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- [00:00]
Joe Weisenthal
89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly with top tier security credentials and 15 years of experience in responsible AI. Grammarly is how companies like yours increase productivity while keeping data protected and private. See why 70,000 teams trust Grammarly@Grammarly.com this.
- [00:28]
Lee Everett
Show is sponsored by BetterHelp.
- [00:30]
Joe Weisenthal
BetterHelp has been revolutionary in connecting people to mental health services. Using BetterHelp can be as easy as.
- [00:36]
Tracy Alloway
Opening your laptop or your phone and.
- [00:39]
Joe Weisenthal
Clicking a button and the session begins. Clients are able to choose in what way they would like to communicate with me. Whether video or on the phone or.
- [00:48]
Tracy Alloway
Chat texting, BetterHelp is there when you need it, and that's what makes all the difference.
- [00:54]
Joe Weisenthal
Visit betterhelp.com podbusiness to get 10% off your first month.
- [00:59]
Tracy Alloway
Therapists were compensated.
- [01:04]
Joe Weisenthal
Bloomberg Audio Studios Podcasts.
- [01:07]
Tracy Alloway
Radio News.
- [01:19]
Joe Weisenthal
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
- [01:25]
Tracy Alloway
And I'm Tracy Alloway.
- [01:26]
Joe Weisenthal
Tracy, you know, one of the big themes obviously in American life and the most recent election was inflation. And there are a lot of things that people think of when they think of inflation. Maybe they think of egg prices. That's in the news these days. Maybe they think of gasoline prices. But a big story is like the cost of living is the cost of housing.
- [01:46]
Tracy Alloway
Yes. Actually, it's kind of funny. Everyone has their own personal benchmarks for inflation. And mine is probably the cost of mayonnaise, because I've been tracking that for a long time. Not because I eat that much of it, but I just find it interesting because it contains eggs and oil and packaging and labor and all that stuff. And rent. And guess what, Joe, my rent's going up again.
- [02:09]
Joe Weisenthal
What about your mayonnaise consumption? It's funny to me. Sorry. When you said mayonnaise, I have to admit the first thing that came to my head was just imagining you in your apartment with a gigantic storing buckets of mayonnaise, a gigantic tub of Costco mayonnaise, eating it with a spoon. I'm sorry. And as wow, you're really consuming a lot of mayonnaise. If this is what comes to your mind when you think about the cost of living.
- [02:30]
Tracy Alloway
Well, as part of my research for this, I can tell you you can buy buckets of extra heavy mayo off of Amazon.
- [02:37]
Joe Weisenthal
Sounds good. We're actually not doing a mayonnaise episode. We're talking about the other one.
- [02:41]
Tracy Alloway
We're talking about I tried to throw in my rent stat.
- [02:44]
Joe Weisenthal
Yeah, I know, to keep you on.
- [02:46]
Tracy Alloway
Topic, but you wanted to talk about Mayo.
- [02:48]
Joe Weisenthal
We'll do a Mayo episode at some point. But rent is really interesting, actually. In the government's measure, there's so many moving parts with anything hous. Most recently, actually, the government's measure of rent price growth, which has been a key contributor to overall inflation, et cetera, actually has been moderating lately. We're sort of getting back to the point where we're like at pre Covid levels of rent price growth.
- [03:11]
Tracy Alloway
Right. So it's still going up, but just not as much as it was before.
- [03:14]
Joe Weisenthal
But the perversity, perhaps it's a perversity, is that obviously the Fed jacked up interest rates quite aggressively to fight inflation. Inflation has come down. Took a little longer than people expected, but, you know, it has come down. The. But one of the things that we do know that happens is that when the Fed jacks up interest rates, that really has an effect on housing development, which of course requires a lot of capital and leverage, et cetera. And if you look at a chart of, say, multifamily housing starts buildings, five units or more, that's come way down since its peak, like in 2022.
- [03:48]
Tracy Alloway
Yeah. So we had this huge wave of supply in sort of late 2021, 2022, as you said, it's fallen quite a lot. The interesting thing that I see here is like, yields on bonds are still going up. Yeah. So we're at 4.55% or so on the 10 year, and that is higher than when the Fed started cutting rates. So the cost of financing these projects is still going up and there's not that much activity.
