mediahype? No. Where this has gotten
Not
Michael Episcope (13:17):
at all. I mean, real estate is a leverage
game and everybody uses realestate and leverage is a good
thing, right? Used inmoderation. And so like it
impacts your your cost of debt.It impacts your ultimate cash
flow, right?
And deals and then it impactsyour valuation methodology
because there is a correlationbetween your interest rates and
cap rates. You know, at timesthey become disassociated with
(13:41):
one another, but it's one of theleading indicators. When you
look at cap rates to Treasuries,that's a great forward looking
indicator to the investmentperformance of real estate going
forward. So when that spreadwidens, meaning your cap rates
are much, much higher than yourinterest rates, that's actually
a good sign. So you see thatduring distressed times where
(14:03):
cap rates might be six-sevenpercent, but your borrowing
costs are four percent.
That is a phenomenal time Today,you've got 100, maybe 120 basis
point spread between cap ratesand treasuries. I would say it's
good. It's not like you're notrunning away from it and you're
not running to it right now.It's probably going to achieve
(14:24):
historical decent averages goingforward. I think '26 is going to
be a good vintage.
Mark Bonner (14:31):
If you're just joining us, this is First Draft
Live. We're here with ourorigins Michael Episcope
unpacking where the longestshutdown in US history leaves
real estate investors andoperators after six weeks in the
dark. So for the past month, aswe've talked about a bit, BLS
hasn't published the data theentire market depends on. No
CPI, no jobs reports. It's leftit without a compass of sorts.
(14:54):
Even the Fed is squinting.Investors had to navigate the
most opaque macro environmentyears while all this political
dysfunction that we're talkingabout is hung over every
assumption. At Origin, how doyou price risk when the
government's data streamdisappears? And Michael, I want
to frame this as we have a lotof people that are watching this
(15:14):
right now who are in the dark.Like, what do you do in these
moments when you've got a littlebit of lack of visibility into
what's happening in The USeconomy?
Michael Episcope (15:23):
Yeah, it's not quite risk off for us. I would
say we do have an advantagebecause we have our own data
science team and a lot of thethings you're talking about the
CPI data, the BLS data, thingslike that. We're not pricing
those exactly into our model.Certainly we're keeping an eye
on the macro. A lot of times inreal estate it comes down to the
micro location to the deal, thedeal economics.
(15:45):
So we're tying something uptoday. We can sit on that deal
for three, four, five, sixmonths until that information
comes up. I think the challengeis and we talked about this just
a few minutes ago when you don'thave this data when you start to
get a kind of a loss inconfidence in the market for
what people don't know andunderstand they start filling in
(16:06):
with their own ideas, right? Andso you've seen an uptick in the
treasuries and the treasuriesare still functioning, they're
still operating. And what I'mmore concerned about is, is this
a micro cosm of what we sawcoming out of COVID where you've
had 800,000 workers furloughedfor forty three days.
They haven't gotten paid. It'staken out. They're going to come
back into the economy. They'regoing to get paid. Are we going
(16:28):
to suddenly see this inflationspike and have this whole
conversation about is ittransitory again?
And so like these are just thisis volatility we don't need in
the market. So we're not againcompletely risk off, but I would
say that our parameters fordoing deals, and this is really
true over the last year, yearand a half, two years is that
our margins and our cost ofcapital has grown much, much
(16:50):
higher. And something like thisdoesn't help even we're glad
interest rates are coming downor have come down to where they
were a year ago, but they'restill not where we need them to
be. And the government has toget their crap together so we
can see some normalcy in themarket.
Mark Bonner (17:08):
Yeah, I don't want be a Debbie Downer, but it seems
unlikely, right? I mean, itseems like for at least the next
few years, political dysfunctionin some shape or form is going
to continue. And so that initself is predictable, right?
And I wonder from your end ofthings, can political
dysfunction itself become aquantifiable input in
underwriting?
Michael Episcope (17:30):
It's a good question. Mark, the way I would
answer that is it is an input inthe sense that it's the status
quo. And we could have a wholeconversation about politics and
you can give me riled up, but Imean, it's one of my sort of hot
buttons and looking at thedysfunctionality of Congress
right now in the Senate andwhat's going on. And these are
(17:50):
just things that we shouldn't bedealing with, The government is
supposed to be there to quoteunquote, you know, help The US
economy and that's just nothappening. And I understand each
side has their positions and isdigging their heels in that they
think they're right, But there'sreal people being impacted with
these decisions.
