A (3:23)

I want to talk more to you about that kind of ultimate goal. But before we get there, I do want to get some context from you on the state of housing in America today, because there's some kind of big picture stuff that I think helps explain where we are now. And it's stuff that even I, as a somebody who's kind of like a. An educated layman on this stuff, I like following housing politics. I'm interested in stuff, but I didn't know some of these details and so I started prepping for this conversation. So I want to get from you a perspective on where we've been in the last 10 to 15 years since the Great Recession. So 0809, there's been this huge change in the American housing market, and this was new for me that more and more of our new housing is apartment buildings instead of single family homes, just at a really high level. Why is that?

B (4:11)

Well, not only is that true, it's even more true depending on which market you're in. So first of all, an apartment is only going to go in an area where like the land values are slightly higher.

A (4:22)

Right.

B (4:22)

Because it's a little bit smaller product, like a single family house is more likely to go in greenfield development. So not only is it the case that like a greater share of housing is apartment product relative to generations past, but it's also the case that that is obviously much more concentrated in those areas where apartments were being built at all, which is cities and the areas that are directly around them. In terms of why that happened post Great Recession, there were some, I could say like my company and my career started immediately after that. So I was not involved. Professional real estate prior to the Great Recession. But after that, in 2009, 10 and 11, if you had a project that could have been called either a condo project or an apartment project, the same building, the same volume, the same space, the barriers placed on you by lenders in particular post Great Recession were very high, very high. They required things like pre sales of units in order to make the loan, whereas for an apartment they were going to allow that to just go forward. So there was a loosening of. And I'd say this is one part that I don't think gets telegraphed enough to the, as you mentioned, like the intelligent, like layman's crowd of how much the agency lenders, Fannie and Freddie in particular, they're sort of in one group and the government took them over. But now they're together and there's talk of them being separate or even going private. But the policies of that, of that agency drove a significant amount of development and rehabilitation of like apartment stock and like a lot of other government programs or government related programs. It turns out that there are corner solutions and so apartments ended up being one of those corner solutions. And then smaller and smaller apartments or apartments that had a greater share of one bedrooms and roommate oriented two bedrooms started being built in significantly greater numbers.

A (6:11)

Yeah.

B (6:12)

Accelerating from 2009 until, until today.

A (6:16)

And was that just to get some, some more color here? Was that nervousness from lenders because of regulation, because of like Dodd Frank in 2010, or was it just kind of this once bitten, twice shy? You know, post the housing collapse, lenders are just much more nervous or both or what was going on there?

B (6:34)

Well, I think a lot of it was just there was so much inventory of stuff that was for sale or that had been built for sale that was still like slowly working its way through the market. I mean that same time period is when like the private equity firms Started entering like in a big way, right? Like buying single family rentals that hadn't really existed before, but there was a huge amount of stock which ended up getting purchased by Invitation Homes and other firms like that. So I think it was just very difficult to justify how you could make numbers work when the market was so saturated with sales. And the way to make apartments work was you could look at the exit of what it was going to be like to sell. Essentially like an apartment building becomes a stream of cash flows. And interest rates even for that time were extremely low. So the way that apartments are valued is just basically cash flows divided by cap rate. And cap rate is mostly, but not entirely, but like largely connected to interest rates. So interest rates are low. The same stream of noi, of cash flows ends up being worth like more. So it was easier to project that you could build to a certain exit value based on cash flows over interest rates than you could over sell out costs.

A (7:46)

Okay, and say that one more time for somebody who's, who's not familiar with NOI or exit values.

B (7:51)

Okay, so the net operating income of an apartment building is the revenues minus all the expenses other than interest. Right. So it includes real estate taxes, it includes like paying the on site employees, includes everything there. So it is like, it is as if you bought the building cash. What is just like the free cash flow of the property. And then based on that number, let's say it's $2 million. Then comes the calculus of how much are you able to borrow on this free cash flow? And so the way that agency lenders for stabilized properties ended up pricing, that was mostly related to what's called like a debt service coverage ratio. So it's generally priced at about like 1.25. So if you had $2 million in free cash flow, you could pay, you know, a certain amount to service the size of your debt. And the lower interest rates are, the, the larger that loan amount could be at the same fixed rate. And so that math pushed valuations higher since there's really nothing holding that valuation increase other than just rates. So everything eventually flowed to the same pricing.

A (9:00)

Got it.

B (9:01)

Which also had really interesting impacts in the way that those ratios were identical for New York and Amarillo, Texas, which is kind of an interesting thing because it just meant that there was no differentiation between where the values were going to compress to, right, or inflate to. So they inflated to the same.

A (9:16)

So that's one trend here in kind of housing for my entire adult life, which is more apartments built. The financial Incentives to build apartments are much stronger relative to what they used to be. The other interesting fact that I just came across, and this is maybe likely correlated here, is just that post Great Recession, apartments are getting smaller. And this is work from the Institute for Family Studies. And I know you've got a paper out with them. Full disclosure, my wife does a project with the Institute for Family Studies. They're great, but I'm just looking at a chart here and I'll throw it in the transcript, but it's the average square footage of newly built multifamily housing and it peaks in 0809 and it's been dropping basically since. So that like, on average it looks like in 2024, the average square footage of a, of a new apartment is around 1,000 square feet. And that's equivalent to the square footage that it was in 1994. Like we were up from then for, until the recession, and since then we've been trending back down towards that, like mid-90s apartment size. What's going on there?