- [04:16]
Joe Weisenthal
Well, we did an episode in November 2023, and our guest said something really interesting to me that I've repeated probably many times, which is that for a lot of multifamily developers, they might prefer a hard landing in the economy because, sure, that might mean demand for rent goes down or some of their tenants can't pay their rent. But if it means that you get a dramatic drop in interest rates because of how levered they are to the cost of money, that might actually work out better for them, which is sort of still blows my mind. But it is what it is. And so one of the other things that we're thinking about is like, well, what's going on with all these multifamily developers carrying big debt and so forth, given the fact that rates have not come down.
- [05:00]
Tracy Alloway
Yeah. Let's talk about it.
- [05:01]
Joe Weisenthal
Well, we are going to be speaking with the same guest who commented that in 2023 we're going to be talking about all of these dynamics. Really the perfect guest. Thrilled to welcome back onto the show Lee Everett, head of research and strategy at Cortland, which is a multifamily owner operator, roughly 80,000 units nationwide. Lee, thank you so much for coming back on the podcast.
- [05:23]
Lee Everett
Thank you for having me.
- [05:24]
Joe Weisenthal
I've actually just wanted to have you back on to talk about this specific. There's a lot we're going to talk out, but as Tracy mentioned, rates haven't come down. I know people were like, oh, the Fed's going to start right? This is Relief is in sight. How stressed out are a lot of these entities by the fact that after all this time we haven't seen any rate relief?
- [05:45]
Lee Everett
It's interesting. I think stress is hitting sort of all sides of the market. You have your bigger, more well established shops that have been managing through this, able to handle the higher rate environment, but have obviously taken a very real valuation hit on their existing portfolios, like 20 to 30% depending upon the portfolio composition. At the same time, you've had record demand hitting the sector because cost to buy housing is exceptionally unattainable today. And then on the other side you're having a very material impact on the supply side. And I think that's what's really unique. If you think back to September, the 10 year was around a 36 I think the day Chair Powell cut us by 50 basis points. Well, we're at almost a 4, 6 today. And I remember that night you heard reports about developers out at like local dinners and they were calling it Fed Day and getting ready to put shovels.
- [06:38]
Joe Weisenthal
In the champagne and stuff like that.
- [06:40]
Lee Everett
Exactly. And what you've seen instead is increased stress on both the short end and the long end of the curve. That's given you trouble on the short end to start new housing and trouble on the long end to afford longer term for ownership housing.
- [06:55]
Tracy Alloway
You mentioned that some of the bigger players are better able to deal with higher rates. Can you talk about how people try to offset some of these higher rates and is it the case that there is still an ability to refinance and term out your debt or is that starting to go away now?
- [07:12]
Lee Everett
I think extend and pretend, which you're referring to, and the always popular looming maturity wall discussion is what you're hitting on. And what we're seeing there is the established owners that have strong relationships throughout either Fannie and Freddie Balance Sheet lenders, et cetera. They're able to continue to negotiate and work out loans and delays. The people that got out really far over their skis, the syndicators, the new entrants to the place. And a lot of what we talked about last time, those players are sort of hitting the end of their window here. And what we've seen in the financing space actually as we delve into this a bit more, is there's so much liquidity on the debt side that wants to come back to work. They want to be rid of these sort of balance sheet hindrances that are these unproven players in the market. And they want to get back to work with the sponsors they appreciate. And we've generally seen spreads come in about 100 basis points from their peak. So that has helped limit some of sort of the financing pressures. But it's certainly a far cry from a 1% 10 year to a 4 or 510 year. So it depends a lot on who you are in the space and how this has impacted you today.
- [08:29]
Joe Weisenthal
Right. Because 2021, probably part of 2022, we were like in that era where Instagram influencers were posting about get in. You know, rent prices always go up.
- [08:42]
Tracy Alloway
TikTok multifamily landlords.
