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- [00:01]
A
Walker and Dunlop brings you insights for life,
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Unique perspectives
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from impactful leaders. This is the Walker webcast with Willie Walker.
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C
Good morning, everyone and pleasure to be here. I'm Ivy Zelman and run research and investment banking at Walker Dunlop, and I'm excited to have such a prestigious panel with myself. Stephen DeFrancis with Cortland is going to be our multifamily expert. Ryan Marshall with Pulte Homes CEO will talk about single family. And Dallas Tanner who runs Invitation Homes will talk about single family rental. So Willie talked about a lot of things today. I'm going to hit on some of them, but I want to kick it off with a discussion about demographics. We're just about to publish an updated version of a report we did back in 2021 that was pretty unpopular, called Cradle to Grave. And really probably the reason it was unpopular. It was pretty troubling to look at the demographics of this country's future. And I want to revisit that because right now with immigration being predominantly shut off, we do have a very troubling outlook. We have an aging population. I politely say many of those people are aging out and currently our fertility rate is below replacement level. So when we look at future population growth, which drives household growth, it doesn't look very good. And it's going to only get worse unless something changes around immigration because I don't think young adults today, predominantly women, are that interested in having children. I can tell you. My 25 year old tells me she doesn't want children, which breaks my heart. But a lot of them are saying they're one and done or frankly don't want them at all. From many reasons, political ideology to can't afford it. But with that said, I'd like to kick it to first each of the gentlemen to talk. I should have done this. I apologize. Why don't you just walk through your footprint and give people some perspective on your operations. Dallas, do you want to start?
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A
Yeah, sure. Great to be with everybody, Ivy. Thanks for hosting us. Dallas Tanner, CEO of Invitation Homes. We're a publicly traded single family rental business. We basically cover the west coast, Southwest and Southeast. We have about 110,000 homes that we own and operate. Average customer is sort of 38, 39 years old. They have a combined household income of call it $150,000. And they stay with us about five years. And so we have a lot of obviously interesting information on what that sort of consumer is up to.
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C
Thanks, fellas.
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B
Good morning, Ivy. Thanks for having us. The view this way is spectacular. Hopefully it's probably not nearly as good looking this way, but it's really nice to be here in Sun Valley. So, Willie, thanks to you and Ivy and the W and D team for hosting us. I'm Ryan Marshall. I'm the CEO of Holti Homes. We're headquartered in Atlanta, Georgia. We're a national home builder. Most of what we do is all for sale. We do a little bit of single family rental with partners like Dallas, we're in almost every single made top 50 housing market in many of the top 75 housing markets. Last year, we built about 30,000 single family for sale homes, most of those being single family. We do a little bit of condo, a little bit of townhome in a few markets. The majority of our business is in the south, east, Florida, Texas, Southwest. We've got a fairly decent Midwest business, including Ivey's hometown of Cleveland, which we love building in. And we don't want anybody else to go there because it's quite lucrative for us right now. We do a little bit of a business in the Northeast as well. Boston, D.C. new Jersey, New York. Average price point for us is $560,000 and we serve everything from the entry level to the move up luxury. And we have a big active adult business as well.
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C
Great.
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D
Stephen, Good morning. Stephen DeFrancis, the CEO of Cortland. We're based in Atlanta. We're a vertically integrated multifamily investment manager, meaning we buy, build, develop, renovate and operate multifamily communities. We have about 80,000 units today. And our focus, the markets we focus on are the, you know, we consider the growth markets of the US So think, you know, naturally the Sun Belt, Mountain West, Mid Atlantic and you know, in the middle of the country, the breadbasket of the country. So we're most places that aren't the Northeast or the West Coast.
- [04:58]
C
Great. Well, thank you. So let's get back to my demographic discussion. Ryan, I'll start with you as it relates to discussions in the boardroom, recognizing after Covid or during COVID we had massive migration to the Sunbelt and yet home prices surged and we all are now dealing with a lot of affordability issues and overbuilding. So do you discuss recontemplating, where to go strategically and do you still want to be in the Sun Belt, given that we're seeing migration reverse outside of the Sunbelt?
- [05:29]
B
To your question, Ivy, about the boardroom, we talk about it a lot. And the report you mentioned, Cradle to Grave, was not one of my favorite reports. I read it multiple times and tried to find all the reasons I didn't agree with it, but there's a lot I did agree with. And there are a lot of things in there that could potentially be problematic for both for sale and multifamily developers because we need population growth ultimately to continue to grow our businesses. So we pay attention to it a lot. We really focus on where population growth is going and we also talk maybe more importantly where the job's going because ultimately population follows the. The jobs. The, you know, the post Covid environment was certainly a very beneficial one for us because all the land that we had bought pre Covid, we got a real nice lift in gross margins as prices went crazy. I think we're dealing with some of the fallout of the post Covid environment in markets like Austin and Denver, a little bit in Phoenix, where things maybe went too high too fast, there was too much population growth followed by rapid price increases. And you're seeing some of that reset, you know, and then you mix in all the things that we've seen with interest rates and, you know, I'm sure we'll, we'll touch on that at some point in time. But you get back to the question that you asked. Do we focus on it in the boardroom? 100%. And one of the things that we've tried to do as a company is to own less land and have more optionality, more flexibility, so. So that we're not stuck in a own land position forever. There was a point in time when we were and we learned some of those hard lessons in the great financial crisis.
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C
But you have expanded more than other public builders into the Midwest, and that strategy seems to be really serving you well right now.
- [07:21]
D
Yeah.
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B
Rather than expanding there, that's where our company started. We were founded in Detroit, and we expanded into Denver, Chicago, Washington, D.C. and Atlanta, where the first four cities that our company expanded into 75 years and we've continued to grow a Midwest business. We often on our investor marketing information, we tout that we're the most geographically diverse home builder. And the reason that we can say that is because of our Midwest business. And it's Indianapolis, Columbus, Minneapolis, Cleveland, Chicago. Those are all markets that aren't the sexiest, highest growth markets. But there's a lot of people that want to be there. They're more affordable, they've got good jobs, they're very stable. And because there's arguably less competition there, they've been great markets for us.