B (10:17)

The largest thing that's going on there is that, and there's some other great data that I can point to on this part is like the share of apartments that are studios is dramatically increasing. Right. And I'd say that, you know, it's a literal chicken and egg issue of like, there are more people moving to the cities, there are more moving to slightly denser areas. People would rather live on their own than live with roommates. And so before 2000, if you look like in Austin, studios, like, weren't really built that much. And by the time you get to now, like, the share of that is in some markets as high as like 20 or 30% of like, new product. And so just the greater share of the overall mix being, you know, 400, 500 square foot units just like drives the average down quite a bit. And then I also say in general, that's one other thing that I don't think gets picked up enough is in terms of housing statistics, it's just like people look at raw numbers rather than typology, right? So the average unit size shrinking anyway just becomes a lot easier to understand when you say we didn't build studios and now we do.

A (11:17)

Now we build tons of studios, right?

B (11:19)

Now we build tons of studios, right?

A (11:21)

Well, one thing you've talked about a bunch and I want to hear more about here, is that kind of data versus this qualitative experience question. Because when you talk about how hard it is, how it's increasingly hard for families to find A place to live in a city. You're not just saying there are fewer two or three bedrooms than there used to be. You're also saying the two bedrooms and the three bedrooms that exist, especially the two bedrooms, often are not designed for families.

B (11:48)

That's right.

A (11:48)

What does that, what does that mean?

B (11:51)

Well, I would encourage everyone to just look at the floor plans and then I think it'll become abundantly clear. But if you were to look at So a typical two bedroom apartment in like a slightly more urban market, D.C. philadelphia, Boston, even Austin, Dallas will look the same in most of those different markets that has essentially like two equal sized bedrooms. Both bedrooms will have direct access to a bathroom and they'll both have large closets. Now that's an ideal layout when what you're trying to solve for is maximizing rent again based on studios. So let's say the studio rent is going to be, let's just say a thousand dollars. That's too low. But it's, let's just a thousand dollars to make it easier. Sure, everyone can understand that like to share a bedroom, it's going to be slightly cheaper than that. Right. So it'll be like 80 or 90%, whatever the market is. So that still puts two bedroom rents like at a fairly good number rate based on the overall size. So I would say that the, there was no like poor intent on anyone. But the main reason why they're not designed for fit or they're not good for families is that they were most often designed for roommates. And again that's, I think lots of people have pointed out that, that since I'm not sure it's related to. But since the Great Recession, a whole lot more young people moved into the cities. It's all grown there. And so there is a market reacting to that fact of people want new apartments and they want to share.

A (13:12)

And what would that same two bedroom look like if it was built for a family and not for two guys my age, you know, more or less splitting rent?

B (13:21)

Well, I'd say that is one of the exact things that the IFS study looked at, which was to show different survey respondents like a two bedroom that had two equal sized bedrooms and then one that had a larger bedroom for parents and then two smaller rooms, one that had a window and one which did not. And families or people who were open to having children had a dramatic preference for the same size square footage with the extra room. So I would say that is the general principle of what it would look like of more open space, smaller secondary Bedrooms. And I think the other key point within a fixed square footage is fewer bathrooms and bedrooms. That's the other. Like, I mean, I did some, the research that I did in. It wasn't quite as in depth that I want it to be, although I'd love to either fund or participate in a study of this at, at various points. But the other interesting thing about the makeup of apartments is that up through the 1970s and 1980s, two bedroom, one baths were actually a fairly commonplace like unit type to be built since the 90s. And predictions 2000s, like two bedroom, one baths just like are not built in new construction. Really it's all two bedroom, two baths.

A (14:33)

Yeah.

B (14:34)

By new apartment of all of us. So it's another interesting thing about not only have apartment sizes shrunk, but the ratio of bedrooms to bathrooms has also shrunk or increased depending on what's the numerator, which is the denominator. But it means, so it means the living space or the excess living space has also decreased because bathrooms are regulated by turn radius and some other like fixed things more than other types of rooms. So you really can't get them much smaller than five by eight, especially if they have like a shower or a tub. So that usable fixed square footage then shrinks even more.

A (15:08)

And just to define terms here, I think I understand just from context what turn radius means, but it's literally I have to have a certain amount of room in a bathroom for it to be up to code. I've got to feel a turn with my arms out or something.

B (15:20)

Well, so the turn radius is specifically designed for like wheelchair.

A (15:24)

Wheelchair.

B (15:25)

Right. So whether the unit is fully compliant with like a wheelchair radius or whether it's partially, one of them needs to be partially available for that. So it just, it is the reason that bathrooms are larger in the United States than they are in, say, Europe.

A (15:37)

Got it. When you looked at people's preferences in this study and you looked at if you're open to having kids, if you do have kids, here's the kinds of features in a floor plan that you would want, that you would pay for. Obviously, I think to most listeners one of those is extra bedrooms. And people are willing to trade off against other things to get those extra bedrooms. What do people who want kids or who have kids say? I'm willing to trade against that. What are they willing to give up?

B (16:04)

Bedrooms are far and away like the highest attribute they want over everything else, including yard, including price, including space. So they're easily the most important attribute. So we could not Find one. And we tried a lot that they preferred more so for people who want that extra room. And again, when you think about it from like first principles or common sense, like you want another place to put your child. And for everyone who's lived in the city, they know that like parents are quite resourceful, right? I mean, being in New York, like I knew plenty of people who used a second bathroom, a closet, put up temporary wall. You figure out some way to get your child in their own space. Obviously there are some people who do co sleeping, other things like that. But I'd say by some point, right, by some point of the child's age, you want them to have their own little area where they can hit their bedtime at 7pm and then the parents don't have to go to sleep at the same time.