- [08:43]
Joe Weisenthal
Yeah, TikTok multifamily family landlords. Rent always goes up. We have a new project, it's probably called the Reserve. It's in the suburbs of Houston and it has a pool table and there's no kids allowed. The pool table and you're guaranteed. And a bunch of them got wiped out. What happened to them? Since we talked and then talked about it from the more established operators. And how much of a relief has it been that some of this, I don't know, new money, whatever you want. TikTok money has maybe gotten washed out. Tell us how that story ended.
- [09:12]
Lee Everett
I would call it a thinning of the herd that we're still going through. I don't want to necessarily call out people by name, but you can see in the news there is a certain prominent syndicator that basically doubled their positions and became a top 30 owner in 2021 or so. And banks are personally suing the founders of that company on carry guarantees. Today you've seen potential investigations and some of the debt funds being talked about in the space. And that relates specifically to valuations on some of assets that weren't maintained or taken care of by certain owner operators. So you're seeing a high level of delinquency. A lot of these properties that were These new money and TikTok landlords have a ton of liens against them because they weren't paying their contractors, they weren't executing their value add plans and ultimately they're going to be in a world of pain. Would be my sort of outcome at the end of all of this because as I said before, the banks are just getting tired of carrying this on their balance sheets. Same with the debt funds. Like you can't make money with this much bad money hogging your buck.
- [10:19]
Tracy Alloway
I have a really basic question which I feel kind of bad asking because I used to cover commercial real estate and I should know this since multifamily is the forgotten commercial real estate as I sometimes call it. But what's the best thing to look at if you want to just get a gauge of multifamily markets? Health. So you know, I can look at like permits or something like that, but that number is really volatile. I'm not sure how much it's actually telling me.
- [10:47]
Lee Everett
Yeah, I think there are sort of two high level factors. One is going to be your rent growth because that's going to feed your NOI growth. The other factor is going to be your cap rate, which we talked about this a little bit last time. Your cap rate is essentially your yield, your income over your price. As money's entering the space, prices go up, so you get healthier cap spaces and that's on the sort of for sale side. And as NOI goes up, you also can get tightening of cap rates because you get a higher value on the noi. And that also would be sort of your high level indicator. And what we've seen in cap rates is they've just started to flatten in the last few months, but they're up roughly 100 basis points across the board. And that's where sort of that 20 to 30% hit in valuations I mentioned has come into play.
- [11:34]
Joe Weisenthal
All right, let's talk about from the perspective of a renter. So I have some familiarity with the Austin, Texas housing market. Supply and demand apparently has worked very beautifully. There are a lot of people wanted to move there and then there's just towers up everywhere, including deep into the suburbs. And then actually rent price I believe is actually negative for many years in Austin, which seems like good news overall. That's a rare story though. But we've had this big fall and anyone can just go on Fred and search new privately owned housing units, started units and buildings with five units or more and see that we've had this big drop over the last Two years roughly since the peak of all these developments. What's going to happen? Play this out a little bit over the next two years where supply meets demand here. And you know, we already have these affordability. Rent is already basically expensive everywhere, even in Austin. With the declines. Is it going to get worse?
- [12:30]
Lee Everett
Yes, I think frankly we're about to transition from what has been a very renter friendly market to again a landlord friendly market over the course of the next two to three years. And that's going to be particularly driven by what we're seeing on the supply side. We're going to have over a million units come to market over a two year period here in 24 and 25. Okay, but peak supply is hitting in the next six months. And if you look at relative time from a peak supply and then B to getting to a level of lower supply than you saw last cycle, every major market in the country will be there by the end of 2026. Beware, delivering less housing units than they did on average from 17 to 19 in apartment buildings. So you're going to go below prior cycle supply very quickly. At the same time, we do have exceptionally strong labor markets here and the demand story has been outstanding. So 2024 is going to end the year depending upon the data provider you use as the first or third highest year for rental demand ever. 2021 was the prior record. So we're seeing people form rental households at unprecedented rate in the US and as that supply comes down, you're going to see that demand struggle to frankly find high quality, well located assets to move in. And you're likely to see that relationship flip. At that point.
