May 9, 2024 • 29 mins
Amid a U.S. housing shortage and a shift toward rental living, build-for-rent (BFR) is the fastest-growing sector in commercial real estate. This week, David Bourne, Director of Investments at PEG Companies, explores how BFR is redefining the residential landscape. He discusses economic underpinnings, performance metrics, and financing shifts in the BFR segment. Learn about leading BFR brands like Christopher Todd Communities and Alante Homes and how the industry meets the demands of modern renters.
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Episode Transcript
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Rachel Oh (00:04):
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the Peaks of
the Mountain West and beyond.
Hello everybody Once again fromthe Peaks of the Mountain West
high up here on the WasatchFront.
We are here again to talkcommercial real estate, the
economy and anything else thatmay come about.
So thank you again for joiningus for this week's episode of
(00:46):
Peaks and Portfolios by PEGCompanies.
We've been hearing a lot abouta housing shortage around the US
.
We also know that there are nowmore renters of choice those
who could buy but choose not to.
We also know that with today'sinterest rate environment, there
are more renters by necessity.
To better understand today'srenters and the housing options
available to them, we are goingto speak with David Bourne,
(01:08):
director of Investments here atPeg Companies.
Not only is he a respectedcolleague, but also a friend.
Now, for how long has it been?
Is it 20 years?
David Bourne (01:17):
David, I don't want to date us, but it's been
more than 20 years.
Rachel Oh (01:20):
Are we that old?
David Bourne (01:21):
You are.
Rachel Oh (01:23):
Anyway, David.
Okay, let me give everyone alittle bit of background on
David, because I know you wellbut others don't.
David was actually brought intothe firm to build and lead our
Build for Rent strategy, whichis dedicated to the development
and management of purpose-builtsingle-family home rentals.
Prior to PEG, he was head ofmergers and acquisitions at one
(01:44):
of the largest charter schooloperators in the nation.
David has also been withdifferent developers and spent a
good chunk of time at Lenar,perhaps one of the nation's
largest home builders.
If I'm not mistaken, he alsoearned his bachelor's of science
in accounting from BrighamYoung University and his MBA
from UCLA Anderson School ofManagement.
And, if I'm not mistaken,weren't you like some sort of
(02:05):
pitcher or something at UCLA aswell?
David Bourne (02:08):
Undergrad.
I was a bullpen catcher for theUCLA baseball team prior to
transferring to BYU.
Rachel Oh (02:14):
There we go, awesome, okay.
Well, david, thank you so muchfor joining us today, so let's
just dive right in.
You were brought in to lead outthe firm's Build for Rent BFR
strategy.
Brought in to lead out thefirm's Build for Rent BFR
strategy.
It's got a lot of press.
There's a lot of buzz about it.
For our listeners, could youjust kind of break down like
let's start off with like, whatis BFR?
Or even they call it BTR, whatis it exactly?
David Bourne (02:35):
Yeah, well, I think that's a great way to
start and segue into this assetclass.
For starters, it's veryconfusing for a lot of people.
First off, it's called BTR insome segments of the country.
It's called BFR in othersegments of the country, and
when you break it down into itsdefinition of build for rent or
build to rent, really anythingwould fall under that umbrella,
(02:56):
including multifamily.
But we're segmenting it intothis single family type rental
class and the types of productsthat fit into it are anything
from your traditional singlefamily home a 3,500 five bedroom
square foot home in suburbia toa 600 square foot one bedroom
(03:16):
horizontal apartment within astandalone rental community, and
all of that would fit into whatis called build for rent.
The asset class really startedback in the early 2000s.
There was a growing movement ofpeople, kind of in the run-up
to the great financial crisis,of people who were buying all
sorts of real estate assets.
One of the assets that peoplewere buying were brand new homes
(03:40):
and they were buying them forthe sole purpose of renting them
, and that was sort of new onthe horizon.
Prior to that you only hadmultifamily homes and maybe you
would have a mom and pop whowould move out of their primary
residence and upgrade, andinstead of selling it, they'd
keep their home and rent it out.
Rachel Oh (03:55):
That's what I did.
I always did that.
I never I don't even know, Ithink only in college did I ever
live in an apartment building.
But once I got out of college Iwas like I want a yard, I want
to be in a neighborhood.
I never lived in an apartmentAgain my personal taste.
So that's what you're saying.
A lot of people like homes andthe run-up to this asset class
was.
David Bourne (04:13):
you had a whole segment of the population who
was now acquiring brand newhomes and using them for rent.
Now, part of that problem wasthe lead up to the great
financial crisis and the debttools that they were using to do
it, which wasn't good.
But after the great financialcrisis, you had a lot of public
home builders, or even smallerhome builders, who had great
positions in land that wereunderwater.
(04:35):
They no longer fit the businessplan that they were looking at
and they said wait, if peoplewere buying these historically
to just, they are buying ourhomes to rent them, would it not
make sense for us to build themspecifically to rent?
So build to rent or build forrent started with these home
builders building their homesthat previously were for sale
and they were building themspecifically to rent as kind of
(04:55):
a way to supplement theirbusiness plan.
And that has transformed nowinto one of the fastest growing
asset classes in multifamily orin residential real estate,
which is built for rent, and now, as we mentioned, it takes all
shapes and sizes, and I thinkpart of the popularity is
exactly what you were mentioningHistorically if you wanted to
(05:16):
rent you had a multifamily,traditional garden style
apartment or a high rise, if youwere in an urban area and you
could try your luck at finding arandom rental house in a
neighborhood that a mom and popor somebody was renting, and
those were really the onlyoptions that were available for
somebody looking to rent inAmerica.
And what Build for Rent hasdone is it's kind of filled in
(05:39):
that middle with a lot moreoptions.
Traditionally, build for Renthas a couple characteristics it
has no one above or below you,so you're not walking upstairs
to get to your unit.
You're not having someone aboveyou.
Rachel Oh (05:51):
That's the big thing, right?
No one above or below.
David Bourne (05:53):
Right.
I think that's really what itcomes down to.
It's not necessarily a sense ofgreater space, but it's a sense
of greater privacy.
You want to have your own place, because the second very
consistent trademark of abuild-for-rent property is the
ability to have your own yard.
So you'll see a lot of—.
Rachel Oh (06:11):
And you don't have to do your own yard work right,
like I don't have to—if I rentedone I don't have to move my
lawn.
David Bourne (06:16):
Most of the time you're looking at—so a lot of
build-for-rent homes now areheld within their own standalone
communities, very similar to amultifamily community, and
they're managed like that.
I think that's been one of theappeals that's really allowed
this asset class to grow the wayit has is.
You can come in people wantedto rent something more than an
(06:37):
apartment, but they didn't likedealing with the lack of
sophistication that oftentimescomes with smaller managers.
So a lot of build-for-rent homecommunities now are in their own
standalone communities,professionally managed, which
means everything from your ownyard that's maintained the
interior of the home that'smaintained, but also and I think
this is the change that hasreally come in the last few
(06:58):
years it's in its own community,where people have a sense of
neighbors, they belong, but theyalso have a yard, more sense of
their own place, and also pools, gyms, walking paths, and they
feel they're around other peoplelike them who are in the same
places in life.