A (16:53)

I got breakfast with a buddy this week who has a daughter and she sleeps in the tub of the second bedroom, second bathroom. I mean. Yeah, they said it works great. Yeah, yeah. Don't turn on the faucet. The only thing, if I remember correctly from looking at this study, the only, only feature of an apartment that I saw that, that people hated more than they liked having the extra bedroom was I think a 10th floor walk up. That was the only thing people were like, yes, yeah. Under no circumstances.

B (17:17)

Okay, yes, you're right.

A (17:18)

Yes.

B (17:19)

I didn't phrase it partly because if that one was like absurd, but yes, that's true.

A (17:22)

Does that exist? I mean, are there 10th floor walkups today in America? Are there?

B (17:27)

There might be.

A (17:28)

I mean, you can't rule it out.

B (17:30)

There are some, I'd say, like, for, for the purpose of this study, like they are not allowed to be built. So it's not. You can't be in new housing.

A (17:37)

You can't.

B (17:37)

No new house, new housing can't do that. Like once you get over, once you get up to four stories and some places three, like you have to put in an elevator. So it's not a new product. If exists it is a vestige of an earlier time. Like, so you might find it in some parts of, you know, part of a city that hasn't burned down over like 140 years or something like that. But it'd be very unusual.

A (17:57)

When my wife was pregnant with our first kid, when we were looking to, we had to move out of Manhattan because we were, it was a one bedroom that was kind of closer to a studio layout. You know, she was pregnant and I was tasked with, you know, going to a bunch of visits of places and there was A place in Chinatown that I really liked, but it was a fifth floor walk up. And I was trying to kind of in my head rationalize, like, can I sell this to my pregnant wife? This is. What am I doing?

B (18:20)

I had to throw that one out.

A (18:22)

No.

B (18:23)

So I would say on that exact issue, the thing you went through. So I have a few different, I guess, like either, well, the values for the company that I have now and other ways that I've thought about development moving forward or evangelizing to other people. It's that if there's one thing that I want to build products that we prevent, it is the exact situation you described. Like, I want people to be able to have a kid and stay right? And that to me is like the extra room gives, whether it's a closet, a windowless room, or something like that. Like having that space so that someone can not find out they're having a baby, which is, you know, the most marvelous news in the world. And then immediately say, now we gotta go find a new apartment so that we aren't moving and having a baby at the same time. And so to me, it's just so much more of like, have the kitten stay. And that to me is when the city loses too many different people. Like, they make the decision almost unnecessarily. Like, we're gonna move anyway, so we might as well closer to one of our parents. We have to move anyway, so we might as well move to the city because does the school work, et cetera, and all of those different decisions. And there's a lot of different things which I'm sure we could go into, or you've talked to other people on about the things that city needs to fix. But to me, the key part about like making the cities better for families is that they don't have to be fixed for a newborn babies are small, all they need is that extra space and then you can figure things out. That's not to say there aren't other things that are just as annoying as the fourth floor walk up. I mean, like anyone who uses the subway who was a kid knows, like, there's no elevators that go to any subways. And the ones that do have it, you probably don't want to take them anyway for other reasons. Right? Either they're unreliable or they're unsafe or something like that. So you're carrying the stroll up and down four flights of stairs anyway every day if you live in the city. So anyway, which was, which was good.

A (20:05)

For me, it was less, less good for my Wife. It was, yeah, character building on my end, but I think less so for. For mama. Well, let me ask you about policy fixes or non fixes. I think one thing that you hear a lot when this comes up is we need to fix zoning. And I tend to be in that camp that at least one thing that needs to happen is we need to make it easier to build at all in cities. I think the counterpoint, and I think you've talked about this a little bit, is that upzoning under the current holding everything else constantly tends to produce a lot more studios and one bedrooms aimed at singles. That you're not actually increasing the stock of apartments for these families. I, I guess I just would throw it to you, like give me the. What's the possible range of things that you could do to try and make it easier to build family housing, actual family housing in city centers.

B (20:57)

I'm not an academic obviously, like I'm a, I'm a practitioner. So my motives for participating in and helping like the study that we did with IFS was very biased and that like I wanted it to have the effect of change the kind of product that gets built. So with that caveat aside, I'd say that like I am very leery of additional well intentioned government intervention. Right. So I've had plenty of people ask me what are the kinds of policies that we could do that would essentially be putting a weight on the scale against studios in order to increase like more family oriented housing. So I generally try to take those off the table because like I don't like that. And there I think could be like a thousand other different unintended consequences of things that work at a minimum, I think units should be treated the same. So there are some sorts of policies that I'd say that are designed against apartments for families or, or that are designed to make apartments like for roommates. One being that in many jurisdictions, although not in as many urban cities, more so in the areas around it, parking ratios are assessed per bedroom and not even per unit. So when you have the added cost of adding per bedroom, you will get less bedrooms, right? Or if you have to build a parking space for every bedroom, then you will make dang sure that like they will be designed for the people who will need two parking spaces. Which again is going to be more likely to be two roommates and not a young family who shares a single car. So at minimum it just start even what are policies that could make it better? Housing is a series of necessary but not sufficient conditions. So we can relax it. But I think that realizing that the power that drives studios and one bedrooms is one that's mainly driven by like there is higher rents. Right. Like a 400 square foot studio is going to get in any city in America. We'll rent for $1,200.

A (22:54)

Right.

B (22:55)

That is like just very inexpensive even for a Cincinnati or for any like, not even like New York where that would be outrageous, but that would be there. So that's $3 a square foot, right?

A (23:06)

Sure.