- [14:09]
Joe Weisenthal
89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. But with AI tools popping up everywhere, how do you separate the helpful from the hype? The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly. With over 15 years of experience building responsible secure AI, Grammarly isn't just another AI communication assistant. It's how companies like yours increase productivity while keeping data protected and private. Designed to fit the needs of business, Grammarly is backed by a user first privacy policy and industry leading security credentials. This means you won't have to worry about the safety of your company information. Grammarly also emphasizes responsible AI so your company can avoid harmful bias. See why 70,000 teams and 30 million people trust Grammarly@GRAMLY.com Enterprise? That's Grammarly@GRAMLLY.com Enterprise Grammarly Enterprise Ready AI.
- [15:09]
Mikayla Shiffrin
I'm alpine skier Mikayla Shiffrin I've won the most World cup ski races in history. But what does success mean? To me, success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stifel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there.
- [15:34]
Stifel Representative
At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row.
- [15:52]
Mikayla Shiffrin
If you're an advisor or investor, choose Stifel.
- [15:56]
Stifel Representative
Where success meets success. Stifel Nicklaus & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit jdpower.com Awards compensation provided for using not obtaining the award.
- [16:09]
Tracy Alloway
So the other thing that affects multifamily housing construction other than interest rates, has to be just general confidence, I guess, in the direction of the economy, the direction of the world, and certainly there's a lot going on right now. We're recording this on January 28th and there's news that the Trump administration is freezing a whole bunch of federal spending. I think it's something like 20% of federal spending that includes, presumably stuff like Section 8 and other affordable housing measures. Would that be expected to hit multifamily as well?
- [16:47]
Lee Everett
Yeah, and I think it's probably easiest to sort of start at the top. Right. When you're building multifamily, you're generally trying to build to an acceptable return on cost. Frankly, what we're doing is putting an investor's money together and generating returns for them. Multifamily isn't built for free, and it can't be in this sort of economic world. And a general rule of thumb is a 6 plus percent return on cost. So cost to build, you want to yield over 6% of that. To get a building to pencil that tracks up closer to seven depending upon the institution, because you need to build to that yield on cost, you have to have rents that are high enough to generate enough rental revenue to drive that return. So in order to build today, you have to build at exceptionally high rent levels because of the cost to build, because of the cost of interest rates. The only way to drop that is to drop the cost. And that cost drop typically comes for affordable housing from the federal Government, be it HUD grants that are then deployed through the local housing agency, be it lihtc, be it any sort of ensemblage of ways to cut costs. That's how you can get to affordable rents on the supply side. And then on the demand side, you can cut rents by literally giving people a rent check, which is what Section 8 is. And that again comes from the federal government via grant given to the local housing agencies to deploy. And if that money dries up, you have immense problems in terms of A fueling the demand for these people because you're cutting rent on the section 8 side and B encouraging future construction of affordable apartment buildings.
- [18:27]
Joe Weisenthal
Just to be clear though, because there are projects that have their market rate rent and then they have some allocation to what people call affordable units, right? And different cities or whatever have different rules about how much you need to allocate. Is that Section 8 housing too? Or is Section 8 housing like how much does it commingle? Does this also affect development of buildings that people don't think of as quote, affordable housing projects?
- [18:56]
Lee Everett
So in those sort of mixed buildings, you're going to see more of a price lock. You're going to see a supply side affordable building, be it tax credit, be it a locked price on X percentage of ami, which is ultimately what you're going to see. What's AMI area median income, which is how Fannie, Freddie, all of them essentially set what's affordable through HUD so that won't be destroyed or eliminated. Frankly, usually when people are building they understand in Massachusetts you need X percentage of the building to be affordable. So they need the building to pencil around that. Honestly, typically it just means higher rents in the rest of the building to fund those units. So I don't expect that to dry up. What I expect are larger scale community investment projects to revive an area within a town like a Pilsen. We looked at buildings with one of the states prior at a prior job and that was looking at doing a massive housing development that would be entirely affordable for the community there, and this is in Chicago, so stuff like that's going to disappear. Purpose built is going to disappear. Anybody who was planning to build an entirely voucher building through Section 8, that's going to disappear. So you're going to have real pain in that stuff, at least in the short term. I mean, in theory this could be a quick turnaround and it's just a big wave of disruption that goes away in four weeks. But there is a world where it severely impacts housing construction at the lower Level.