Rachel Oh (07:16):
Yeah, so when you say horizontal apartments, then it
truly is just like I was livingin one of those fancy high rise
apartments with all theamenities, but instead of on top
of each other in a big building, I now have my own individual
home that I can rent, but Istill have access to all these
amenities.
David Bourne (07:34):
Yes, that's what a lot of the built-for-rent
communities look like today.
It's imagine you take a three-,four-story garden-style
apartment and just squish itdown.
So now all of it's flat.
Most of them are eitherstandalone or road townhomes or
possibly a duplex, but the greatmajority of them are standalone
units.
This model was reallypopularized in Arizona.
(07:54):
There were a couple of bigbuilders down there with Next
Metro and Christopher Todd thatcreated these communities of
their own doors, their ownbuildings, but all of the
amenities that a lot of themarket had become accustomed to
in apartments Interesting,interesting, yeah, no, I feel
like again, you know I have,I've seen them.
Rachel Oh (08:11):
There's not a ton here right in the Mountain West,
which is, I think, one of theopportunities that Peg is trying
to fill right, because there'ssuch rent growth here but not a
lot of diversity and optionsother than your mom, like if you
want to be in a single-familyhome.
Yeah, it's very interesting.
David Bourne (08:26):
When I started with PEG close to three years
ago, that was exactly the linethis does not exist in Utah and
Idaho, it should because, thedemographics in Utah match,
where it has been successfulelsewhere in the country.
That's not as true today as itwas three years ago.
You are seeing a lot morebuilt-front communities.
Rachel Oh (08:42):
You're seeing a lot more of these communities along
the Wasatch Front and in Boise Ican see them on the freeway,
but I don't feel like I see fullamenities.
I don't feel like I see poolsor clubhouses or whatnot.
I feel like I just see a bunchof townhomes in a row.
David Bourne (08:55):
I think that's part of the confusion with the
description of Build for Rent.
That counts.
So you have a community thathas 25 townhomes.
That's technically built forrent.
Now they don't all look thesame as a community that has,
you know, pools and gyms, butthat would technically be, you
know, count under build for rentAlong the Wasatch Front.
(09:16):
You're seeing some of those,but there's also large build for
rent communities here as well,with hundreds of units.
And you know, one of them evenhas a lazy river in their water
feature.
I think part of what you sayabout not seeing it off.
The freeway is come to thenature of what Build for Rent is
.
Where they are usually locatedis in suburban areas, typically
close to some type of masstransit.
Rachel Oh (09:48):
But you're not going to see them in heavy urban
environments.
You're going to see them insuburbia, a little further off
the beaten path sometimes, butalong the established path of
growth.
David Bourne (09:55):
Interesting.
So I mean, how long has thisthen been burgeoning, Like how
you mentioned?
Well, you could say all the wayback to the early 2000s.
I think it's really picked upin earnest in the last 10 years,
especially with some of theemphasis.
Rachel Oh (10:03):
So it's new, it's very new, it's a very new asset
class.
David Bourne (10:06):
I mean, when you think 10 years, relative to what
we've been doing in America forthe last 200 years, it's very
new and I think some of it isgoing back to kind of coming
full circle.
I think historically, your onlyoptions weren't always an
apartment or a standalone home.
You had a lot of things in themiddle of that housing market
(10:28):
and this fits that.
Rachel Oh (10:29):
Yeah.
So I mean then, who are the bigplayers?
Not to rain on your parade, butI mean there was a big
announcement that Heinz hasentered BFR, I think through
some acquisitions.
But they're also buildingcommunities Like who are the big
players now?
David Bourne (10:42):
Well, it's still a very spread out.
The big players are notrepresenting a majority of the
marketplace.
But you have anywhere frombehind.
You see Blackstone that justhad a major acquisition.
You see a lot of the publichomebuilders.
Dr Horton has a reallyextensive build-for-rent group
that they're working on.
But, dr Horton, as youmentioned, they're the number
(11:05):
two homebuilder in the countrybehind Lenar.
They're not necessarily thenumber two home builder in the
country behind Lenar.
They're not necessarily thenumber two.
They're not necessarily thenumber two BFR builder in the
country.
You had Next Metro, whooperates under the Avila brand.
That was very big in Arizona.
Rachel Oh (11:21):
And they're in Colorado now, right.
David Bourne (11:22):
They've extended into Colorado into.
Texas and they've gone throughsome acquisitions as well, and
you had Christopher Todd, whowas really big in Arizona
specifically and really they'vekind of focused on we're only
going to do these horizontalapartment communities and really
you see the different specifictypes based on where you are in
(11:43):
the country.
Some of that's based on who'sbuilding them.
That, hey, this is what we knowhow to build and this what
we're building.
Others are driven by what themarket demands.
Rachel Oh (11:51):
So let's talk about what the market demands, like
who is renting these?
Who are we talking?
David Bourne (11:56):
A lot of times what you see is both ends of the
family spectrum.
You see a lot of youngprofessionals.
They're coming out of school.
They want additional space,additional privacy, maybe
they've been in apartments, butthey're ready to move on to
something else.
But they either can't or arechoosing not to buy a home.
Obviously there's some veryreal economic constraints
(12:18):
pushing down on that.
The need for a large downpayment.
A lot of them have studentloans that they're carrying.
Interest rates are now high,but on top of that there are
some economic factors that wouldmake it so that, even if you
had the means, you may decidenot to.
A recent article came out inthe Wall Street Journal talking
about how there's never been abetter time to rent, just
because the ratio of a rentalpayment versus a home payment is
(12:39):
out of balance.
So you see, a lot of thosepeople who historically may have
been buying homes either cannotor are choosing not to buy
homes and they want an optionbesides an apartment.
They want a little more space,a little more privacy.
The other large group you'reseeing is the other side of the
family spectrum Empty nesterswho maybe had their home who
(13:05):
raised their family and now theydon't need all the space.
They want a lower maintenancelifestyle, but they still want
to be involved in some type ofcommunity where they feel a part
of something Right.
Rachel Oh (13:11):
So let's talk about that just a little bit.
So you've got renters by choice, you've got renters by
necessity, and now single familyrental communities offer an
additional rental option,whereas, you know, heretofore it
was just your traditionalmultifamily.
David Bourne (13:27):
How is the asset class performing when it comes
in comparison to the otherresidential so I think when it
first came out and people wereunderwriting it, they weren't
really sure how to underwrite it.
There were a lot of assumptionsthat over the last 10 years
have proven to be inaccurate,which is probably true of any
type of underwriting, I think.
Initially we thought thatinflation rates for, or
(13:49):
appreciation of, rents wouldincrease at a faster rate than
multifamily.
That hasn't necessarily beentrue.
There were also concerns thatoperating costs of a horizontal
apartment community would behigher than a traditional
multifamily.
Rachel Oh (14:02):
That also hasn't been true, so it's kind of that has
balanced out, even with, likemowing lawns and maybe, like in
our region you know, shovelingsidewalks during the winter and
whatnot, it seems and they'reusually offset by something like
well, you're not airconditioning as much common
space, or there's other themanner in which they're built
(14:23):
and the materials that are usedtend to wear a little bit better
and don't require as muchmaintenance.
So there's been some offsets.