B (23:06)

But for a family apartment, like $3 a square foot or for 1500 square feet would be $4,500. There are not many cities like where that would be affordable for a two income household, let alone single income household. So I'd say the power of that ratio is what has driven studios and one bedrooms. It hasn't been that developers or planners or anyone involved like is putting their finger on the scale against families other than in some specific cases. It's mostly that it is the highest and best use for short term rents. And so I think the study that and the, the message that I've been trying to preach to other people in my industry and that is guiding the product that I'm building is that there are other factors that in small projects or at individual units or individual floor plans can on margin make it so that it is not as harmful on the initial face rents to build something designed for a family. And in fact it can be quite rational as an investor to take contrary bets. Right. If a new neighborhood has 8,000 new one bedrooms and studios, well in five to six years, then we should expect that some percentage of them will be couples and then five years after that some percentage of them should be parents. So it feels like we should build at least a portion of those for that same exact people who move in when they're 22 versus when they're 32.

A (24:30)

In the study that you guys put out, you have people look at a bunch of these different floor plans and randomly pick, you know, assign A or B, which one do you prefer and that way get a sense of what people are willing to, to choose. And it's funny, I feel like there's one of the big takeaways from your work overall is like if you want to support families, if you want to build a typology of housing for families, get rid of the open floor plan. You know, it's like the open floor plan has to go. And it's funny because I think we think of the open floor plan as like a feature of like modern suburban Family life. You know, at least when I think about it, I think like the open floor plan was like, invented, like, for families for this kind of particular idea where mom can see the kids from the kitchen. And, you know, we're all kind of in the same space, even though it's much bigger. So it's kind of funny. Like your, your point, at least in like an urban context, is like, get rid of the idea. Forget about it.

B (25:22)

Oh, well, I mean, I think it's where you have different design features that have been imported from other housing types into certain ones. I mean, like, go look at any 750 square foot one bedroom, right? Like in Avalon Bay or Toll Brothers or something like that. The kitchens are enormous, right? And the joke I always make is like, they're also enormous for all floor plan types, even studios, right. Like, every single one of them has a full size kitchen range, right? And like, the other joke is like, no one ever cooks in there, right? Like, it's not like anyone's hosting Thanksgiving in their 550 square foot studio, and yet the kitchen is still 14 and a half feet long. And. Well, I'd say there's a very interesting avenue we could go down on how that is driven by institutional standards, like with like, more apartments and it being, like, easier to build like one type of things and manage things appropriately. But anyway, it drives that thing. So people look at pictures of a kitchen with a huge island. That makes Sense in a 3400 square foot McMansion and the kitchens are about the same size in the city.

A (26:23)

It's really remarkable.

B (26:24)

Makes no sense, but it's what. But it's what's done.

A (26:26)

And when you say that's driven by kind of on the institutional side, do you mean it's easier to build that big boat of a kitchen or it's easier to build it at scale. What's the institutional driver there?

B (26:42)

So there's a few different. There's a few different specific.

A (26:45)

You're taking a heavy side.

B (26:46)

Sure. All right, so there's one that I'd say specifically, and I think it illustrates the point well, and it is. I think anyone who takes a first principle approach and walks into a studio would say to themselves, why is the refrigerator in a studio or the range in a studio the same size as one in a three bedroom? It just does not make sense. Right.

A (27:06)

Why do they have four burners and the fridge is taller than you?

B (27:09)

Exactly. Right now. And maybe some people would say, like, okay, well, it's for like three roommates. Then maybe there should be even more kitchen. But the point is it shouldn't be the same. So there's a question of like, why is it. Well, housing costs, and this is certainly an important. But housing costs elsewhere are certainly going up. And when housing costs are going, people are looking for, to reduce costs as much as possible. And in the United States, as opposed to other places, we have not been able to manage either panelized or modularized construction as well as other places. But the way that we can marginally reduce construction costs is through standardization at the building level. So when someone builds a 250 unit apartment complex, they want to say we have 15 floor plan types, three one bedroom types, and of those we have all these different kinds of kitchens. So it becomes an easier way of both designing and constructing like a limited number of things on site. So that's what keeps similarity there. And the other sort of funny one is that it has become politically convenient to talk about units being held vacant. And obviously we know, like, I think in this space we obviously agree that like no one is holding market rate apartments open on purpose in order to make money, because they don't. Right. They lose money.

A (28:24)

But it's just as a side note, it's one of the really mystifying, like, beliefs that people have in this space. It is like, I just don't understand why people are convinced that developers and landlords are sitting on vacant apartments.

B (28:35)

Well, so, I mean, there are some parts of it that are like a teeny bit true in that like optimized price theory would say that like if you're at 100% occupancy, like the prices are too low. Right, right. So it is assumed.

A (28:46)

But that's about, that's about where you're setting the price, not about you trying to keep.

B (28:49)

Right. So in an efficient market, there should be some level of like a vacancy just because it means that you've raised it enough such that there are some empty, some empty units. But that isn't quite the same as.

A (29:00)

Like, it's a bit of a different theory. Right.

B (29:02)

Like, and that is a great thing. But the other part of vacancy, which actually adds like 1 to 2%. And it's an interesting part that we actually touched on in the study that a part of vacancy is that again, just think through the work through process of what it's like when someone gives notice. Right now New York is a little bit of a strange market in that like, there is so much demand that, that like units are rented basically the same day they're made available. But in Most markets, right, like when someone gives notice, it's usually like either 60 or 90 days in advance, right. And then the property manager gets that notice and the decides what date are they going to place that unit available for rent? And that ends up being. Because again, unlike in New York, but in most other markets, you are going to choose the date at which you set that unit available to be the lowest common denominator of when like your worst turn is going to be. Because the thing that cannot happen to property manager is that someone's lease date comes and the unit isn't ready. That either means you have to put them up at a hotel or there's just like a tremendous amount of like management hassle.