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C
Stephen, your thoughts?
- [08:10]
D
Yeah, so we talk about it a lot. It's, you know, like Ryan Our focus is on, you know, where the jobs are going and then the population follows the job. So, you know, a lot of those markets have been, from a multifamily standpoint, have been struggling over the last few years because of oversupply, but that's still where the population growth is going. And yes, population growth is down overall, which I think makes it that much more important to be mindful of where there is population growth. You know, right now, the coastal major markets are doing well relatively in the multifamily space. However, in most of those places, they're, you know, if they don't have immigration, they're losing population, you know, so they are net negative until people immigrate into those places, which, you know, long term is obviously very tough to run a housing business. So we are focused on, you know, you know, where is population going and where's the growth going, really, where's the job growth going.
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C
But at this point, you're not changing the footprint or expanding and exiting. You're kind of staying packed.
- [09:25]
D
We're sort of always looking, you know, we were very close to moving into Boston a few years ago. Then, like right before COVID we had a portfolio we were chasing. Then Covid happened, so we blacked off. And then, you know, once we got ready to move back in because we liked the market, then the regulatory environment up there really started to shift. And so we've held off. So we're not, you know, there's no red lines on markets. You know, we're just always watching what's going on with the population growth and the.
- [09:57]
C
Yeah. I want to come back to you on immigration a moment. So, Dallas, have you made any decisions to expand into new markets or exit markets given changing dynamics in population growth?
- [10:06]
A
Yeah, I mean, sometimes we look at our business just based on where we have dislocation from a concentration perspective. If you think about the way we grow our company, I mean, 90% of our assets came out of the GFC where we were buying homes one by one. And we did. We basically did 30,000 homes one by one in 18 months. And so we had to go where the puck was in terms of where the discounts were the greatest, where we saw an ability to achieve scale. And then over time, we've sort of fine tuned our portfolio. So, like, for example, today in Florida, we have 26,000 homes in Florida. We love the market. It's high growth, a little bit higher property tax, which sort of hurts our margins. So those things we take into consideration. But you might look at that market and say, okay, we have a lot. And on a relative basis, where else could we invest capital and sort of diversify in a way that would give us better risk adjusted return? There are markets like Nashville where we're looking at trying to do more. Salt Lake City, which we're pretty small in, but we see that as high growth. To your point around demographics, people are still having kids in some of these markets. Like, those are the sort of places where we like the opportunity long term. And then there's. And Ivy was kind of busting my chops on this in the back room, like California. You know, we still own 12, 13,000 homes in California, which we bought really cheap in 2012. And you know, that's a 75% margin business for us with 6% plus revenue growth year over year. The challenge is it's California. And for all of you that own or operate in California, you're just always dealing with extracurricular noise based on something. So you sort of weigh that out. We're not, you know, doing a pivot from the Sun Belt to say that we think the growth stopped by any stretch. In fact, I probably have a longer view that I would be more bullish on the Southeast than the Southwest based on all the different reasons. I think demographics will sort of shift, immigration reform will sort of shift back and forth. And then I think at the end of the day, people want to be where the sun is shining and where, I hate to say to make it so partisan, but, like, red states are easier to do business in than blue states. And there's a lot of red states in the south and the Southwest and the Southeast. And so I just think they're going to be a net winner sort of over the long haul. And I think as an operator, warmer weather is a little easier on your assets and everything else as well.
- [12:14]
B
Ivy, if I can, I'll give you maybe a compare and contrast of two markets that we contemplated going into five or six years ago, Greenville and Boise. We looked at Greenville and saw a big job opportunity. Job growth, population growth, affordability, good quality of life. You had a lot of attractive things about Boise with a lot of population growth that was coming from California as people were fleeing California for a variety of reasons in the kind of pre Covid post Covid environment. The thing that we couldn't wrap our head around with Boise is job growth. And you know, while there are jobs there, it didn't seem to be as robust and sustainable as what we saw in Greenville. So we elected to expand into Greenville. We're Very happy about it. We elected not to pursue an opportunity in Boise, and I'm pretty happy about that, you know, 2020 being perfect.
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C
Yeah. And Boise certainly had a lot of reversal of that migration when people were called back from. From working remote. So maybe in hindsight, it's a good decision. One of the things that the demographics also, I think you've capitalized on, Ryan, is the active adult segment. And by the end of 2030, we'll have 20% of the population will be 65 or older. It feels like that's still the where to be. And you've capitalized on that and going into active adult into a somewhat different strategy. Do you want to elaborate a little bit on that?
- [13:35]
B
Yeah. So we've about a third of our company is in active adult, which is. We predominantly do with our Del Webb brand. You may be familiar with that. It was a company that we bought in the early 2000s. It was its own standalone, publicly traded company that we acquired in 2001. And we've continued to operate that Del Webb brand as a standalone business unit. So our Sun City or our Del Webb communities are. You've got to be over the age of 55 to live in them. They've been incredibly successful in large part due to some of the slides that Willie showed about net worth and balance sheets. And so you've got a population that's over the age of 55. They love owning homes. In some cases, they own multiple homes. They've got a lot of wealth tied up in their existing home. They can liquidate that and they can come and pay cash and downsize into a community that perfectly fits their lifestyle. It's a little bit about the piece of real estate that we're selling. More than anything, it's creating a lifestyle opportunity for these individuals that are either retired or moving towards retirement to be around people that are like them, that are active, that are wearing their whoop strap and they're kind of living their best version of their retired life. So it's been a very important part of our company. One of the things that we've started to identify and we're moving there now, is that as that boomer population continues to get older and older and older, is that a problem for us because it's no longer a growing demographic. If anything, it's flatlining. And so we've launched a new brand called Explore by Del Webb, which will be targeted toward the Gen Xers. And I personally right square smack dab in the middle of the Gen X population. I'm not ready to retire. I'm not old enough to be in an over the age of 55 community. But you know, I might want to start moving toward that at some point in time when we think there's a whole population of folks that are over the age of 40 that are still working, that would like the benefits of living in a highly amenitized resort style community. And so that'll be, we think, a big growth opportunity for the company over the next decade.