David Bourne (14:29):
Some of the revenue assumptions have been
lower.
Some of the cost assumptionshave been lower to balance out,
so a lot of the returnmeasurements are very similar to
multifamily.
I think the one area that Buildfor Rent has an advantage over
traditional multifamily isresidents tend to live in their
units longer and, as we talkedabout, the asset class covers a
(14:51):
lot of different product types.
The closer the products get totraditional single family homes,
the longer the residents seemto stay.
It just has there's a lot ofglue that holds them there, and
those also tend to get biggerfamilies, which would be
expected.
Rachel Oh (15:04):
Yeah, yeah, no.
I mean I definitely amsurprised sometimes when I hear
of families having been in theirrental home for 10 years or
whatnot.
So I could see how that wouldbe Okay.
So they're performing you're.
Now the industry has a betterunderstanding of how the
underwriting works.
What is financing like then?
I mean, in this era wherefinancing is tight and banks are
(15:27):
more hesitant, is BFR an assetclass that banks are now
comfortable with?
Will they lend on that?
David Bourne (15:34):
Banks are definitely now aware of it.
They're comfortable with it.
They're lending on it about thesame interest rates terms that
you'd see in a traditionalmultifamily debt package.
Rachel Oh (15:43):
Okay, so not necessarily better or worse, but
Not necessarily better or worse.
David Bourne (15:48):
I think that's another one of the underwriting
assumptions that people weren'treally sure what to do with.
Oh, this is going to get betterthan multifamily, or it's going
to be worse than multifamilyand it's right about on par.
Okay.
And same with exit cap rates.
I think there was some thoughtthat, oh, this should be a
tighter cap rate than what you'dsee in multifamily.
Rachel Oh (16:11):
Or some people thought it'd be a higher cap
rate and it tends to be rightalong where multifamily cap
rates are.
Okay.
You know I was in preparationfor this conversation and we
talk about BFR quite a bit,obviously, but I was reading
here that you know rent pricesnationally are almost 30% higher
than before the pandemic.
So we know this.
We also know that multifamilyrental prices only grew about
(16:32):
2.7% from January 2023 toJanuary 2024.
However, compared with singlefamily rental prices, they
actually grew 4.7% over the sameperiod.
So it does sound like we'reable to capture higher rents on
these single family rentals.
Sound like we're able tocapture higher rents on these
single family rentals.
David Bourne (16:51):
And so just curious, you know if that's what
you're seeing, and if that'sthe case, it seems like that
would be quite compelling.
I think what you're seeing onenationwide is all of the
economics classes that we tookin college being played out in
real life.
There's a supply and demandfunction going on across the
country and very locationspecific.
So during the pandemic, you sawrents skyrocket in a lot of
(17:13):
very specific markets Boise,denver, austin, nashville and as
a result, rents went throughthe roof and all of the builders
jumped in to build moremultifamily.
Those same areas are now havingsupply challenges and rents are
softening.
Rachel Oh (17:28):
So too much supply came in.
David Bourne (17:30):
Too much supply came in, and now they're working
through that.
Rachel Oh (17:32):
Which is, I think, kind of a nationwide phenomenon.
Right, because you had a lot ofconstruction, costs were low,
or at least at the time, well,yeah, interest rates were low.
David Bourne (17:42):
Apartment or rental inflation rates were very
high.
It was a very compelling timeto build.
There were some constructionanomalies with supply chain and
lumber and some of the costs allover the board, but a lot of
people wanted to buildmultifamily because they saw
these returns during thepandemic.
It is a nationwide challenge,but it's also very specific.
Certain specific locations arereceiving that more than others.
What we are seeing is thecloser something looks to a
(18:05):
family home, a single familyhome, the higher those inflation
rates are.
Is what the data is showingnationwide.
Okay.
So the horizontal apartments notseeing as big a bump as the
larger single family homes, it'smore on par with what you would
see in a multifamily apartmentright now.
I think what the challenge inthe marketplace right now is and
(18:28):
I don't think I'm sharing anytrade secrets I think everyone
would have the same consensus onthis it's really difficult to
underwrite any type of rentalproduct right now.
Combination of land prices arestill relatively high.
We have interest rates that arehigh and everyone is looking at
the same kind of flatteninginflation rates that you just
(18:50):
mentioned, and it's tough to getsomething to pencil.
Rachel Oh (18:54):
Okay, let's talk about that.
It's tough to get something topencil, but that means no one is
doing it.
I shouldn't say no one.
David Bourne (19:01):
No, there's been a huge drop right.
Rachel Oh (19:04):
But we've also seen, I feel like, historically, when
things drop, like, for example,the GFC, affected home building.
We are still trying to catch upon that, and so I'm curious If
no one quote unquote is able topencil is now the time to build
this product which, again,you're able to capture higher
(19:25):
rents?
It seems like it is the rentaloption of choice.
You've got folks that arechoosing to rent for different
lifestyle change reasons andalso being forced to rent
because of where interest ratesare.
It doesn't look like interestrates are coming down anytime
soon, so is now the time tobuild more.
David Bourne (19:43):
I think that's the question that everybody is
asking.
And the second question behindthat is how there was a chart
that just, I think last week ortwo weeks ago made its way
through the sphere that got alot of traction, showing how the
decrease in starts inmultifamily buildings across
various cities across America.
Yeah.
You know, new York, salt Lake,nashville a lot of these were
(20:06):
down 40-something percent from2021.
So we're all talking about this.
You know a very short blip insupply that is softening rents
To the point that you madeearlier.
We're still trying to recoverfrom some of the supply damage
that happened to the economyafter the great financial crisis
, so we're talking aboutoversupply right now.
Rachel Oh (20:25):
It's a very but it's a short period.
I feel like.
David Bourne (20:27):
It's causing a softening of rents.
Rachel Oh (20:29):
We're not seeing collapsing of rents or prices,
because what they say about 25,26, again we're going to be in
that same.
David Bourne (20:35):
That's Well if all of the starts that are not
happening today again a decreasein 40% is not just.
You know, you don't make thatup overnight, Right?
And that's going to have tocome out somewhere, Right?
So the homes that are not goingto be are not being built today
.
Right People are not going to beable to live in them in 25, 26,
when those typically would bemade, yeah.
So again, I think that a lot ofthe consensus in the market is
(20:58):
in 2026, we're all going to besitting around saying I wish I
owned a lot more rentalproperties.
Um, this is a.
You know, the if you, if youlook at the, the supply and the
inventory of what's being builtright now, I think the there was
a stat that came out that saidthe the horizontal apartment
supply is about a quarter, ofwhich the multi, you know, in
terms of timeframe, uh, 25% ofwhat the multifamily supply is
(21:26):
so they're going to burn throughthat a lot quicker.
Say that again In terms of thetime it's going to require to
burn through the existing supplyof production.
The build for rent is going tobe about 25% of what the
multifamily is in terms of thetime to burn through that supply
.
I think the big question iswell, when there's a significant
shortage of one specific assetclass, like build for rent, how
(21:46):
is that going to be affectedover the broader multifamily
market?
I think?
that's still to be determined.
I mean, I think what we'reseeing right now is even as
people are.
You know, the asset classesthat people are building tend to
be class A, you know.