- [20:22]
Tracy Alloway
What are people in the market saying about it right now? Or is everyone just sort of in wait and see mode?
- [20:28]
Lee Everett
I think like most things, it's wait and see mode. I think that's been the general markets approach to this entire administration transition. Just because you need so much clarity to start figuring out real world impacts here, and that very much trickles into the cost to build stuff with the tariffs, with the deportation impacts on labor and things along those lines.
- [20:48]
Joe Weisenthal
Let's talk about deportation impacts on labor. What are the estimates for what percentage of the multifamily workforce, whether it's construction or maintenance, whatever else, is undocumented Labor?
- [21:02]
Lee Everett
It's estimated 20% of construction workers in this country are undocumented labor. I venture to guess it's similar for the whole multifamily industry when you look at staffing and things along those lines. And I think when you look at a combination of deportation of construction workers as well as the sheer amount of labor it's going to require to rebuild huge swaths of California, I think you could be looking at a massive deficit in labor within the construction space. And when you think about that, that's going to be your strongest lever. That's going to hit your cost to build, and that's what's going to drive up those rents that are necessary. Is all of this immense pressure you're going to see in the labor costs?
- [21:43]
Joe Weisenthal
Tracy, I hadn't even thought about the huge demand for construction labor that's going to come out of California.
- [21:49]
Tracy Alloway
Oh, yeah, because of the wild.
- [21:50]
Joe Weisenthal
The fire. So we have the fires, we have deportations, we have the end of a lot of affordable housing projects, at least temporarily, and the interest rate shock all coming together so far. This is what we've covered so far at the same time to sort of like constrain the supply of new housing in the coming years.
- [22:09]
Tracy Alloway
Well, the irony is, like, everyone's building at the same time after the wildfires, right. So like, everything is just going to go up. Actually, that reminds me, we should talk about insurance rates because I think this is another source of pressure on multifamily, which is that insurance rates for a lot of these operators have also been going up quite a lot. And there aren't that many levers they can pull in order to reduce that particular cost.
- [22:34]
Lee Everett
Yeah, I think this is another situation of kind of the haves and have nots. At Cortland, we insure our entire portfolio and when you're able to sort of spread risk over 80,000 apartment units, you can get far more Beneficial rates. If you're a small owner in la. If you're a small owner in California, Florida and Texas, I don't know what you do today. Rates had hit an estimate of 300 per unit at one point in Florida to insure some buildings. While there's been some normalization since then and costs have generally stopped with the massive spikes again pre wildfires. But it's just a huge, huge cost that hits everyone and it's tough at this point in time to enact in certain markets. And that includes also Texas. Tornado alleys had as much of an increase as you've seen in Florida and California to date.
- [23:31]
Joe Weisenthal
So where does the rubber meet the road? We're going to have you back on sometime in 2026, maybe somewhere in 2026 if the pattern goes. What are we talking about?
- [23:40]
Lee Everett
I think what you're looking at in 2026 is a very investor friendly rental market again and we sort of have returned to where we were last cycle. What I think's really interesting and what I see in the housing market today is almost a displacement of people living where they want rather than people not being able to afford housing. And it starts at the top. The baby boomers have the vast majority of three plus bedroom homes in this country and they aren't giving those up despite plummeting bedroom utilization rates. So the millennials can't really push into the housing they want. So millennials continue to rent or buy first time homes, things along those lines. Gen Z at the same time is the richest earning young generation on record because of frankly the baby boomers exiting the labor force.
- [24:26]
Joe Weisenthal
They don't feel it that way though, from what I understand.
- [24:28]
Lee Everett
No, they do not. But the Fed strongly disagrees with their feelings.
- [24:33]
Joe Weisenthal
The Fed doesn't care about your feelings. Sorry, keep going.