- [15:49]
C
Yeah, I was surprised to see the stats for the number of second homeowners predominantly are in their 40s, which I thought was, I would have thought it would have been older. But as we think about the aging population, maybe Stephen, you could start with, is there an opportunity to provide rental communities for active adults or people in that 40, you know, age cohort? 40 plus?
- [16:12]
D
Well, first, I have to say my perspective has changed recently. As of a couple months ago, I became 55 plus eligible.
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B
We'll sell you a home, Steve, and we'll give you a discount. Friends and family discount.
- [16:25]
D
No. So we actually, in about 2014 or 15, after looking at the demographics and the demand group, got into that business and started a sub brand called Ativa. And we did about, I don't know, around a dozen deals, bought some and did value add and then built some. And frankly, we got out of that business several years later because while they were all working, we were frankly had to be honest with ourselves and recognize that they were working because everything was working in the market at that time, not because the idea, you know, at the end of the day, what we learned was the profile that we were serving in our 55 plus communities. A you could have gone through all of ours and never found a whoop strap. So it was a much older demographic. And what we found was the demographic we were serving was extremely thin. So if you were below that, you couldn't afford to live there. And largely their biggest concern was outliving their money. And so they would prefer to go in a traditional multifamily deal, get more value out of that instead of paying a premium to be in a senior specific development. But most of them frankly would rather be in your product where they could, or even an invitation home where they could rent a home and still be in the, you know, in a house. And so really what we found was it was largely an older demographic that was being pushed to do it by their adult children and most of them were actually being subsidized by their adult children. So, you know, we felt like that was really Too thin of a demographic to commit to for projects. So we stopped doing it. We got lucky because of the timing. But we are seeing that the population of folks 55 and older in our traditional multifamily is going up. It's in the high teens today as a percentage overall population. And so we are serving more and more of those folks in our traditional multifamily.
- [18:34]
C
Got it. And Dallas, we spoke about it. But with respect to the SFR invitation strategy, any reason to try to capitalize on that aging population and have age restricted communities?
- [18:46]
A
The BTR stuff is sort of along the same lines as Ryan talked about. From a segment perspective, you can highly amenitize some things. I've spent a bunch of time recently understanding that Margaritaville concept, which I think is really cool. If you haven't been to one, go check it out. It'll totally expand the way you think about highly amenitized sort of senior experiences. It's when seniors become teenagers 100%, maybe worse than.
- [19:14]
C
Yeah, it's worse than their teenagers.
- [19:17]
A
Look, there's going to be a lot of opportunity. I do think private capital can play a meaningful role. I like where Ryan went that, you know, the mobility to your point around second homes, this thing in terms of how flexible our lives have become because of the cell phone. There's obviously ways that people want to explore living differently. I think there's going to be many opportunities for private capital to step in, create new experiences. Some will be gimmicky and won't work. I think some could have a sticky factor like a Margaritaville. And I certainly think that there's a way to create operating companies around those very specific segments. I mean, just think about the way we travel. We travel so much differently than we did 30 or 40 years ago. Some people want to river cruise through Europe and that's all they want to do. And there's segments that are available for that now that didn't exist 40 years ago. I think living can be the same way and I think it'll just. There'll be a lot of ebbs and flows and some of it will work and some of it won't.
- [20:12]
C
Got it.
- [20:13]
B
Ivy. You know, one of the failures that we had trying to do rental in and I had this, this idea because we'd had so much success working with companies like Dallas's company doing single family rental where we would. We would take part of the community, we would build it, we would sell it to Dallas, they would rent it out and you'd have owners living next to renters and you couldn't tell the difference. In some cases, Dallas's homes look better than the ones that we sold to an individual because he actually cuts his grass. It was nice. And so we said, well, why can't we do that in a Del Webb community where we build a bunch of homes and we sell them to Dallas and he rents them out to people that want to live in a Del Webb community, but maybe they don't want to make the commitment of buying. And Dallas and some of his competitors, they said, nah, it won't work. It won't work. I said, that's ridiculous. They absolutely will work, and we're going to do it. So we built about 10 homes in one of our communities in Phoenix. We put them on the rental market, and guess what happened? Nobody rented them. And I'm like, how is this possible? We must not be marketing it well enough. And so I dove into the marketing strategy, and what we found out was there are owners that we sold homes to, and they're renting their homes at significantly below market rate because they're not living there for that period of time. And so a home that should be renting for 4,500 bucks a month.
- [21:32]
C
That's a good point.
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B
They were putting on the market for 2,500 bucks a month. And so, you know, guys like Dallas, they're not successful, you know, by accident. They couldn't make money and they couldn't make a return. So we learned it the hard way. We didn't rent any homes. The homes that we built, we sold. And I'm going to chalk that up to a fail.
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C
Well, back to your bread and butter. So tried it, but it didn't work.
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D
That's right.
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C
So thinking about just the competitive landscape and recognizing whether we're talking about owning or renting, it feels like the housing ecosystem is really intertwined now. So, Stephen, when you think about the overbuilding that happened post Covid or during COVID 19, how does the SFR BFR for sale impact your multifamily operations?
- [22:18]
D
Was multifamily overbuilt? You know, when things are working close to normally, it doesn't impact it a lot because it's definitely a different segment. When the market got really tough, you know, last year, maybe the year before, it definitely, you know, it's all one pot. A class, B class, C class, you know, for sale, for rent, single family. It all impacted the market. So, you know, we're growing out, or, you know, as Willie said, you saw the demand numbers for this year, and you know, so we've been growing out of that hole. We look at each market individually and evaluate by market where we think each market or really submarket is going to get back to a point of stabilization where you can get normal rent growth. And if you look across all of our markets where we operate, probably 40% of them or maybe 25% are at that point, you probably got half of the balance are popping along the bottom. They're not gaining, but they're not losing ground. And the other half of the remainder are close to turning. And we think by the, you know, next spring all of it will have turned. I don't, we don't think it's going to go, you know, next year is going to go running off the page with performance. But we think you'll get back to a more normal rent growth type of year and you know, starts continue to, you know, thankfully developers continue to struggle to be able to make deals pencil and hopefully that'll continue for a few more years to give the market time to cycle.