You mentioned renting bynecessity, not necessarily the
renting by necessity crowd.
It's renting by choice.
But that does have a supplyimpact across the whole market.
(22:08):
So the big question thateverybody has is I think
everyone knows they want to beowning multifamily in 2026.
But it's how do you not justunderwrite, but how can you find
the capital, how can you findthe investment to build those
today so that you have them in2026?
Yeah, I think that's thequestion that everybody's trying
to solve.
Rachel Oh (22:26):
Let's talk about that then.
So you have a brand, so youwere brought in.
We're doing BFR.
You created a brand.
I mean, obviously, to makeanything pencil these days, we
have to make sure it's a Class Aplus brand even and the one
that we've created is AlanteHomes.
So tell me about Alante Homesin terms of what makes that
compelling and how are you ableto pencil that, because you're
(22:47):
still doing them, I mean, you'rebuilding those.
David Bourne (22:49):
I think the one challenge I would say to what
you said there are people arebuilding asset classes beside
Class A.
There are groups that buildthem.
They're very successful at them.
I think what a lot of peopleare seeing is it's hard to build
anything other than Class Ajust to get over the cost of
construction.
But to the question you asked,yeah, we have the Elante Homes
brand.
(23:10):
We have a number of communitiesalong the Wasatch Front, in
Salt Lake and in Boise that areeither open, operating or under
development.
I think as we approach ourunderwriting, I mean our
strategy is always to be veryconservative, which can be a
double-edged sword.
If you're too conservative, youcan't get financing for a
project.
If you're not conservativeenough, you end up being burned
(23:32):
with unrealistic assumptions.
That was, I think, one of thelessons I learned working for a
public home builder during thekind of the lead up to, during
and then post great financialcrisis going back and reviewing
underwritings and just saying,oh my goodness, how did somebody
get these assumptions passed?
So we're very conservative inour underwriting.
(23:53):
We make sure that everythingmakes sense, that it can pass
muster, which requires that wehave to be really diligent in
the deals and the projects wefind.
Some deals will come to usthrough brokers, but the really
good projects it's throughrelationships, it's through
understanding communities, it'sthrough understanding what is
(24:14):
available and really findingthose and then being creative in
what those communities looklike.
We have some that involvetownhomes and patio homes.
We have some that involve justpatio homes or horizontal
apartments.
We have some that involve allof those as well as commercial
and retail components, becauseone it helped returns and it
also was what was necessary inthat community, right by the
(24:34):
city, right the community or themunicipality, and it made sense
, so we had to be nimble in whatwe were creating.
Rachel Oh (24:40):
Pickleball courts too right.
David Bourne (24:41):
Yeah, people love pickleball courts.
Rachel Oh (24:44):
I'm trying to get into pickleball.
David Bourne (24:45):
People love pickleball courts, they love dog
parks, they love walking paths.
It's very interesting.
You know.
A great discussion point in themarket today is you know what
do amenities look like?
You know you kind of bring upamenities.
I think traditionally it'salways been pools and a fitness
center traditionally it's alwaysbeen pools and a fitness center
, and even that's kind of youknow, moved across the spectrum
as things are being built.
(25:05):
What really good managementcompanies are looking to build
now are amenities that theydescribe as sticky, that they
really it makes it difficult forsomebody to leave, and
sometimes that is I'm like well,if you like playing pickleball,
and here we can play pickleballor you have a dog and you like
walking your dog, and the dogpath is within your community.
Well, to move it means you needto find somewhere else to walk
(25:28):
the dog that provides all thesame benefits of your current
walking path.
So that's also something we'retrying.
Rachel Oh (25:31):
People love their pets.
David Bourne (25:32):
Well and that's something you're seeing a lot in
Build for Rent, we're seeingpet ownership upwards of 60 to
75 percent which's amazing.
Which is again 30 to 40 percenthigher than what you would see
in some traditional multifamily,and part of it is because, you
know, with the traditional yardsand standalone units it's a
little more conducive to owningpets, not just the ability to
(25:54):
let them outside easier, but youknow, I think we've all had,
you know, lived and heard a petgoing clickety, clickety, clack
on the roof up above you and youdon't have to worry about that
here?
Rachel Oh (26:04):
No, I super appreciate that.
Okay, so we're in an era highcosts, higher interest rates
than we're accustomed toalthough, again, my mother
always reminds me she financedher home in the double-digit
interest rate environment.
But, that being said, build forRent sounds like it's an asset
class that renters are choosingand preferring above your
(26:25):
traditional multifamily and Idon't want to knock any
multifamily by any means, but itjust offers an additional
rental housing option.
David Bourne (26:32):
No, here at PEG we definitely do not knock
traditional multifamily.
I think one of the thingsthat's interesting that we
really haven't touched on in themarket I think there's been a
lot of talk and you touched onit costs.
We've talked about inflation,just overall.
We've talked about thediminishing power of the dollar.
One of the trends that you'reseeing in multifamily is over
(26:52):
the last 16 months, wage growthhas actually exceeded rental
appreciation.
So you know we all have beenhearing complaints about the
cost of milk and the cost ofinterest rates, but your dollar
is actually getting stronger upagainst rental growth rates than
it has.
And that's a 16-month trendAgain, probably something that
will be adjusted.
(27:13):
I know as a renter you'rehoping not as someone who owns
rental units you hope that theappreciation does go up in that
area but that's one of thetrends we're watching and
keeping an eye on.
Rachel Oh (27:25):
Yeah, no, I appreciate that.
Okay, so any last parting wordsas we kind of wrap up this.
By the way, I think one of themore interesting strategies that
we have at PEG again just kindof seeing the landscape and
knowing that we're in thisrather challenging environment,
at least for the developmentside, because the other thing
(27:45):
too is it's not like you canacquire a bunch because there
isn't any right, especially inour market.
David Bourne (27:49):
No, they're all developable.
There's a challenge.
You know I go back and forth.
I get so excited about thisasset class.
I love it.
I go and tour our communitiesand one of the fun things you
see is I'll interact with someof our residents and they are
thrilled.
One of our communities has someactually abnormally large yards
in them and these residents comeout and they're excited to be
(28:13):
there and as we're underwriting,we're thinking, man, these rent
assumptions we have in there,this seems like a lot.
And they come out and say Ican't believe what a good deal I
got.
Rachel Oh (28:22):
They're so excited they feel fortunate to in there.
David Bourne (28:23):
This seems like a lot and they come out and say I
can't believe what a good deal Igot.
Yeah, they're so excited.
They're so they feel fortunateto be there.
Rachel Oh (28:25):
Yeah.
David Bourne (28:26):
And I think part of that is because, to your
point, there's not a lot of themRight, there's not a lot
trading.
There's a lot being built now,or more than there was yeah.
But it's a it's still in a lotof these marketplaces.
It's a unique product type thatpeople are excited to be in.
And it's excited to buildsomething that people are
excited to be in.
Rachel Oh (28:44):
It's very satisfying.
Like I said, it's one of myfavorite strategies that we have
thus far, so super appreciateit.
Well, good friend David Bourne,thank you so much for joining
us this week.
I loved hearing about it and Iloved hearing the passion around
it.
David Bourne (28:57):
Rachel, always a pleasure.
Thank you for having me on.