A (30:05)

Right.

B (30:05)

So how does a good enterprising manager handle that? They say, all right, we do not know the actual state of that unit until the day that unit is like vacated. Are we going to try and back to back every unit over the turn? That would be insane. So you generally push out like one or two weeks. There might be some that you turn right away where you go in advance and you think that it's going to be a little better, but you still won't know exactly. So it's usually about like a week or two weeks in advance. Someone gives notice that it's going to be July 1st and you say the unit is available July 15th, but someone can move in between the 15th and 30th. So the actual occupancy might end up being a month. And here's the other part that becomes interesting, how that plays into studios. Studios turn over about double the rate of say like a three bedroom. And that's because for people who are getting like 22 to 26 or who they're, they're going to be changing jobs a lot more. They might want to upgrade to something else. So from the product turn, whether it's like the churn or whatever, the more that units turn, the more like just the building occupancy is going to decrease just due to the logistics of turning a lot of different types of units, needing to change the carpet if something went wrong or doors got broken. So that all comes back around to the kitchen question of people use specifically on the appliances, they use their vacant units of which they know they're going to have a few percent as basically like storage for their other units. So if you need to get something ready right away and the handle on their fridge is broken on one, well, you just go to one of your vacants, you pull it right. So the thing that you want to do as a good efficient manager is to have similarity within all appliances between all things, to be able to swap things out as much as possible because it's treated as a back of house storage.

A (31:54)

That's fascinating. Yeah, I never thought about that. But managers think about it all the time.

B (31:59)

I guess they do.

A (32:00)

So just to make sure I'm hearing you correctly here, at least one thing you're saying is in a world where there are a lot more studios and studios turnover way more, you would expect mechanically the amount of vacancies in that market to rise over time. Because those turnover way more than you expect the percentage of vacancies to be.

B (32:20)

Higher, the percentage of vacancy will increase. That's absolutely.

A (32:24)

Because people who rent studios move out much more than people with two kids.

B (32:29)

So we were in a once in a generation bull market run of institutional like apartment class over from 2012 to 2022. Right. The ZIRP era was phenomenal for anyone who's involved in like the real estate development. So basically the compression of interest rates or interest rates being low just basically pushed all asset values like to the moon in every market. Right. So Phoenix, Austin, every urban city was already going crazy anywhere. So the point was that like even if you didn't do anything to increase like your profitability at the unit, your asset value went up. Just generationally good time to be involved in, to be involved in the real estate market. What has happened since 2022 is now people are having to look at a lot more things like operations. And it is becoming, I would say if you talk to the sophisticated professional investors, the people who are now buying apartments for like long term ownership rather than to essentially take interest rate bets on valuations, they are focused a lot more on those operational things. Like I know of several large owners who own nearly a hundred thousand units who will pass on buildings as a result of their mix by saying like it's just going to be too operationally complex. And we know that income is soft because we can't operate it well enough. And the other interesting part of how real estate works is that developers can respond to what prices are today, but the product isn't delivered for several years. So there's always this lag effect of how things happen. So what I would hope is that in subsequent years as people see the market is softening for buildings that are studio heavy, that developers can change their product a bit to build units that don't churn quite as much. Which I think is where there is an opportunity for some developers to on the margin build slightly family friendlier apartments.

A (34:23)

Right within the buildings. One thing I noticed in prepping for this was you, you just, you love floor plans.

B (34:30)

I do.

A (34:30)

But you were, you were posting about pre war floor plans and just reminding people and this was, this is really interesting that. I mean, I guess it's obvious when you think about it, but pre war apartments generally look like what you're talking about. It's got slightly smaller common living spaces. They have substantially fewer bathrooms generally. Sometimes closet space for the second and third bedroom are constrained and there's a second and third bedroom. So in a sense, I mean what you're pushing for in the industry is just like, hey, like contemporary developers, the thing that we used to do can still pencil, you know, in certain constraints. Like we should just do more of the thing that we've. Developers have done historically in America quite a bit.

B (35:12)

Yes, yes, yes. So I think most of the best ideas are ones that have already been done before and proven to be true. Building for long term ownership. Right. Like aligning incentives and again looking to pass not in the nostalgic way, more of like it has worked for a while. I mean it's one of the reasons why the product that I'm excited about building is like you know, two and three story, like connected row home product. It's been built since you know, millennia. Right. That people have lived in those kinds of units and there's good reason for it.

A (35:38)

So I'm in one right now. Yeah, yeah.

B (35:41)

I mean pre war units are better. And I think, you know, going back to your question on like regulation, there is certainly the case in which like we can look to reform our current building codes. Well, I'd say one of the things that I find the most compelling about like the entire YIMBY movement is people who point out the different maps who say here are all the buildings that exist, here's the percentage of them that would not be allowed today.

A (36:05)

Right, right.

B (36:06)

And I think it's just like one of the easiest, like strongest versions for like we like the city, we should be able to do what is already there that everyone already like approves of.

A (36:14)

Yeah.

B (36:15)

And in fact like you would think that like there is certainly some level of improved regulation that I wouldn't dispute that like there are some safety ones that are better, but generally like we have improved our ability to like fire rate buildings. We've improved like technologically lots of other different like things, but we're still just not able to build some housing product that is built in other parts of the world. Or even that already exists in the United States. So we should go back to that with appropriate safeguards. But that's a technological problem of which, like, we have most of those solutions.