- [24:07]
C
That is a subject I wanted to talk about. Whether we think of it for the shortage or we're oversupplied right now. And I think one of the interesting things has been that rhetoric hasn't really been discussed lately. I haven't heard a lot of people talking that we have this major housing shortage when we have empty apartments, empty houses and you guys are sitting with competitive forces that are impacting multi. Because the friction with sfr BFR is close enough. It impacts you thinking about the dynamics of the oversupply. You know Ryan, we'll talk about the new legislation from the government but as it relates to the competitive landscape, you know, Willie showed a slide that showed the monthly payment for an apartment is substantially less than an owner would have to pay to buy the first time buyer 410,000. But you're buying mortgage rates down. So that actually is not really in effect what's happening. That segment of the market. It feels like that segment of the market doesn't have a chance to really drive for affordability. Why even be in that market? Why are you continuing to build starter homes when frankly people can't afford them and you're being forced to crush your margin doing so.
- [25:15]
B
Yeah, it's a fair question. Iovine, if you went back to 2013, 2014, the question that we were being asked, and in fact I think you were the one asking the question, if I'm not mistaken, was why aren't you building more single family entry level? Because that's where all the Growth opportunity was and we, you know, at that point in time it was probably 25 or 30% of our business. Today it's 37 or 38% of our business. So you know, like all things first time move up active adult, they go through cycles. We're in a cycle right now that's maybe not as ideal for that first time buyer. We've adopted the philosophy and strategically said we're going to be a significant player in every single consumer group, entry level included. It's not the most attractive, but it's also, it's not bad. And we also tend to play at the higher price point of the entry level buyer. So if we look at our entry level product, it's in the high three hundreds, low four hundreds. We're not building very many homes in the kind of high two hundreds. I'm not sure anybody is in the high two hundreds. But you know, if I had, if I had a do over or I could do something today to tweak it slightly, I'd bring our entry level business down to kind of 32, 33% of our business and I would take those four or five points that I'd be giving up and I'd move it into the active adult. I think there's more opportunity there right now.
- [26:41]
C
Well, your point ebbing and flowing definitely. But as we know we have a K shaped economy and for those that are not familiar with the term, we have directionally the wealthy are getting wealthier and the poor are getting poorer. And so when you think about what the administration has been focused on is really the likelihood that we need more rental product because people can't afford to buy because they have difficulty solving for affordability. And the recent legislation really Dallas, what do you think? I mean you got away with still allowing to do BFR but you can't buy on the mls. And does this really help affordability?
- [27:17]
A
This is, this is where I roll the grenade in the room. It's been a very interesting six months. I just want to piggyback on something Ryan said. I do think there is a misnomer in terms of like who the average home buyer is today. And I think the unfortunate piece, it's not all wrong. I want to be fair to like all sides of the argument but like it's not a 23 or 24 year old trying to buy a house today. I bought my first home when I was, my dad lent me a little bit for the down payment when I was 24, 25, I just got married. That is not by the Way just to, you know, kind of compare and contrast what you said about your daughter. Like, probably very different thought process 20 some odd years later, 22 years later, I would say if you go back to LBJ, the homeownership rate in this country has been about 67% continuously. Okay? So for the last 50, 60 years, about 2/3 of the country owns something and about a third of the country leases something. Willie talked about it earlier. In terms of the lock, in effect, like mortgage rate volatility has tons to do with what happens in the housing market. We all know that. But you have to actually, like, believe it. So when you think about Ryan's business, these guys have done a wonderful job booing up housing prices over the last three to five years by buying down mortgage rates. The percentage of new home sales, as in total aggregate of all home sales, is abnormally high right now and has been for the last two to three years. So you sit there and you say, well, what's going on? It's like looking at a pool of water. Like, it's really stagnant. You have about 4 million sales a year right now happening. 4.1, 4.2. That's a million units light first.
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B
Is that the pool that got painted blue?
- [28:57]
A
It's got challenge, it's got reflection pool challenges.
- [29:00]
B
Got it.
- [29:00]
A
But, but what I would say is, is like Steve's business benefits, my business benefits, Ryan's business benefits from more transaction volume. So if we have 4 million sales a year in the US it's probably 20, 25% light. So you have people staying put. You have more disposable income availability, as Willie talked about also earlier. So people just aren't as much focused about, like, let me burn my, my awesome three and a half percent mortgage rate and let me go buy a five and three quarter rate and see my payment go up 60% for what at this point in time? And so it's just a little bit of a tricky balance. So to Washington's credit, I think both sides of the aisle are trying to say, like, well, how do we stimulate sort of both the politics of a good story around housing growth and everybody deserves the American dream, but also the real practical application, which is we need people. The economy sort of built on housing to some degree. I think the current. We got caught up as sort of the. When I say we like our industry, you know, if you look at that housing bill, am I okay to go here?
- [30:01]
C
Yeah, go for it.