I might just move into one,just so you know.
Rachel Oh (29:02):
In the meantime, thank you to all who have joined
us today.
From the peaks of the MountainWest, I am Rachel Oh, your host.
This is presented by PEGCompanies as we dig into all
things Real estate, Until nexttime.
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the Peaks of
the Mountain West and beyond.
Hello everybody Once again fromthe Peaks of the Mountain West
high up here on the WasatchFront.
We are here again to talkcommercial real estate, the
economy and anything else thatmay come about.
So thank you again for joiningus for this week's episode of
(00:46):
Peaks and Portfolios by PEGCompanies.
We've been hearing a lot abouta housing shortage around the US
.
We also know that there are nowmore renters of choice those
who could buy but choose not to.
We also know that with today'sinterest rate environment, there
are more renters by necessity.
To better understand today'srenters and the housing options
available to them, we are goingto speak with David Bourne,
(01:08):
director of Investments here atPeg Companies.
Not only is he a respectedcolleague, but also a friend.
Now, for how long has it been?
Is it 20 years?
David Bourne (01:17):
David, I don't want to date us, but it's been
more than 20 years.
Rachel Oh (01:20):
Are we that old?
David Bourne (01:21):
You are.
Rachel Oh (01:23):
Anyway, David.
Okay, let me give everyone alittle bit of background on
David, because I know you wellbut others don't.
David was actually brought intothe firm to build and lead our
Build for Rent strategy, whichis dedicated to the development
and management of purpose-builtsingle-family home rentals.
Prior to PEG, he was head ofmergers and acquisitions at one
(01:44):
of the largest charter schooloperators in the nation.
David has also been withdifferent developers and spent a
good chunk of time at Lenar,perhaps one of the nation's
largest home builders.
If I'm not mistaken, he alsoearned his bachelor's of science
in accounting from BrighamYoung University and his MBA
from UCLA Anderson School ofManagement.
And, if I'm not mistaken,weren't you like some sort of
(02:05):
pitcher or something at UCLA aswell?
David Bourne (02:08):
Undergrad.
I was a bullpen catcher for theUCLA baseball team prior to
transferring to BYU.
Rachel Oh (02:14):
There we go, awesome, okay.
Well, david, thank you so muchfor joining us today, so let's
just dive right in.
You were brought in to lead outthe firm's Build for Rent BFR
strategy.
Brought in to lead out thefirm's Build for Rent BFR
strategy.
It's got a lot of press.
There's a lot of buzz about it.
For our listeners, could youjust kind of break down like
let's start off with like, whatis BFR?
Or even they call it BTR, whatis it exactly?
David Bourne (02:35):
Yeah, well, I think that's a great way to
start and segue into this assetclass.
For starters, it's veryconfusing for a lot of people.
First off, it's called BTR insome segments of the country.
It's called BFR in othersegments of the country, and
when you break it down into itsdefinition of build for rent or
build to rent, really anythingwould fall under that umbrella,
(02:56):
including multifamily.
But we're segmenting it intothis single family type rental
class and the types of productsthat fit into it are anything
from your traditional singlefamily home a 3,500 five bedroom
square foot home in suburbia toa 600 square foot one bedroom
(03:16):
horizontal apartment within astandalone rental community, and
all of that would fit into whatis called build for rent.
The asset class really startedback in the early 2000s.
There was a growing movement ofpeople, kind of in the run-up
to the great financial crisis,of people who were buying all
sorts of real estate assets.
One of the assets that peoplewere buying were brand new homes
(03:40):
and they were buying them forthe sole purpose of renting them
, and that was sort of new onthe horizon.
Prior to that you only hadmultifamily homes and maybe you
would have a mom and pop whowould move out of their primary
residence and upgrade, andinstead of selling it, they'd
keep their home and rent it out.
Rachel Oh (03:55):
That's what I did.
I always did that.
I never I don't even know, Ithink only in college did I ever
live in an apartment building.
But once I got out of college Iwas like I want a yard, I want
to be in a neighborhood.
I never lived in an apartmentAgain my personal taste.
So that's what you're saying.
A lot of people like homes andthe run-up to this asset class
was.
David Bourne (04:13):
you had a whole segment of the population who
was now acquiring brand newhomes and using them for rent.
Now, part of that problem wasthe lead up to the great
financial crisis and the debttools that they were using to do
it, which wasn't good.
But after the great financialcrisis, you had a lot of public
home builders, or even smallerhome builders, who had great
positions in land that wereunderwater.
(04:35):
They no longer fit the businessplan that they were looking at
and they said wait, if peoplewere buying these historically
to just, they are buying ourhomes to rent them, would it not
make sense for us to build themspecifically to rent?
So build to rent or build forrent started with these home
builders building their homesthat previously were for sale
and they were building themspecifically to rent as kind of
(04:55):
a way to supplement theirbusiness plan.
And that has transformed nowinto one of the fastest growing
asset classes in multifamily orin residential real estate,
which is built for rent, and now, as we mentioned, it takes all
shapes and sizes, and I thinkpart of the popularity is
exactly what you were mentioningHistorically if you wanted to
(05:16):
rent you had a multifamily,traditional garden style
apartment or a high rise, if youwere in an urban area and you
could try your luck at finding arandom rental house in a
neighborhood that a mom and popor somebody was renting, and
those were really the onlyoptions that were available for
somebody looking to rent inAmerica.
And what Build for Rent hasdone is it's kind of filled in
(05:39):
that middle with a lot moreoptions.
Traditionally, build for Renthas a couple characteristics it
has no one above or below you,so you're not walking upstairs
to get to your unit.
You're not having someone aboveyou.
Rachel Oh (05:51):
That's the big thing, right?
No one above or below.
David Bourne (05:53):
Right.
I think that's really what itcomes down to.
It's not necessarily a sense ofgreater space, but it's a sense
of greater privacy.
You want to have your own place, because the second very
consistent trademark of abuild-for-rent property is the
ability to have your own yard.
So you'll see a lot of—.
Rachel Oh (06:11):
And you don't have to do your own yard work right,
like I don't have to—if I rentedone I don't have to move my
lawn.
David Bourne (06:16):
Most of the time you're looking at—so a lot of
build-for-rent homes now areheld within their own standalone
communities, very similar to amultifamily community, and
they're managed like that.
I think that's been one of theappeals that's really allowed
this asset class to grow the wayit has is.
You can come in people wantedto rent something more than an
(06:37):
apartment, but they didn't likedealing with the lack of
sophistication that oftentimescomes with smaller managers.
So a lot of build-for-rent homecommunities now are in their own
standalone communities,professionally managed, which
means everything from your ownyard that's maintained the
interior of the home that'smaintained, but also and I think
this is the change that hasreally come in the last few
(06:58):
years it's in its own community,where people have a sense of
neighbors, they belong, but theyalso have a yard, more sense of
their own place, and also pools, gyms, walking paths, and they
feel they're around other peoplelike them who are in the same
places in life.
Rachel Oh (07:16):
Yeah, so when you say horizontal apartments, then it
truly is just like I was livingin one of those fancy high rise
apartments with all theamenities, but instead of on top
of each other in a big building, I now have my own individual
home that I can rent, but Istill have access to all these
amenities.