A (36:47)

Yeah. Can I ask you to say a little bit more about what we should be copying from places outside the U.S. i think people who spend time in this debate, you know, always end up with like some, some favorite country or some favorite city overseas. They're like, oh my gosh, we just need to do it. Vienna does, or, you know, you name it. But everyone's got their, like, what they'll point to. What's your set of wants from.

B (37:08)

From overseas in the United States? Like, we are a rich country, unlike Europe, and we actually put H Vac in all of our apartments, which is rare in Europe. So I don't think that anyone in the United States is like, serious about doing that for new construction. Now it is certainly true that like older, more outdated apartments, whether it's like steam or having window AC of like, there's plenty of people who we both know in New York and San Francisco and elsewhere who are quite well off who live in buildings that have window AC and they're totally fine. So I mean, it's plausible that a developer could build without central air. I just don't know anyone who would be willing to take that risk. I mean, I'd say the easiest one is one that's been like the most successful. You might have met Stephen Smith, but he's a friend, like one of the people who's been like, talking a whole lot about single stair. But I think that's probably the easiest example of the most straightforward difference between Europe and the United States. That would just make the easiest to implement. And there has been, I would say, success at both the state and local level of passing different measures is changing the requirements and the number of stairs that you need to have in a building under certain circumstances. So in Europe, there are a lot more buildings that are smaller that have a single stair and then fewer units off of that landing. In the United States, two stairs are almost always the requirement once you get.

A (38:31)

Above three stories for fire safety reasons.

B (38:35)

I would say that is the justification that's given. Yes, that's the justification given. Whether that's actually safer or not. Like, I think it's mostly an issue of like, it's just safe in general. Right. Like, buildings that are that tall, especially new buildings, are all required to have pressure rated stairs in general and they all are required to have sprinklers. So it is extremely unusual. For there to be a fire in a new apartment building. The only ones that I'm aware of that go through now are ones that are done like mid construction, which is like before the sprinkler system is actually in place. So the number of injuries that occur in new apartment buildings in the US is shock is just extremely low. So it's just an issue of safe versus already safe.

A (39:23)

On that point, I learned recently the listeners may remember Mayor Eric Adams in New York got into a lot of trouble. A corruption scandal involving fast tracking the fire alarm permitting for a Turkish camera Turkish embassy if it was a Turkish owned building. But he got in trouble for expediting that process. And that's right. There's, I think, a strong argument separate from the question of corruption, which is bad, there's a strong argument that that should not be its own process at all. Because as folks have pointed out, every other permit for those buildings happens through the Department of Buildings. It's all centralized and you have requirements for sprinklers and requirements for the building to not be flammable, et cetera. And the fire department still manages to own this one permit. And you would make it harder to extort other actors if you just consolidated all that permitting.

B (40:11)

I think there are a thousand other ones that are very similar to that. And it's one of the reasons why I am the most skeptical is the wrong word, but more of just like I'd say have a. That zoning isn't all of it. Right. The other example which is related to that one, which people wouldn't think about as much is when a decent sized apartment building is being built, there is a time period you want to have that building leased as quickly as possible, which always means that you want to start leasing it in advance of the date that it's actually like where people can move in. That almost always involves getting permission from your local fire marshal to allow people to walk through the building to see it before that happens. So you can either have a very agreeable fire marshal who says yes or you could have someone who says no. So there are lots of different ways, I would say for all those various different little agencies and city employees to either help or hinder projects. But it's why I think if you talk to any local developer, they will always tell you that as much as possible like they will take. They want to be friends with everyone in the city as much as possible. The adversarial nature of, I'd say of some legislation which is designed to sort of like whip different either localities into shape are, I think, underestimating how many different levers there are for truly adversarial like relationships to go sour in building housing. So it's why ever just like wants to be nice, wants to be friendly. And when they don't, I guess they call their city councilman and try to expedite the process to have them lean on them.

A (41:47)

Right, right, right.

B (41:48)

Which on a side note is extremely common. That thing for which Adams got dinged happens hundreds of times in every city across the country.

A (41:57)

Just because to fast track stuff, you often need a political to call in a favor or to pressure the. The fire marshal.

B (42:05)

You won't need it. But like if you do and if you have that relationship, then you would just have them say like, hey, can you have someone call and ask?

A (42:13)

And sure.

B (42:14)

It obviously there's a point at which it tips into corruption, but there's also a point at which someone who is an engaged local, like politician, like, does check in with the city employees and says like, hey, like this thing is really important. Can we make sure that it gets done? Because it is a priority to get housing done appropriately. So I think without being too much of an Eric Adams stand. And I would say that, like I would vote for him if I was a resident of New York City. I would say that, like, there is a way in which it isn't blatantly corrupt. There is a time which it crosses into corruption. And it seems like that anyway, that does happen.

A (42:44)

Yeah. Eric Adams will lose the upcoming election. So it really doesn't. Doesn't matter at this point. But I think some of the other corruption stuff is quite bad and is a real black mark. And expediting a fire permit.

B (42:56)

Yes.

A (42:56)

Like a nothing burger to me. There's other stuff that he's done that to me is I think more egregious. But this one is not registered especially highly me.

B (43:03)

No.

A (43:03)

This has been great. I want to close by asking you just to. We've done kind of the recent past and the present and what you guys are working on in the American Housing Corporation, I want to ask you to project a little bit into the future. What trends in housing and urban life are you paying attention to? I know one that you were tweeting about recently is just there's a lot of trouble coming for student housing as the number of students in US colleges likely decrease or at least the number of 18 year olds is larger than the number of 17 year olds in this country, which is larger than the number of 16 year olds. And we're In a new place. That means I think a lot of colleges will face these kind of pressures. What other kind of big structural trends are you are developers looking at when they think about building housing for the next five years or the next 10 years, the next 20?