- [30:02]
A
If you look at that housing bill, it's like 300 and some odd pages. The final version came through the piece about sfr, which got sort of the most attention when the tweet was in January. It's about 20 pages. And you know where I came encouraged from the process, we obviously spent a lot of time in D.C. i came very encouraged that both sides of the aisle were open to healthy discussion. Now it was really clear to me very quickly, both sides of the aisle, and I'd say the administration, treasury as well, is that the politics that are interplaying in all this totally dilute the messaging we all hope would be really pure makes sense. It's like that around pharmaceuticals, it's around oil and gas. Housing's no different. So our industry got sort of painted as a boogeyman. But I think the one helpful thing through the process for the industry was that for 10 years, we couldn't get a fair media article written on our industry. We had hundreds between January and June where everyone was like, guys, these aren't the companies that are really creating the issues. By the way, we don't even buy really any homes on the MLS. We haven't since about 2017. So the reality is we're all out building. We're trying to create new supply. I think the government, from a federal perspective, wants to create a narrative where supply can be easier, easily, more easily induced into the market. I do think there's some good things in the bill that sort of incentivize local municipalities to deregulate, to do some things that are smart. I think, unfortunately, a lot of the energy and the momentum around that bill was caught up in sort of the false narrative around supply being taken or this, that and the other, which isn't true. The challenge for the federal, the federal government is that they just, they can't have the impact that the local and the states have. We all know that in this room. And so the waterfall effect is hopefully local and state sort of gravitate to the good things in that bill, which will help obviously open up better pathways for developers and operators and institutional or private capital to play more of a meaningful role. Now, that being said, and I know all three of us would answer this the same, if we can't see the demand, we're certainly probably not going to take the risk. And so you have to be incentivized in some of these parts of the country where maybe a Midwest market, take, for example, wants more housing units, there's gotta be sort of a risk, reward, trade off. If we're not sure what those absorption statistics are gonna say or do And I think that's the tricky part, because when you get down to the brass tacks, even with the politicians, and I would say, look, to be fair, I was very impressed with a few people on both sides of the aisle that are truly trying to tackle this. And I'd give fair credit to the administration as well, Legislative Affairs Office, the back office that was really trying to kind of strike the right balance. Everyone was collaborative. I think the challenge is the noise around housing. And it's a very easy pinata to put out there to say, you know, do you want something cheaper? I do. I don't know about anybody else in the room, but the reality is, like, the market's what moves that. So to Willie's last point around, you know, stand up for capitalism, you also have to stand up for free markets.
- [32:56]
C
Right.
- [32:57]
A
Because when markets dislocate, that's when usually the opportunity either comes or the wiping of the bad decision making occurs. And then the market can kind of course. Correct. And so I think the challenge is as a consumer, and I'm speaking about myself now, we've all been so stuck on hot money and housing for so long, that sort of the overhang effect isn't that fun, Steve, like we talked about the last couple years, but we have to pay the piper at some point, right?
- [33:21]
C
And, you know, with respect to the oversupply that we're now dealing with, in reality, Ryan, really the way that the market will adjust is if we have capitulation by land sellers, and that's not happening.
- [33:34]
A
That hasn't happened yet.
- [33:35]
C
So really, how does the government get involved in creating affordability? I don't think they really can unless they start using a big stick to governors and saying you need to figure out at the local level how to bring more housing. But I guess, Stephen, on our prep call, we talked about, do we even need more housing? I mean, you mentioned the multifamily starts. They're running still at 400,000 roughly annually. And arguably, if you go back historically, that's still slightly above a trend line. So tell me what you think as it relates to supply. Do we need more supply?
- [34:06]
D
I would say no to all of you developers in the room.
- [34:13]
B
Well, we'll go over a hike this afternoon, Stephen.
- [34:16]
D
Exactly. We need more single family for sale. Ivy, to your point, you know, starts have not gone down nearly as much as everybody would have assumed they would have given the fact that we're in probably the fourth year of softer declining fundamentals in areas which cover probably more than half of the population of the country. I think there's a, you know, it's become a political narrative that we don't have enough housing in the US and we truly do not have any. You know, you talked about the K shaped recovery at the bottom leg of the K. We truly do not have enough affordable housing. I don't know that we can solve that. Telling developers to develop more at numbers where that housing is needed. By and large, you could build that deal for free and still not cover the operating expenses. So I don't know the solution, but it's not get the developers to just build more housing. You know, I don't know of any industry that is as efficient at overbuilding the market it serves as, you know, definitely the apartment market, if not the whole housing market. And, you know, you see this all good at overbuilding. Yeah, we're all really good at it and all pro. And you've seen that in the last few years where, you know, in most all the markets where we operate, wages have continued to grow and rents have been soft. I do want to give one plug, since we're here in Sun Valley to Boise, because we did go and it's been, it's been a great, you know, it's been interesting to watch. It's been a proxy for us, you know, because it's the smallest market we're in.
- [36:04]
B
You're happy with it?
- [36:05]
D
Well, to your point, it went down, so it was the first one to struggle, but it was also the first one to come out. And it's, you know, you know, our, you know, this is not a plug for everybody to go there. But I think our, you know, rents today, or probably our Tradeouts are over 10% year over year. And so, you know, we're hopeful if we can get all of them there,
- [36:29]
C
but there you go.
- [36:30]
D
But it's been a good market. It's small, so it's, you know, a lot of volatility, you know, as you can imagine. But, you know, we don't need more housing today in, you know, most of the markets in the US and, you
- [36:42]
C
know, one of the things about the multifamily industry that I find fascinating back, back in 09, I started researching multifamily and having only done single family, the turnover was call it 55 to 60% per annum and now it's like 35 to 40%. So people just don't want to move because there's too much friction in moving as a result bringing so much more supply. You just don't have that competitive pressure that you would have hoped that people would want to move up from a class B. Let's go to class A. So the dynamics of the food chain don't seem to be working as fluently.
- [37:15]
D
Yeah, I think there's a couple things driving that. Well, one is, you know, the most obvious and hopefully short term one is that because people can't buy houses, they're just not moving. We don't have nearly the numbers of folks move out to buy that we would have.
- [37:28]
C
Do you have any stats on that? Because it used to be like in the teens and now it's in the single digits.
- [37:32]
D
Yes. I mean, so if you compound that over several years, it's a big impact to that renewal number. And the other thing is, you know, multifamily rentals are serving a much higher demographic than we have historically. And so, you know, our average resident's probably making $95,000 a household and paying around $2,000 a month for rent. And these are people who, you know, have invested in that as their home. They've decorated it, you know, so, you
- [38:05]
C
know, and you guys have made the amenities and everything you offer so much better, whether it's goods and, you know,
- [38:10]
D
they're not gonna go spend. You know, 20 years ago, you know, almost every resident we had could move with one pickup truck. You know, today these are, you know, higher demographic. They have, you know, they hire movers and they've, you know, decorated their apartment. And so to go spend, I don't know, five or ten thousand dollars to move, to save $300 a month on the rent, you know, it's a big savings on a relative basis to the rent they're paying. But it's a big cost to move. And by the way, they're making, you know, they're paying less of their income for rent than they ever have, you know, in our case. And so our average, you know, renter is probably paying 18, 19% of their income for rent. So it's just not as material a benefit for them. It's a big cost and not as material a benefit. So I just think that's causing a lot more people to stay put. Stay put.