- [24:36]
Lee Everett
No, it's fine. When you look at this confluence of factors, what you've seen is really higher earning people living lower down what used to be considered the quality spectrum. So in our portfolio we've seen incomes jump to almost $100,000 per unit on average. Our credit scores have spiked to around 700 and our age is in the low 30s. That's a well earning, strong young American worker. And that's across our portfolio. That's primarily in the Sun Belt with some Mid Atlantic and Western exposure. So you're seeing an exceptionally high quality credit worthy tenant and you're seeing huge demand for that housing. And that's because nobody's building in the well located areas. You can't build single family homes in good school districts today, the local builders are entirely out of the market. They've been absorbed by the big boys since the great financial crisis. And you're seeing starts in those high quality locations plummeted a greater rate than you're seeing them in the further out locations. So you're going to have this tight labor force, everybody is going to need to work preventing some kind of crazy AI situation. And you're going to have these high incomes and everyone's going to want to live in the same well connected good areas. And you're likely to see rents in those areas begin to pop because that's where this supply wave is winding down the quickest. And that's where it starts. Aren't going to backfill the current supply.
- [25:58]
Tracy Alloway
Just to be clear though, the expected increase in rents, is that enough to offset all of the pressures from higher interest rates?
- [26:07]
Lee Everett
I think you're likely to see what's happened in the single family sector after the GFC happened a little bit in the multifamily sector where there is a thinning of the herd. I don't think it'll get to the point where I think four home builders have 50% of new home listings today or some crazy number like that. But you're likely to see the small developers end up consumed by the bigger developers that can handle it better. And you're likely to see continued pressure in the multifamily space where smaller funds, smaller operators, people that can't afford interest rate caps, that can't ride out long term, higher for longer, are going to have to exit or ultimately be absorbed into a larger player. So to answer your question, it would be much easier for the industry on the whole to have lower rates. I think a 3 to a 3.5, the industry is just fine. 3 to 3.5 on the 10 year, to be clear. I don't know how soon we can get there and I think in the meantime we're going to see a calling of the herd, if you will.
- [27:05]
Joe Weisenthal
I'm very bullish on driverless cars, but assuming that they're not in mass production or mass deployment in the next couple of years, talk to us about like how far people are going to be having to commute. If it sounds like the desirable places, there's no building, people are having to build further and further out. What do we talk about? What are some of the places? What are the hotspots? You know, three hours outside of Charlotte or whatever.
- [27:28]
Tracy Alloway
You're literally describing my house in Connecticut.
- [27:30]
Joe Weisenthal
Yeah, right.
- [27:31]
Lee Everett
I mean that's really what you're seeing the places right now getting the highest out migration from Atlanta where I relocated for Cortland are Gainesville, which is a separate MSA an hour and a half outside of the city. You're seeing it in all of these sort of tertiary markets because that's where people can afford to build and that's home builders and apartment developers chasing cheaper land basis and cheaper taxes.
- [27:56]
Joe Weisenthal
People don't commute from Gainesville to Atlanta.
- [27:58]
Lee Everett
If you have a hybrid job, you might commute to north Atlanta once upon a time or you work remote but driverless cars. That's a place you could see benefit from that. It's a place trying to grow. Because it's exceptionally difficult to get a home in north Buckhead today or even in some of the closer in suburbs. It's exceptionally expensive. So I think you're going to see people commuting further and further out because that's the accessible product. But also I don't know if demand for that product is frankly as high as it is for the better located product. We run independent renter surveys things along those lines and it seems location matters more to people today than space. To a degree, yeah. And I do think that favors multifamily investment in the longer term.
- [28:58]
Joe Weisenthal
89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. But with AI tools popping up everywhere, how do you separate the helpful from the hype? The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly. With over 15 years of experience building responsible, secure AI, Grammarly isn't just another AI communication assistant. It's how companies like yours increase productivity while keeping data protected and private. Designed to fit the needs of business, Grammarly is backed by a user first privacy policy and industry leading security credentials. This means you won't have to worry about the safety of your company information. Grammarly also emphasizes responsible AI so your company can avoid harmful bias. See why 70,000 teams and 30 million people trust Grammarly@Grammarly.com Enterprise that's Grammarly@Grammarly.Com Enterprise Grammarly Enterprise Ready AI.