David Bourne (07:34):
Yes, that's what a lot of the built-for-rent
communities look like today.
It's imagine you take a three-,four-story garden-style
apartment and just squish itdown.
So now all of it's flat.
Most of them are eitherstandalone or road townhomes or
possibly a duplex, but the greatmajority of them are standalone
units.
This model was reallypopularized in Arizona.
(07:54):
There were a couple of bigbuilders down there with Next
Metro and Christopher Todd thatcreated these communities of
their own doors, their ownbuildings, but all of the
amenities that a lot of themarket had become accustomed to
in apartments Interesting,interesting, yeah, no, I feel
like again, you know I have,I've seen them.
Rachel Oh (08:11):
There's not a ton here right in the Mountain West,
which is, I think, one of theopportunities that Peg is trying
to fill right, because there'ssuch rent growth here but not a
lot of diversity and optionsother than your mom, like if you
want to be in a single-familyhome.
Yeah, it's very interesting.
David Bourne (08:26):
When I started with PEG close to three years
ago, that was exactly the linethis does not exist in Utah and
Idaho, it should because, thedemographics in Utah match,
where it has been successfulelsewhere in the country.
That's not as true today as itwas three years ago.
You are seeing a lot morebuilt-front communities.
Rachel Oh (08:42):
You're seeing a lot more of these communities along
the Wasatch Front and in Boise Ican see them on the freeway,
but I don't feel like I see fullamenities.
I don't feel like I see poolsor clubhouses or whatnot.
I feel like I just see a bunchof townhomes in a row.
David Bourne (08:55):
I think that's part of the confusion with the
description of Build for Rent.
That counts.
So you have a community thathas 25 townhomes.
That's technically built forrent.
Now they don't all look thesame as a community that has,
you know, pools and gyms, butthat would technically be, you
know, count under build for rentAlong the Wasatch Front.
(09:16):
You're seeing some of those,but there's also large build for
rent communities here as well,with hundreds of units.
And you know, one of them evenhas a lazy river in their water
feature.
I think part of what you sayabout not seeing it off.
The freeway is come to thenature of what Build for Rent is
.
Where they are usually locatedis in suburban areas, typically
close to some type of masstransit.
Rachel Oh (09:48):
But you're not going to see them in heavy urban
environments.
You're going to see them insuburbia, a little further off
the beaten path sometimes, butalong the established path of
growth.
David Bourne (09:55):
Interesting.
So I mean, how long has thisthen been burgeoning, Like how
you mentioned?
Well, you could say all the wayback to the early 2000s.
I think it's really picked upin earnest in the last 10 years,
especially with some of theemphasis.
Rachel Oh (10:03):
So it's new, it's very new, it's a very new asset
class.
David Bourne (10:06):
I mean, when you think 10 years, relative to what
we've been doing in America forthe last 200 years, it's very
new and I think some of it isgoing back to kind of coming
full circle.
I think historically, your onlyoptions weren't always an
apartment or a standalone home.
You had a lot of things in themiddle of that housing market
(10:28):
and this fits that.
Rachel Oh (10:29):
Yeah.
So I mean then, who are the bigplayers?
Not to rain on your parade, butI mean there was a big
announcement that Heinz hasentered BFR, I think through
some acquisitions.
But they're also buildingcommunities Like who are the big
players now?
David Bourne (10:42):
Well, it's still a very spread out.
The big players are notrepresenting a majority of the
marketplace.
But you have anywhere frombehind.
You see Blackstone that justhad a major acquisition.
You see a lot of the publichomebuilders.
Dr Horton has a reallyextensive build-for-rent group
that they're working on.
But, dr Horton, as youmentioned, they're the number
(11:05):
two homebuilder in the countrybehind Lenar.
They're not necessarily thenumber two home builder in the
country behind Lenar.
They're not necessarily thenumber two.
They're not necessarily thenumber two BFR builder in the
country.
You had Next Metro, whooperates under the Avila brand.
That was very big in Arizona.
Rachel Oh (11:21):
And they're in Colorado now, right.
David Bourne (11:22):
They've extended into Colorado into.
Texas and they've gone throughsome acquisitions as well, and
you had Christopher Todd, whowas really big in Arizona
specifically and really they'vekind of focused on we're only
going to do these horizontalapartment communities and really
you see the different specifictypes based on where you are in
(11:43):
the country.
Some of that's based on who'sbuilding them.
That, hey, this is what we knowhow to build and this what
we're building.
Others are driven by what themarket demands.
Rachel Oh (11:51):
So let's talk about what the market demands, like
who is renting these?
Who are we talking?
David Bourne (11:56):
A lot of times what you see is both ends of the
family spectrum.
You see a lot of youngprofessionals.
They're coming out of school.
They want additional space,additional privacy, maybe
they've been in apartments, butthey're ready to move on to
something else.
But they either can't or arechoosing not to buy a home.
Obviously there's some veryreal economic constraints
(12:18):
pushing down on that.
The need for a large downpayment.
A lot of them have studentloans that they're carrying.
Interest rates are now high,but on top of that there are
some economic factors that wouldmake it so that, even if you
had the means, you may decidenot to.
A recent article came out inthe Wall Street Journal talking
about how there's never been abetter time to rent, just
because the ratio of a rentalpayment versus a home payment is
(12:39):
out of balance.
So you see, a lot of thosepeople who historically may have
been buying homes either cannotor are choosing not to buy
homes and they want an optionbesides an apartment.
They want a little more space,a little more privacy.
The other large group you'reseeing is the other side of the
family spectrum Empty nesterswho maybe had their home who
(13:05):
raised their family and now theydon't need all the space.
They want a lower maintenancelifestyle, but they still want
to be involved in some type ofcommunity where they feel a part
of something Right.
Rachel Oh (13:11):
So let's talk about that just a little bit.
So you've got renters by choice, you've got renters by
necessity, and now single familyrental communities offer an
additional rental option,whereas, you know, heretofore it
was just your traditionalmultifamily.
David Bourne (13:27):
How is the asset class performing when it comes
in comparison to the otherresidential so I think when it
first came out and people wereunderwriting it, they weren't
really sure how to underwrite it.
There were a lot of assumptionsthat over the last 10 years
have proven to be inaccurate,which is probably true of any
type of underwriting, I think.
Initially we thought thatinflation rates for, or
(13:49):
appreciation of, rents wouldincrease at a faster rate than
multifamily.
That hasn't necessarily beentrue.
There were also concerns thatoperating costs of a horizontal
apartment community would behigher than a traditional
multifamily.
Rachel Oh (14:02):
That also hasn't been true, so it's kind of that has
balanced out, even with, likemowing lawns and maybe, like in
our region you know, shovelingsidewalks during the winter and
whatnot, it seems and they'reusually offset by something like
well, you're not airconditioning as much common
space, or there's other themanner in which they're built
(14:23):
and the materials that are usedtend to wear a little bit better
and don't require as muchmaintenance.
So there's been some offsets.
David Bourne (14:29):
Some of the revenue assumptions have been
lower.
Some of the cost assumptionshave been lower to balance out,
so a lot of the returnmeasurements are very similar to
multifamily.
I think the one area that Buildfor Rent has an advantage over
traditional multifamily isresidents tend to live in their
units longer and, as we talkedabout, the asset class covers a
(14:51):
lot of different product types.