- [39:01]
C
Yep. You know, interestingly, the national numbers show that renters are really burdened. So. So your footprint sewing something different. But more than 50% of renters are spending more than 30% of their income on their rent. And that isn't just the coastal markets, because I looked it up and it's like nationally, 52 and then it's like 40, but it's inclusive of all the other incremental costs that are inflation and things that are impacting them.
- [39:28]
D
It's the bottom leg of the K everywhere and it's a good bit of the upper leg in those coastal markets.
- [39:36]
C
One thing I wanted to ask you, Dallas, and then I want to talk a little bit about factory built because we had Pulte has gone in and out of that. But Dallas, reluctant landlords, Reluctant landlords or accidental landlords? From a competitive perspective, how much is that impacting you? And how is multi oversupply impacting both BFR and sfr?
- [39:57]
A
You know, it's interesting. We survey coming in and we survey going out. So 80% of our customers that come in are coming from a single family rental home prior to choosing our single family rental.
- [40:08]
C
So that's high.
- [40:09]
A
So we don't see as many people saying, hey, I'm, I'm done with the Cortland property and I'm coming. It's just, it's a different customer type. We have a couple of kids, dogs, multiple cars, things like that. The accidental landlord.
- [40:22]
C
Your homes are slightly bigger, right? You're more. Slightly more expensive.
- [40:26]
A
Yeah. So our average square footage is probably right around 2,000ft and our average rent is about $2,500. We do see in the numbers on the supply side on listings, on available listing data. Now, the single family rental industry, we have terrible data in terms of what another competitor is actually leasing their homes. We have no clue. What we see are listing data. So we get all the access to the Zillow and all the public data. We really don't know where people are closing on leases. There's no information system that includes all that. We certainly saw in 24 and 25, an increase of homes available for lease in multiple listing services in some of those markets. So that puts some pressure on rents for sure. This year's rents, we talked about this on our earnings call, feel a lot better than they did at this time last year. And I would say the same thing. We peaked out in rents last year earlier in the cycle. So for us, we typically peak in June. Last year peaked in like April or May. And I think that had a lot to do with the amount of supply that was on the market.
- [41:23]
C
One other thing I wanted to bring up before I go to the factory built, Stephen, as it relates to the immigration stat that Willie brought up, suggesting that occupancy or rents are not growing because the lack of incremental immigrants coming to our markets. Do you agree with that? Yes, I know he's the guy hosting the Conference.
- [41:41]
D
But you know, I always agree with Willie, no matter what he says here, always.
- [41:45]
C
There you go. Where is he?
- [41:49]
D
You know, we do not serve that clientele for the most part. But you know, when the market moves materially, it's hard to separate. You know, it all impacts every piece of it impacts the whole market. And so, you know, I'm sure that impact is, you know, the lack of immigration is impacting our portfolio differently in each market. But it definitely created a meaningful lack of new renter demand which is clearly impacting the overall rental market.
- [42:25]
C
Right. So the bottom, bottom of the food chain because every operator that we survey, every multifamily public company, reit has not had an impact from deportation or the lack of incremental immigration. So I think it has to be at that Households are doubling and tripling up and they don't really get the benefit of immigration for A to come. So I disagree with you, Willie, but apparently Stephen doesn't, at least based on the data that we have as it relates to the competitive pressures out there and we think about ways to solve for affordability. There's been a lot of discussion about factory built housing and we had Katera for a while that really got the market excited about the factory built opportunities and that kind of died pretty dramatically. But Pulte's gone in and out of doing factory icg. You recently exited after purchasing what would have given you backward integration in 21. So talk about why you went in and why you're not staying and what you think about the future of factory
- [43:27]
B
built for the U.S. we bought a company six years ago called Innovative Construction Group and they were a factory, an off site modular building component manufacturer. So they were building walls and they were building floor trusses. And the idea was that we were going to take what they were doing. There's nothing really novel about wall trusses, floor trusses and wall panels. But the idea was, is that we could go in and we could integrate electrical, plumbing and do window installation and then sheath the exterior of the wall and ship essentially a wall unit to the job site. There's something there and I still believe that it's possible. And it really stems from this idea that you've seen no manufacturing efficiency in housing in 40 years. You could look at every other manufacturing system and process and you've seen real gains, meaningful gains in labor efficiency, not in construction. We've had zero. Maybe our biggest invention is the nail gun. That's it. And I really do think that's gotta change. It's gotta be part of the affordability kind of solve an equation. The business that we built, we got some benefits out of it. We learned some good things, we learned some bad things. Ultimately we decided is we're not the best operator of it. There are some companies like BFS and Saint Gobain that are putting millions and millions and millions of dollars into innovation. I think they can do it way better than what we can. You also need real scale in really close geographies to your plant in order to make the transportation efficiencies of those manufactured products work. So us trying to be an owner of it, even as big as we are, we were too geographically dispersed in order to get the efficiencies that you really need to have with the production side.
- [45:24]
C
And you said the returns just weren't attractive enough.
- [45:26]
B
I mean they were positive returns, but they're not the kind of returns that our shareholders want when they give us capital. They've got a different expectation for return on capital that they give to us than on the capital that they give to a BFS as example. So we're going to continue to use those products in our building system, in our construction system. I just rather be a buyer of it than an owner operator of it. I think there's just folks that are way better at it than we are.
- [45:56]
C
Just one segue because the recent activity M and A activity has been pretty significant from non public home builders. So we've got the Japanese have been very active as well as Berkshire Hathaway recently buying Terrell and Morrison. Because the Japanese have come in in a big way. They now have like 20% market share. It's pretty significant. Do you think their plan, maybe you talked to some of the leaders there that are looking at factory built like they have in Japan. Or is it geography in Japan or is it the size of New York?