- [29:58]
Mikayla Shiffrin
I'm alpine skier Mikayla Shifrin. I've won the most World cup ski races in history. But what does success mean? To me, success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stifel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there?
- [30:23]
Stifel Representative
At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row.
- [30:41]
Mikayla Shiffrin
If you're an advisor or investor, choose Stifel.
- [30:44]
Stifel Representative
Where success meets success. Stifel, Nicklaus & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit jdpower.com Awards compensation provided for using not obtaining the.
- [30:56]
Joe Weisenthal
Award Tracy I just want to be clear that if you have to commute even part time from Gainesville to Atlanta or if you have to live in some small multi family development, I do not blame Gen Z for thinking things aren't great even if nominally on paper their incomes are high.
- [31:16]
Tracy Alloway
Well, yeah, that.
- [31:17]
Joe Weisenthal
I just want to be clear. I want to be clear.
- [31:18]
Tracy Alloway
I'm sure they'll appreciate that.
- [31:20]
Joe Weisenthal
I just want to be clear on that one point.
- [31:21]
Lee Everett
I do want to put on that though. Our internal rent to income ratios today are actually 30 basis points lower than they were in 2018.
- [31:29]
Joe Weisenthal
Huh?
- [31:29]
Lee Everett
Okay, so our apartment buildings today, despite 30% post Covid rent gains, are more affordable because since COVID We've had a 34% increase in our new renter incomes.
- [31:42]
Joe Weisenthal
But it's a different cohort. Anyway, sorry as you go.
- [31:45]
Tracy Alloway
So we're talking about the desirability of cities and everyone wants to live there, but you can't really build One of the other things that Trump promised in addition to, you know, mass deportation and things like that, a reduction in federal spending was permitting reform. And I guess I'm curious, have you seen any action on that? Or is there an expectation that maybe the federal government will in some way be able to ease up the bureaucracy around building new construction?
- [32:13]
Lee Everett
I don't know how he has any impact there. It's just they're so local driven. He can't touch impact fees on local areas. You can't start touching fire and safety fees. So I don't know how in a federal system the federal government can control local impact fees. And I just, I can't connect the dots there.
- [32:38]
Joe Weisenthal
Well, setting aside what the federal government can do, do you see, I mean, there's the YIMBY movement all around. Do you see them having an effect as the dial being turned anywhere in a meaningful way outside of Austin?
- [32:51]
Lee Everett
I think it's unfortunate they've gained the most traction in possibly the hardest turn and to build environment possible in theory. You've seen some government elected officials change, you've seen some positions change. I think there's probably some more momentum in San Francisco than there's ever been before. You obviously have the south. It's just build, build, build. But it's hard to put pen to paper on if they're actually achieving things when you can't pencil new buildings in high quality locations today.
- [33:22]
Tracy Alloway
So a lot of multifamily loans have found their way into either CMBS so commercial mortgage backed securities or CLOs collateralized loan obligations. But the defaults on those have I think the last numbers I saw they're still pretty low like on clos. I'm pretty sure it's in the like low single figures for us clos. Why haven't we seen like greater waves of distress make their way into the end product of multifamily.
- [33:52]
Lee Everett
I think people are doing everything they can to protect their warehouse lines in the CLO and CMBS market. You don't want to lose access to capital if you're a debt fund today by having toxic assets. So people are picking them off the CLO book, they're internalizing them. If you're one of the debt funds that has a housing operator wing you can start operating properties on your own. I mean it's, I think it's protect credit at all costs. So people are doing everything they can to protect that credit. The distress is there. You see every week on the pipeline report of what's on market, the same syndicators looking for bailouts. You see the same people that hit the overbuilt nodes and overpaid in 21 looking for help and you see them not getting the prices that even hit the debt levels they need. So it's working out but I think ultimately nobody's willing to sacrifice their credit levels to work it out quicker.
- [34:50]
Joe Weisenthal
Can you just say anything more about the impact of Los Angeles? I hadn't thought about that Fires in terms of like estimates for how much resources that's going to suck up so to speak for construction and development.