You can go back. We could havehad this conversation five years
(18:10):
ago, ten years ago, fifteenyears ago. I think one thing we
can count on is that there willbe a dysfunctional government,
right? I think the differencetoday is our debt to GDP is at
125%. We're looking at hittingthe debt ceiling of
$41,000,000,000,000 next year.
There's going to be anotherconversation about that. We
raised the debt ceiling a fewyears ago to $41,000,000,000,000
(18:31):
We just, you know, through thestroke of a pen by
$5,000,000,000,000 So it doesfeel like there's a lot more
political discourse that we haveto deal with. But in terms of
underwriting, that to me feelslike a lot of noise because
ultimately your real estate,especially in multifamily, it's
going to be rely on jobs andpopulation growth. And that's
(18:52):
what we need to think about. Andthe government needs to be a
supporter of those things, not adetractor of those things.
And certainly what they've donein this last kind of two months
has not helped that, but it'snot spread equally because it's
certainly going to be felt moreon the Eastern Coast, the
Maryland's, the DCs, places likethat than it is when you're
talking about Sunbelt markets,but there's so much of the
(19:14):
economy that's tied to thegovernment that nobody's immune
right now.
Mark Bonner (19:18):
Yeah, and look, on the consumer level, Americans
have been on a roller coasterride. You know? This forty three
day shutdown, you know, itexposed some new challenges on
that front. Snap payments, thathave been delayed, straining
grocery and discount chains, alot of other retail, unpaid
federal workers, and it cutsdiscretionary spending. Tourism
(19:39):
has weakened.
Maybe it balances back. Maybe itwon't. You know, in CRE, the
demand side, you know, wobblesshow up fast in collections,
occupancy, and tenant health.Right? So how do you think
investors should be viewingconsumer risk in this political
landscape going into early nextyear?
Michael Episcope (20:01):
One thing I was reading recently is you have
to assume that there's going belower demand as a result of this
government shutdown. You hadmentioned SNAP program, yes, and
the HUD shutting down. I mean,that also impacted 50,000
families, Section eightvouchers, things like that. It
also pushed out 2,000multifamily starts a lot. It's
going to impact your rentgrowth.
(20:22):
I read that it went from 3.5 tonow 2%. That's going to impact
underwriting and it's just goingto kill a lot of deals when you
look at that because one of themost important variables when
you're underwriting theseinvestments is rent growth. When
you go from 3.5, which is sortof a little bit above your
normal average down to 2% andlook, not every city is created
(20:42):
equally. Some are going to growat zero and some are going to
grow at five still, But thatwill come into the calculus and
decide which deals get done andwhich deals that don't. And if
you're on the margin, you'regoing to have to scrap your deal
or find some cost cuttingsavings, things like that.
But there's trickle effects tothis. So that's kind of how we
think about it. I mean, it'sagain, these things, this too
(21:06):
shall pass. I don't think wesaid that. I don't know when we
were talking about COVID wayback when it didn't feel like it
was going to pass in the moment.
This too shall pass and we'regoing to have to deal with it
again. But I think we're prettyinsulated because of our
diversification, Southeast,Central and Southwest. So that's
what we do feel good about. Andmultifamily is an asset class
(21:30):
that is essential. People needshelter.
They need a place to live.However, as we've seen, you can
always overbuild. We'll be outof this in a few years. And I go
back and I reminisce about'eight when we were completely
overbuilt on the for sale sideAnd then five or six years
later, all of sudden theheadlines were we have a housing
shortage. This is cyclical.
We'll get through it. We'll getto the other side. And we'll be
(21:52):
talking about this in two years.Hey, look at all this rent
growth. We're on the other side.
Look at where multifamily startsare, demand is outpaced. And so
like, you can have me back onwhen those are the headlines.
Mark Bonner (22:02):
I can't wait. I can't wait. And just going back
to the pandemic, like I'm reallyglad you brought this up because
I think there are somecorollaries here. But on the
other hand, I could say we'renot past the pandemic yet. We're
still dealing with the aftereffects of the pandemic.
I don't the pandemic was waymore profound than a forty three
day shutdown. Right? I mean, soit's an unfair comparison. But,
(22:22):
you know, the pandemicpermanently altered all sorts of
things in society and commerce,and we're still dealing with
that shift. And a lot of thosethings that we took for granted
pre 2020 are never gonna ever bethe same again.
Right? But to come back down tothis moment for a second, like,
what do you think are someunderappreciated after effects
of the longest shutdown inhistory from a commercial real
(22:45):
estate perspective, at leastover the next couple of months?