- [46:25]
B
Yeah, so a couple things there. One, I think it's a sub kind of story that nobody's talking about. If, if there was understanding of how much of US housing is now owned by Japanese based companies, it would scare and shock a lot of people in the United States. And they've been doing it very, very quietly over the last 15 years. Coming in and buying founder led entrepreneur led home builders to the point where three Japanese companies own somewhere about 20, 25% of U.S. housing. Now I think, you know, from a geopolitical standpoint, we've got good relationships with Japan, but I don't know that you want a foreign country owning 25% of something so critical as housing in the United States. So you know, that's. Somebody else is going to have to figure that out. But I do think we need to pay attention to it. And then, you know, to your question,
- [47:16]
C
the reason they do, by the way, is because they have no population growth. And so we're, you know, respectfully, probably, you know, doing better than other nations from a developed world countries, but not looking good again.
- [47:28]
B
And these, these Japanese companies have demonstrated they know how to do manufacture off site manufacturing with housing. I think the difference there, Ivy, is what you talked about, the geographic proximity and the densification, the. The density in which they build. It works. And here in the United States, when we're talking about, you know, places like Sun Valley where we have just mass expanses and highway systems and the way that we live as Americans, I'm just not sure that that model is going to have the same level of success that it does in a country like Japan.
- [48:04]
C
Yeah, I think the Japanese that came over for the World cup figured that out when they went to Costco and a few other places that it's a little different here. Yeah.
- [48:11]
B
I mean, when you're trying to take home a gallon jug of ranch.
- [48:15]
C
The ranch dressing, right?
- [48:16]
D
Yeah, exactly.
- [48:17]
C
So, Dallas, you made an acquisition resi built. Thank you for letting Walker Dunlap do that. Zelman. In terms of the opportunities for consolidation and thinking about sfr, that's become more mature now, where do you see the industry going directionally? Is it kind of staying packed or you think there'll be more backward integration through building yourself developers? Will you continue to work with pulte or will you focus solely on your resi build for development?
- [48:44]
A
It was probably like four or five years ago. Ryan and I had this goal, like building 5,000 houses together. And we would still say out loud, I think both of us, we share that same goal. Read. The resi build acquisition was sort of niche. These guys are in four or five markets. They do a really good job. Jay, who runs that company, we've known for 10 years. And I think for invitation homes, our natural sort of progression has been to, you know, stand up and a stabilized operating company start to expand into relationships with home builders. I don't see us being a home builder like a pulte homes and they str like we're just not. That's just not our core competency. But I think having a partner or an affiliated partnership with a call it an in house development platform where, you know, if they can build us a thousand or two thousand units a year, five years from now, great. We should still be buying five or ten thousand units a year from Ryan.
- [49:35]
B
I'm still waiting for him to buy the first 5,000.
- [49:38]
A
He doesn't offer that same friends and family discount he offered Steve. And I would just say the reality is, is that it is going to be very helpful. It gives us unique insight into some of the challenges. You know, we were talking backstage about Denver. The impact fees in Denver are ridiculous right now. Like we can't build a home in Denver and we want to build a home in Denver that would work for somebody in the for rent space. It's just hard to make the math work. So I think our view is sort of continue to lean in with our home builder partners, build as many as we can with the companies that want us in their communities. And then I think off to the side, the nice thing that works for Resi built is it's sort of a bespoke opportunity set where we can do a 50 unit development, a 75 unit development which wouldn't be on the radar for some of the big builders or even some of the bigger regional guys. So it allows us to sort of fit into some of these nooks and crannies that make sense where the demand's there, but it's just not a big enough project. And then all the while we're continually, and we bought, you know, Last month probably $25 million worth of homes from home builders. And so we want to do that every month. We would love to 2x3x those numbers if the cost of capital is there. So the goal is to just continually be active. And I think, look, the scattered sort of buying from the resale person in the MLS really hasn't been a business model for probably eight years. I would say you'd have to have a real depressed overall housing story going on for those sort of assets to make sense. You're just much better off building today.
- [51:03]
C
I remember when Jonathan Gray and I had lunch and he said we're an army, we're invading the country and now we occupy and we don't need to do and we'll just start operating. And when you think about SFR back when the GFC allowed for that depressed pricing for you guys to come in and acquire. Do you anticipate more of the multifamily industry coming into SFR? Because some of the public REITs were really negative initially and now they seem to be slightly more positive or some of them actually getting into bfr. Sfr.
- [51:35]
A
Some, some of them have done it. I mean, to be totally fair to Both businesses, like they've been around for hundreds of years. So you've had the mom and pop landlord who leased a home to somebody in the 1800s. Right. That's just starting to professionalize post GFC. And so now you have companies and technologies and smart home tech and, you know, we can put a washer and dryer in your house. Don't worry about it. Like, that's on us. Like there's things that can just make it much more feasible, which to be fair, we've stolen from multifamily, who made a lot of those amenities offerings, a much more seamless experience. I think on the, on the inverse, there are still a huge segment of the country, 16 million people that want a multifamily apartment. They want that experience. They want highly amenitized stuff next to, you know, running paths and all that. We can't compete with that.
- [52:24]
C
Right.
- [52:24]
A
But we also have parents that have two or three kids that want to live in, you know, Sandy Springs, Georgia, and they need to check the neighborhood out for three or four years before they buy. And so they just exist and there's enough space for all the different things.
- [52:38]
C
Stephen, any thoughts about getting into bfr, sfr?
- [52:42]
D
No. You know, as mentioned earlier, about the average, you know, I think invitation serves a resident that makes a little more than our average resident, but they're paying about, you know, they're paying 25% more for a unit that's about twice the size. And so I think our, you know, average population tends to be a lot more centrally located and is looking to be more centrally located. You know, I think one mistake a lot of apartment, you know, a lot of US department developers make is that we mistake suburban or ex urban areas where people are willing to move to, to get into a house as a place that people want to go rent an apartment. And there's just no reason to because you can rent that same apartment much closer to town for the same price because it doesn't cost materially more to develop. So we think, you know, as Dallas said, it's just a different market. And so our population tends to be closer to town, not all urban, but, you know, inner suburban areas and urban areas. And you know, and I think we're serving that need before they graduate into his population.