- [35:04]
Lee Everett
Yeah, it's interesting. I think our CEO made an off the cuff comment last week. We were looking at a building in a location in Atlanta that is where heavily, heavily populated by construction workers and his remark was going to have trouble getting rent growth there for the next year and a half because I expect all those people to end up in California in the short term. And it's another actually to sort of wrap one other question you asked in there. Is the HUD side of things. HUD is typically vital in these rebuilding efforts and that's a funding channel that if the government turns off, is going to have severe impacts there as well. So A, I think you could see demand move within communities because of la. I think it's going to have a material impact on cost to build in our country and B, you could see it dampened by some of the recent movements by the administration.
- [35:54]
Tracy Alloway
Well, FEMA is also a really big protection layer for like Fannie Mae and entities like that. So fun times.
- [36:02]
Joe Weisenthal
Lee Everett, looking forward to having you back again in 2026 when we talk about how badly constrained the market is. Really appreciate your coming back on odlops.
- [36:13]
Lee Everett
Thank you for having me. It's always great.
- [36:27]
Joe Weisenthal
So it's funny, we got like 10 minutes of housing supply relief and then we're just heading right back to constraints and shortages and it sounds like rent growth and investor friendly environments and so forth.
- [36:42]
Tracy Alloway
We got a glimpse of what could be.
- [36:44]
Joe Weisenthal
Yeah.
- [36:44]
Tracy Alloway
The other thing I was, it's also.
- [36:46]
Joe Weisenthal
Funny, Tracy, thing is like, oh, this was the renter friendly market. I missed it, right?
- [36:50]
Tracy Alloway
Yeah. Seriously. Well, I also thought his characterization of like people are living in houses, it's just a lot of them are not living in the houses in the places that they would prefer to be. Yeah, I mean, that's certainly part of my experience and one reason why I don't own a house in New York, but I own one elsewhere. The other thing I was thinking about is his characterization of, I guess the haves and the have nots in the market. And I think this is really important because this is like you could say this about the entire corporate world. Like if you are a big company that can access the bond market, the past few years probably have not been that bad for you. If you are a smaller player and you have to take out bank loans, it's been a lot more constrained. So a lot of the financing environment has just led to a situation where the big get big. And Lee was talking about how you might see more consolidation in multifamily operators. And that's just an extension of that trend.
- [37:51]
Joe Weisenthal
And of course we've talked about this in the past, the great financial crisis and what it did to the single family home builders. And there are just a lot fewer single family home builders today than there were several years ago. I always think back to last year when we traveled to Mount Airy, North Carolina. The idea that the community has to put together a roadshow to pitch the home builder. Right. Because the power exists in the consolidation of the home builder such that the community is like, please build here. It's the sort of exact opposite in a way of the yimby problem. It's like, no, we have plenty of land, we just need to convince you. But this idea that, okay, we had the great financial shock that consolidated the single family home builders. Now we have this sort of financial shock in the form of higher interest rates, higher insurance, and that's consolidating the multifamily developers.
- [38:44]
Tracy Alloway
Yeah, all right, shall we leave it there?
- [38:46]
Joe Weisenthal
Let's leave it there.
- [38:46]
Tracy Alloway
This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracee Alloway.
- [38:52]
Joe Weisenthal
And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez Ermenarman, dashiell Bennett at Dashbot and Kellbrooksailbrooks. For more Odd Lots content, go to bloomberg.com oddlots we have transcripts, a blog and a newsletter and you can chat about all of these topics 24. 7 in our Discord, Discord, GG, Oddlauts.
- [39:13]
Tracy Alloway
And if you enjoy Odd Lots, if you like it when we talk what's Next in multifamily, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening. Join Bloomberg in Atlanta or via livestream on February 11th for the future investor finding the opportunities this 2025 event series will examine how companies are investing in their businesses to create efficiencies, innovate their products and services, and improve the customer experience. Experience. This series is proudly Sponsored by Invesco. Q. Q. Q. Register@BloombergLive.com FutureInvestor Atlanta.