B (43:49)

Well, what I'm actually most hopeful of is that it's a challenge, but also hopeful is that I think that there are enough challenges right now that developers are starting to look five, ten years down the road. As I mentioned before, the bull run of real estate over the last 10, 15 years has been so short sighted that almost no developers ask that question, like, what is going to happen in the next five to 10 years? You're just building to get the building up because you know you can sell it for more. There are a lot of different critiques that I think I've seen from different sides about like either developers are evil or bad. I think if there's one thing that I think that would need to be a critique of, like a capitalist critique of capitalism is that there is too much housing that is being built for the very short term. And so like if you were just trying to maximize revenue in two years, it probably does make sense just to build a lot of studios. You're not as worried about turnover, you're not as worried about what's going to happen to the city down the road. So whether it's student housing or there's other things, I think there's enough large forces coming into play that I hope a lot more, both capital and developers are starting to think of like, all right, I build this now, what does happen in five to 10 years? I think that like there is enough pressure on both sides that there is going to be densification among different, among new housing types. So like, I mean one of the things that my, my company is betting on is that there will be a wave of both state and local laws that will make it like marginally easier to build slightly more dense housing, not necessarily high rises, but slightly denser. So I think that's, that's positive and I think that's going to continue. My fear would be, and I say this as someone who like, who's a conservative who loves cities is like, I want it to be soon enough. And I think like those of us who love cities know like that there is not, you know, you don't want to, I'm not old enough and I haven't seen enough cycles to want to be in too hyperbolic. Because you know, there were certainly much worse times for cities like in history Very true. But there has been so much good progress that feels like we're on the cusp of making it that it almost feels, I think, urgent to not let those people or that generation, like, leave. So I'd say the parts that worry me the most are that, like, the share of the city population under five, like, continued decline just, like, makes me sad. Right? Like, so anything, to me, anything we can do to stem that tide is something that, like, I almost don't even want to consider, like, not being successful. Are people not being successful that. But there are a thousand different things that need to happen on that. One, you know, housing, schools, safety, transit, you know, all huge ones on their own. But. And the hard part is, like, they all need to go forward. The reason why I focus on housing is because I think, like, one, it's what I do. But two, I think it is the appropriate first one. Well, I guess safety is probably like the bedrock one of like, you need order for there to be society at all.

A (46:37)

But I take your point. If you can't pay for the apartment, if you can't, if the apartment doesn't exist, the rest of it is kind of a foregone conclusion.

B (46:45)

And I think that the way that the city can get better as, as a capitalist, as someone who's, you know, a Christian and believes in, like, in cities and communities and the power of that force, I mostly believe that, like, the city's going to get better, like, bottom up, as I'm sure, like, you experience through your different areas of, like, when there's a few more people with children who are around you, it just naturally gets better. It gets a lot easier to hold hands and say, let's all meet at the park at this time. And it certainly is going to have fewer families than some other suburbs, but it makes it so much, so much easier. And to schools, to me, the solution, one of the solutions is people being friends with other people in the area and just all willing to put your kids in pre K or kindergarten. And then you try to make it work totally. So that, to me is like, is the hopeful one. There's a lot of other, like, difficulties in the horizon. Like, it worries me that people are trying to copy some of the bad parts of California real estate policy, like eliminating real estate taxes or capping real estate growth too much for, especially for non homeowners. That one frightens me. But other than that, I think, like, there's plenty of stuff to worry about.

A (47:52)

Yeah, it definitely makes it a lot easier, I think, to keep your kids in the city when there's just a couple more, you know, it doesn't take a lot more families to make it feel much more doable. I was in the, our local park recently and I was out of curiosity. I was like, what was, how many kids were there in this neighborhood 100 years ago, you know, in like the 1920s. And you know, the average family had like five or six kids, it turns out. And so, you know, like, the park would have looked totally different. Like, you know, it's the same park, but it would have been, you know, totally overrun with kids. And obviously we're, I don't think we're going back to that.

B (48:24)

Right.

A (48:24)

That state of affairs. I don't think that anyone expects or, you know, has, has, that has a dream. But it definitely just made me think like the bones of, of the city, bones of New York are like totally compatible with a lot more, a lot more kids living here. Like, there's no rule that says that cities have to be places for people my age and no older and no younger. It's, it's just been my, you know, our experience, especially post Covid, that people with families leave, people with kids leave. But it, it's not the fact about New York or about any other great American city.

B (48:52)

It's not. And I also think that like, families being in and around the city is by far the most effective way to encourage pronatalism. Like, I'm, I tend to be skeptical like, of preaching being like an effective means of that. Right. Like, or if there is gonna be preaching of that, it's going to be done through people just seeing other people in their neighborhood with kids. Right. Like, that to me is like, is the most effective way of like, people to see other kids around. And you know, little kids are wonderful. My kids are 10, 8 and 6. And I've started, I've started sending my wife like more like pictures of our kids when they're little and just be like, my goodness, I just, I miss little kids. And they're not even not. And they're still not big yet, but I, I just miss them. They're, they're great. They make, they make the cities better place to be. They force people to focus like on real problems. Because if kids aren't getting educated, then suddenly, you know, heads are going to roll.

A (49:41)

Yeah. Bobby, anything I missed here as we close, anything that you would have, that I should have asked you about?