- [54:00]
C
Got it. So can't leave the panel without finally talking about AI and thinking about the implications of AI in your businesses. So maybe we start with you, Steven.
- [54:12]
D
Yeah. So, you know, I think half the population is convinced that all the jobs are going to disappear tomorrow and the other half is convinced that there's going to be such an increase in economic activity that it's going to create a whole new set of jobs that we're not thinking about. You know, we're watching what's going on. We don't have. We have not taken an opinion either way. We think it's still early to make that decision.
- [54:43]
C
Have you implemented AI into your business?
- [54:45]
D
We're implementing AI. So two different questions I guess. One is are you using it and how are you using it? And one is are you making business decisions based upon the long term impact on the job market? The second one, we're not, we're watching it. You know, we don't know whether it's going to be A or B, but we tend to think B is probably what happens on the implementation side. We are using it in a number of different ways in prop tech operations, our construction and purchasing execution. None of these are sort of Elon Musk level AI uses, but there's dozens of little ways where our teams have created more efficient ways to operate and to underwrite and find or evaluate opportunities, you know, and that's growing pretty regularly as you could imagine with the.
- [55:45]
C
Has it resulted in incremental net jobs down or up?
- [55:51]
D
I would say neither yet for us. I do feel, you know, obviously, you know, we can read a lot of the media about a lot of these big tech firms which are cutting jobs, you know, huge numbers of jobs because of AI. There's also a lot of folks that I speak to who are not hiring low end jobs or staffing their low end positions because they're depending on those people that are there just to use AI to accomplish that expanded execution need. But if you look at the jobs numbers, you're not seeing it in the jobs numbers. There were some concerns earlier this year, you know, jobs for, you know, newly, you know, young people newly out of college, you know, or that age, you know. But that seems to have corrected itself in the second quarter. I don't know where all those folks are going because they're not becoming households, obviously a lot of them and the data are staying with their parents. But the job seems to have corrected and you know, as we.
- [56:52]
C
But for you, for Cortland, you're not incrementally hiring and you're waiting to see how AI develops and benefits the business before incrementally starting to bring in a lot of new bodies. Is that fair?
- [57:03]
D
Yeah, I mean we've always had a pretty big data science team, so we're not hiring a Significant amount of new people specific to AI because we've tended.
- [57:13]
C
It seems like everyone I talk to, and I'm curious, Ryan, whether I'm talking to Lennar or I'm talking to Home Depot. There's this. We're just gonna see how it goes before we incrementally start hiring. And our ecosystem's under pressure. But tell us about what you're doing. You've only got four minutes. So you got two, and then Dallas, you got two.
- [57:30]
B
Yeah. And we're really trying to experiment with it and use it in kind of back office to make our employees more efficient. So we just gave more than half of our workforce. Cowork or copilot? Yeah, cowork, copilot. We're experimenting with a bunch of the other models and I think we are seeing some efficiency out of it. It's not caused us to reduce staff at all. Maybe it's slowed hiring just a tad, but it has not eliminated it by any stretch. The one that I'm probably most excited about is efficiencies in the loan origination process. We have our own Mortgage Company. 80% of the homes that we build and sell, we do the mortgages for. We have 1,000 employees in that space and it costs us $9,000 per loan. $9,000 to manufacture a loan. It's absurd. You think about $9,000 worth of paperwork to create a 30 year fixed rate mortgage. It's, it's, it's absolutely crazy. And so I think there's a big opportunity in that business where we can potentially reduce, significantly reduce the cost and the labor hours that go into originating a loan. We'll see if, if it pans out. We are also, and I've got, my team's got a strategic offsite in a couple of weeks. One of the topics that we're really trying to study is if AI plays out the way that some are talking about and there's real changes in the workforce, what does it do to some of the migratory and demographic trends that we started talking about? And what does that ultimately mean for housing?
- [59:08]
C
Is that the study I participated in.
- [59:10]
B
It is. It's a study. Yes, it is one that you participated in, Ivy. And I don't think it's a three or a five year question. I absolutely do think it's a five, 10, 15 year question. And you know, we're thinking about that and how it impacts our land strategy.
- [59:23]
A
Yeah, lots of low hanging fruit. Centralized leasing functionality, HOA management. We manage 45,000 disparate HOAs. And so a Lot can get sort. That's a very archaic industry in itself. So just like deconfusing the coordination there. We've seen some headcount reduction in a few areas but nothing that I would say is earth shattering. The fun stuff is I was actually showing a friend this last night like you know, on my Claude cowork, it scrapes every night and it presents a CEO summary every morning of just things that's picking up around macro policy, legislative at the state levels industry. Now you still have to kind of curate it and fine tune it but like every iteration gets a little bit better. So I think having information quicker, that makes me a little bit more nimble on my feet when I'm talking to my ops team, talking to my finance group or my head of ledge affairs. I think, you know, it's been pretty helpful so far. So I think it's nothing's like reinventing the wheel, but it's definitely making our teams faster.
- [60:22]
C
Yep. And what about hiring?
- [60:25]
A
No, I mean, look, I would say there's definitely going to be some functionality in our company that will get quicker with automation and will in fact reduce some heads, like more back office functionality. It can't change the way one of my 500 guys in a maintenance van shows up and does great customer service. So I wouldn't expect like anything like that. It's definitely made our investments team a bit more efficient. So like if Ryan's team sends us a tape of 2,000 homes that they're sort of thinking about selling down the road, that would have taken us a couple days to go through. I can get a pretty good desktop in a couple of hours now which would sort of give us some leading indicators of how to give feedback. And so I feel like we're, our revolutions are getting a lot quicker in terms of how we can sort of work with partners.
- [61:06]
B
And maybe that just ultimately contributes to what Jamie Dimon said. AI is going to give us all a three, three day a week work week.
- [61:14]
C
Right. Or four day weekend or Elon Musk says no working and we'll just be in Utopia. So we'll see how it goes. Well everyone, thank you so much for joining us. Thank you gentlemen. Sam.