The closer the products get totraditional single family homes,
the longer the residents seemto stay.
It just has there's a lot ofglue that holds them there, and
those also tend to get biggerfamilies, which would be
expected.
Rachel Oh (15:04):
Yeah, yeah, no.
I mean I definitely amsurprised sometimes when I hear
of families having been in theirrental home for 10 years or
whatnot.
So I could see how that wouldbe Okay.
So they're performing you're.
Now the industry has a betterunderstanding of how the
underwriting works.
What is financing like then?
I mean, in this era wherefinancing is tight and banks are
(15:27):
more hesitant, is BFR an assetclass that banks are now
comfortable with?
Will they lend on that?
David Bourne (15:34):
Banks are definitely now aware of it.
They're comfortable with it.
They're lending on it about thesame interest rates terms that
you'd see in a traditionalmultifamily debt package.
Rachel Oh (15:43):
Okay, so not necessarily better or worse, but
Not necessarily better or worse.
David Bourne (15:48):
I think that's another one of the underwriting
assumptions that people weren'treally sure what to do with.
Oh, this is going to get betterthan multifamily, or it's going
to be worse than multifamilyand it's right about on par.
Okay.
And same with exit cap rates.
I think there was some thoughtthat, oh, this should be a
tighter cap rate than what you'dsee in multifamily.
Rachel Oh (16:11):
Or some people thought it'd be a higher cap
rate and it tends to be rightalong where multifamily cap
rates are.
Okay.
You know I was in preparationfor this conversation and we
talk about BFR quite a bit,obviously, but I was reading
here that you know rent pricesnationally are almost 30% higher
than before the pandemic.
So we know this.
We also know that multifamilyrental prices only grew about
(16:32):
2.7% from January 2023 toJanuary 2024.
However, compared with singlefamily rental prices, they
actually grew 4.7% over the sameperiod.
So it does sound like we'reable to capture higher rents on
these single family rentals.
Sound like we're able tocapture higher rents on these
single family rentals.
David Bourne (16:51):
And so just curious, you know if that's what
you're seeing, and if that'sthe case, it seems like that
would be quite compelling.
I think what you're seeing onenationwide is all of the
economics classes that we tookin college being played out in
real life.
There's a supply and demandfunction going on across the
country and very locationspecific.
So during the pandemic, you sawrents skyrocket in a lot of
(17:13):
very specific markets Boise,denver, austin, nashville and as
a result, rents went throughthe roof and all of the builders
jumped in to build moremultifamily.
Those same areas are now havingsupply challenges and rents are
softening.
Rachel Oh (17:28):
So too much supply came in.
David Bourne (17:30):
Too much supply came in, and now they're working
through that.
Rachel Oh (17:32):
Which is, I think, kind of a nationwide phenomenon.
Right, because you had a lot ofconstruction, costs were low,
or at least at the time, well,yeah, interest rates were low.
David Bourne (17:42):
Apartment or rental inflation rates were very
high.
It was a very compelling timeto build.
There were some constructionanomalies with supply chain and
lumber and some of the costs allover the board, but a lot of
people wanted to buildmultifamily because they saw
these returns during thepandemic.
It is a nationwide challenge,but it's also very specific.
Certain specific locations arereceiving that more than others.
What we are seeing is thecloser something looks to a
(18:05):
family home, a single familyhome, the higher those inflation
rates are.
Is what the data is showingnationwide.
Okay.
So the horizontal apartments notseeing as big a bump as the
larger single family homes, it'smore on par with what you would
see in a multifamily apartmentright now.
I think what the challenge inthe marketplace right now is and
(18:28):
I don't think I'm sharing anytrade secrets I think everyone
would have the same consensus onthis it's really difficult to
underwrite any type of rentalproduct right now.
Combination of land prices arestill relatively high.
We have interest rates that arehigh and everyone is looking at
the same kind of flatteninginflation rates that you just
(18:50):
mentioned, and it's tough to getsomething to pencil.
Rachel Oh (18:54):
Okay, let's talk about that.
It's tough to get something topencil, but that means no one is
doing it.
I shouldn't say no one.
David Bourne (19:01):
No, there's been a huge drop right.
Rachel Oh (19:04):
But we've also seen, I feel like, historically, when
things drop, like, for example,the GFC, affected home building.
We are still trying to catch upon that, and so I'm curious If
no one quote unquote is able topencil is now the time to build
this product which, again,you're able to capture higher
(19:25):
rents?
It seems like it is the rentaloption of choice.
You've got folks that arechoosing to rent for different
lifestyle change reasons andalso being forced to rent
because of where interest ratesare.
It doesn't look like interestrates are coming down anytime
soon, so is now the time tobuild more.
David Bourne (19:43):
I think that's the question that everybody is
asking.
And the second question behindthat is how there was a chart
that just, I think last week ortwo weeks ago made its way
through the sphere that got alot of traction, showing how the
decrease in starts inmultifamily buildings across
various cities across America.
Yeah.
You know, new York, salt Lake,nashville a lot of these were
(20:06):
down 40-something percent from2021.
So we're all talking about this.
You know a very short blip insupply that is softening rents
To the point that you madeearlier.
We're still trying to recoverfrom some of the supply damage
that happened to the economyafter the great financial crisis
, so we're talking aboutoversupply right now.
Rachel Oh (20:25):
It's a very but it's a short period.
I feel like.
David Bourne (20:27):
It's causing a softening of rents.
Rachel Oh (20:29):
We're not seeing collapsing of rents or prices,
because what they say about 25,26, again we're going to be in
that same.
David Bourne (20:35):
That's Well if all of the starts that are not
happening today again a decreasein 40% is not just.
You know, you don't make thatup overnight, Right?
And that's going to have tocome out somewhere, Right?
So the homes that are not goingto be are not being built today
.
Right People are not going to beable to live in them in 25, 26,
when those typically would bemade, yeah.
So again, I think that a lot ofthe consensus in the market is
(20:58):
in 2026, we're all going to besitting around saying I wish I
owned a lot more rentalproperties.
Um, this is a.
You know, the if you, if youlook at the, the supply and the
inventory of what's being builtright now, I think the there was
a stat that came out that saidthe the horizontal apartment
supply is about a quarter, ofwhich the multi, you know, in
terms of timeframe, uh, 25% ofwhat the multifamily supply is
(21:26):
so they're going to burn throughthat a lot quicker.
Say that again In terms of thetime it's going to require to
burn through the existing supplyof production.
The build for rent is going tobe about 25% of what the
multifamily is in terms of thetime to burn through that supply
.
I think the big question iswell, when there's a significant
shortage of one specific assetclass, like build for rent, how
(21:46):
is that going to be affectedover the broader multifamily
market?
I think?
that's still to be determined.
I mean, I think what we'reseeing right now is even as
people are.
You know, the asset classesthat people are building tend to
be class A, you know.
You mentioned renting bynecessity, not necessarily the
renting by necessity crowd.
It's renting by choice.
But that does have a supplyimpact across the whole market.
(22:08):
So the big question thateverybody has is I think
everyone knows they want to beowning multifamily in 2026.