B (49:48)

I don't think it's often appreciated by laymen, like how impactful short term private equity has been on the phenomenon of the housing stock that we build and the type of the housing that's in those different apartments, okay. The vast majority of the capital that is used to fund apartments comes from closed end funds and closed end funds due to the different types of risks of housing, need to build apartments in order to maximize like revenue at two to three years. Basically when the building's finished. It's because there's a very different kind of return expectations when you take the risk to go from vacant land to finished building. Generally an investor wants to have high teens or low 20s like returns on that, on that kind of real estate. And that's because the risk you're basically taking is that there is nothing and now there's $2 million a year of this like new asset. So developers buy it, it's funded with capital out of New York or Los Angeles elsewhere. And someone gets a, you know, one and a half times multiple on that money and then sells it to another like large institution. Those institutions are going to put long term debt on it. And I touched a little bit on how that debt was I'd say historically sort of mispriced between different markets. But that's bought by things like life insurance companies or people who just want steady streams of income. The effect of short term capital being used to fund these buildings is that very few people look to the long term. So in a similar way of like people talk about this like the effect of private equity on rolling up H Vac or veterinary clinics or they talk about like short term retail buyers in the stock market. Like when there's a lot of capital that's going either quarterly or two years, it has distorting effects on things long term. So one, I guess I would encourage more investors to build and invest in things very long term. I think your organization and other ones have looked at opportunity zones and things like that or other types of vehicles which encourage investors to put money in for longer periods. More stuff like that is good. But in general the more capital that we can get into real estate that is built and held so that that alignment of incentives can be for the city and for investors is helpful. But as of right now we have things that are, I wouldn't say cross purposes, but developers right now are primarily worried about how good is New York going to be for my building in two years. That is the decision being made by developers. Long term owners are more how is income going to grow? But I would say that is a topic that bears exploring or more understanding for people who care about cities and Believe in capitalism being like an important force in that. Because I think there's a good amount of appropriate critique again, for people who are capitalists who can either look at that as investors and say, how do we do better knowing what the factors are, or people who are more skeptical of capitalism to have points that are accurate.

A (53:01)

Yeah, I'll say on the financial timelines point at ifp, this is something I learned just from working with my colleagues. I would never have really understood this otherwise. But we work on geothermal energy, which is clean and firm and baseload. And there's a lot of good things about it. If you can get it to pencil, if you can get it to scale. And to do that, turns out you have to pay close attention to like, is this investable? On what timelines could you see returns? What are the blockers there? You know, how long does it take to drill? Well, it turns out a lot of the exploration, you could take a lot more risks as an investor in geothermal if we're getting into the weeds here. But if you fix the permitting process, so it didn't take four or five years to get the permit, all of a sudden a bunch of actors who otherwise cannot invest in this sort of risky technology can suddenly jump in and jump start learning by doing so. There's just, it's been part of my adult education how many industries, like the financing is really like the upstream bottleneck. Turns out, unless you understand that, you don't understand the industry.

B (54:00)

That's true. And I would say, like, for people who care about cities and care about like urbanists or planners who do that, I would say, like, you know, understanding the incentives of how that works. One of the reasons why comparisons of housing between the United States and Europe don't really work is like, we don't finance them in the same way. They are largely built by either public or fixed profit type, like financing vehicles. Whereas the United States, it's primarily built with short term private equity or short term private equity incentives. And so it just, I mean, what is. It was, it was like Charlie Munger says, like, show me the incentive and I'll show you the outcome. Right. And that's the kind of housing we have, like housing, like lots of other things, has become a financialized product. And the other part about the real estate industry is that unlikely a lot of other private investing or private money types. Real estate is a very good way of deploying a whole lot of money. Right? Like venture capital is about trying to take $100,000, turn it into like $100 million. Right. Real estate is about trying to take $50 billion and turning it into $60 billion. Right. Like over 10 years. It's very efficient at that. So one of the other things which our paper gets into is like one of the challenges for the upzoning of like small missing middle or smaller projects is that even were those to be permitted, the people who have all the money in real estate don't want to do 10, 20 unit projects. They want to do one 200 unit project. Why? Because it's significantly easier to deploy one $30 million check because they're in the business of deploying $2 billion a year. And it's just unsustainable to do that in a linear fashion at, like smaller check sizes because again, like, those firms have to deploy a lot of money and they're not as interested in maximizing returns by a little bit. They just need to put it in. And it's why every time a stock gets listed, the price goes up. Why? Because Vanguard had to buy it. Right. Nothing about the fundamentals of the company changed, but suddenly the stock is worth more. Valuable real estate is the same way. And understanding those incentives is key to in particular, making the city better. Or else. Or else the only product that's going to get built is going to be 250 unit apartment complexes and 10,000 home, you know, greenfield communities. Because that's very efficient for Bain Capital and Blackstone and Apollo and those people to fund. It's not efficient for them to fund, you know, a, a great boutique 12 unit project with like, you know, a daycare in a coffee shop on the ground floor, which would be, you know, phenomenal. Right?

A (56:37)

Yeah, yeah, yeah. You're making, you're making me drool. Okay. Yeah. Well, Bobby, this has been a pleasure. Thank you for the work that you do.

B (56:44)

Of course.

A (56:45)

Yeah. Where can, where can we find you?

B (56:48)

Well, you can always go to my Twitter, obbyfian, and I have a few more pieces that are going to be coming out in long form through the end of the year, so you can stay tuned for that. The study that has been published with ifs, I think she'll be out, so that's what people can do. And I'd say, like, you know, stay tuned for. I can. When I'll be excited to share more about the kinds of products we're building, but I'm building housing for young families in the city. So as soon as I can share more about that, I will be happy to.

A (57:14)

Super. All right, thanks, Bobby.

B (57:16)

Of course.

A (57:25)

Sam.