Michael Episcope (22:50):
The after effects, what always happens
anytime something gets shut downas you create pent up demand in
the future. So a lot of thesethings are going to show up in
2026 and we're going to seecertainly lower GDP this year as
a result of it. That's going toprobably knock 50 to 100 basis
points off of our GDP growth.And next year, some of that will
(23:13):
actually show up and you'll seehopefully a lot of starts coming
in Q1. But I think when I lookat some of the key features,
actually I have this list, itwas interesting, like what are
the most impactful things.
And some of these things, likeThe US debt ceiling, what's
going to happen next year. Ithink that's the next thing that
(23:35):
we have to look towards. Thatwas raised by $5,000,000,000,000
in July 2025. And you thinkabout the magnitude of that,
that's the size of Japan's GDP.It's actually more than that,
right?
800,000 federal workers, that'smore people than live in San
Francisco. The 43, the longestshutdown ever. Before that was
twenty two days. So there's alot of, I think after effects
(23:59):
that are going to happen andpeople are going to really have
to rethink their investmentstrategy and how these
government shutdowns, how thedebt, how the government,
because there is a possibilityand I wouldn't say it's a
possibility. It's a when, not anif.
When does the government reallyhave to get the debt under
control? We don't know whenthat's going to happen. We're
(24:20):
growing the debt at 6% per yearGDP. We know that sustainable is
3%, but if you cut 3% off ofthat number and you get to that
3%, that is going to have aripple effect. And where is that
going to impact the most?
I think as our debt grows, wehave to be cognizant that there
will be a reckoning. I don'tknow if it's austerity, if
(24:40):
there's like a healthy reset orif we're just going to
absolutely run off the tracks.But when people ask me, what do
I worry about the most? Yes, itis government dysfunction, but
it's it's the government debtjust running running a ride. It
doesn't seem like anybody inCongress, anybody you know who's
in DC right now wants to reallydo anything about it.
(25:00):
And you hear these senators,these congressmen who raised red
flags, and they're just met withdeaf ears. You're like, actually
like what he's saying. Why doesnobody else see this? And I know
many people and I'm sure thepeople listening today agree
with me. We see the problem, wesee the situation, it's a simple
solution.
And yet there are so many kindof hands in the cookie jar and
(25:24):
so many conflicts here that arejust not letting us address the
problem. And it might have tobe, just go off the tracks and
then address it. And hopefullyRay Dalio is not right in his
predictions.
Mark Bonner (25:37):
If you had to call it right now, what does 2026
look like for the real estateinvestor who keeps their head
while everyone else panics?
Michael Episcope (25:47):
I think 2026 is going to be better than 2025.
The fundamentals are setting up.I think this is regardless of
what happens to the government.There's always an X factor, but
a shutdown isn't going to bebecause and it's going to be
better than 2024 and it'scertainly going to be better
than 2023. So the market isstarting to show signs of
(26:10):
recovery.
Have the supply starting todwindle. You still have one of
the biggest challenges in theeconomy, which is owning is
incredibly expensive. Renting isway, way cheaper. That rent to
own gap is fueling demand forrent, for rentals. I mean, you
go to Nashville right now, Tomand you're renting down there,
(26:32):
you're going get three months offree rent, walk into any
multifamily property down therethat will slowly disappear.
And I think that when you lookat the demand side, when you
look at the supply side, thingswill start to clear up. Market
and the economy has a selfregulating mechanism and it's
the profit incentive. So peoplehave not put a shovel in the
(26:52):
ground in two years. They seethis probably two and a half,
maybe even three years now. Andall that supply cliff is going
to happen.
It's going to take a while toclean up the existing supply,
get that rented, get rid of thisfree rent, get back to some
normalcy. But I'm optimistic. Idon't think this is going be a V
shaped recovery, but I thinkyou're going to see us, like
(27:12):
we've been skipping on thebottom and I think we're going
to start to leave the bottomhere. And I think the first
place and for anybody watching,just start to watch the public
REITs. And I think you're goingto see them start to go up over
the next year.
Mark Bonner (27:27):
Okay, Michael, I'm getting the hook from my
producers here. That's our showfor today. Thank you so much for
taking the time.
Michael Episcope (27:33):
Thank you for having me, Mark. It's been a
pleasure.
Mark Bonner (27:36):
If you missed any part of this conversation or
wanna catch earlier episodes,you'll find every show on
biznow.com or in your favoritepodcast feed. Just search First
Draft Live. We'll be back nextweek. Until then, this is First
Draft Live. Have a greatweekend, y'all.
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