But it's how do you not justunderwrite, but how can you find
the capital, how can you findthe investment to build those
today so that you have them in2026?
Yeah, I think that's thequestion that everybody's trying
to solve.
Rachel Oh (22:26):
Let's talk about that then.
So you have a brand, so youwere brought in.
We're doing BFR.
You created a brand.
I mean, obviously, to makeanything pencil these days, we
have to make sure it's a Class Aplus brand even and the one
that we've created is AlanteHomes.
So tell me about Alante Homesin terms of what makes that
compelling and how are you ableto pencil that, because you're
(22:47):
still doing them, I mean, you'rebuilding those.
David Bourne (22:49):
I think the one challenge I would say to what
you said there are people arebuilding asset classes beside
Class A.
There are groups that buildthem.
They're very successful at them.
I think what a lot of peopleare seeing is it's hard to build
anything other than Class Ajust to get over the cost of
construction.
But to the question you asked,yeah, we have the Elante Homes
brand.
(23:10):
We have a number of communitiesalong the Wasatch Front, in
Salt Lake and in Boise that areeither open, operating or under
development.
I think as we approach ourunderwriting, I mean our
strategy is always to be veryconservative, which can be a
double-edged sword.
If you're too conservative, youcan't get financing for a
project.
If you're not conservativeenough, you end up being burned
(23:32):
with unrealistic assumptions.
That was, I think, one of thelessons I learned working for a
public home builder during thekind of the lead up to, during
and then post great financialcrisis going back and reviewing
underwritings and just saying,oh my goodness, how did somebody
get these assumptions passed?
So we're very conservative inour underwriting.
(23:53):
We make sure that everythingmakes sense, that it can pass
muster, which requires that wehave to be really diligent in
the deals and the projects wefind.
Some deals will come to usthrough brokers, but the really
good projects it's throughrelationships, it's through
understanding communities, it'sthrough understanding what is
(24:14):
available and really findingthose and then being creative in
what those communities looklike.
We have some that involvetownhomes and patio homes.
We have some that involve justpatio homes or horizontal
apartments.
We have some that involve allof those as well as commercial
and retail components, becauseone it helped returns and it
also was what was necessary inthat community, right by the
(24:34):
city, right the community or themunicipality, and it made sense
, so we had to be nimble in whatwe were creating.
Rachel Oh (24:40):
Pickleball courts too right.
David Bourne (24:41):
Yeah, people love pickleball courts.
Rachel Oh (24:44):
I'm trying to get into pickleball.
David Bourne (24:45):
People love pickleball courts, they love dog
parks, they love walking paths.
It's very interesting.
You know.
A great discussion point in themarket today is you know what
do amenities look like?
You know you kind of bring upamenities.
I think traditionally it'salways been pools and a fitness
center traditionally it's alwaysbeen pools and a fitness center
, and even that's kind of youknow, moved across the spectrum
as things are being built.
(25:05):
What really good managementcompanies are looking to build
now are amenities that theydescribe as sticky, that they
really it makes it difficult forsomebody to leave, and
sometimes that is I'm like well,if you like playing pickleball,
and here we can play pickleballor you have a dog and you like
walking your dog, and the dogpath is within your community.
Well, to move it means you needto find somewhere else to walk
(25:28):
the dog that provides all thesame benefits of your current
walking path.
So that's also something we'retrying.
Rachel Oh (25:31):
People love their pets.
David Bourne (25:32):
Well and that's something you're seeing a lot in
Build for Rent, we're seeingpet ownership upwards of 60 to
75 percent which's amazing.
Which is again 30 to 40 percenthigher than what you would see
in some traditional multifamily,and part of it is because, you
know, with the traditional yardsand standalone units it's a
little more conducive to owningpets, not just the ability to
(25:54):
let them outside easier, but youknow, I think we've all had,
you know, lived and heard a petgoing clickety, clickety, clack
on the roof up above you and youdon't have to worry about that
here?
Rachel Oh (26:04):
No, I super appreciate that.
Okay, so we're in an era highcosts, higher interest rates
than we're accustomed toalthough, again, my mother
always reminds me she financedher home in the double-digit
interest rate environment.
But, that being said, build forRent sounds like it's an asset
class that renters are choosingand preferring above your
(26:25):
traditional multifamily and Idon't want to knock any
multifamily by any means, but itjust offers an additional
rental housing option.
David Bourne (26:32):
No, here at PEG we definitely do not knock
traditional multifamily.
I think one of the thingsthat's interesting that we
really haven't touched on in themarket I think there's been a
lot of talk and you touched onit costs.
We've talked about inflation,just overall.
We've talked about thediminishing power of the dollar.
One of the trends that you'reseeing in multifamily is over
(26:52):
the last 16 months, wage growthhas actually exceeded rental
appreciation.
So you know we all have beenhearing complaints about the
cost of milk and the cost ofinterest rates, but your dollar
is actually getting stronger upagainst rental growth rates than
it has.
And that's a 16-month trendAgain, probably something that
will be adjusted.
(27:13):
I know as a renter you'rehoping not as someone who owns
rental units you hope that theappreciation does go up in that
area but that's one of thetrends we're watching and
keeping an eye on.
Rachel Oh (27:25):
Yeah, no, I appreciate that.
Okay, so any last parting wordsas we kind of wrap up this.
By the way, I think one of themore interesting strategies that
we have at PEG again just kindof seeing the landscape and
knowing that we're in thisrather challenging environment,
at least for the developmentside, because the other thing
(27:45):
too is it's not like you canacquire a bunch because there
isn't any right, especially inour market.
David Bourne (27:49):
No, they're all developable.
There's a challenge.
You know I go back and forth.
I get so excited about thisasset class.
I love it.
I go and tour our communitiesand one of the fun things you
see is I'll interact with someof our residents and they are
thrilled.
One of our communities has someactually abnormally large yards
in them and these residents comeout and they're excited to be
(28:13):
there and as we're underwriting,we're thinking, man, these rent
assumptions we have in there,this seems like a lot.
And they come out and say Ican't believe what a good deal I
got.
Rachel Oh (28:22):
They're so excited they feel fortunate to in there.
David Bourne (28:23):
This seems like a lot and they come out and say I
can't believe what a good deal Igot.
Yeah, they're so excited.
They're so they feel fortunateto be there.
Rachel Oh (28:25):
Yeah.
David Bourne (28:26):
And I think part of that is because, to your
point, there's not a lot of themRight, there's not a lot
trading.
There's a lot being built now,or more than there was yeah.
But it's a it's still in a lotof these marketplaces.
It's a unique product type thatpeople are excited to be in.
And it's excited to buildsomething that people are
excited to be in.
Rachel Oh (28:44):
It's very satisfying.
Like I said, it's one of myfavorite strategies that we have
thus far, so super appreciateit.
Well, good friend David Bourne,thank you so much for joining
us this week.
I loved hearing about it and Iloved hearing the passion around
it.
David Bourne (28:57):
Rachel, always a pleasure.
Thank you for having me on.
I might just move into one,just so you know.
Rachel Oh (29:02):
In the meantime, thank you to all who have joined
us today.
From the peaks of the MountainWest, I am Rachel Oh, your host.
This is presented by PEGCompanies as we dig into all
things Real estate, Until nexttime.
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