Episode 17

Workforce Housing with Industry Veteran Jeff Adler: Part 2

In this episode of the Real Estate Wealth Podcast, host Ed Aloe continues his conversation with industry veteran Jeff Adler. Exploring the multifamily real estate market, Ed and Jeff discuss the current dynamics of workforce housing and the factors influencing investment opportunities. They highlight the challenges posed by rising labor, materials, and tax costs, and how technology is being leveraged to enhance operational efficiencies in property management. While short-term pain is due to oversupply in certain markets, Jeff shares that the long-term outlook remains optimistic, with the potential for rent growth exceeding inflation. 

Takeaways

  • Real estate remains a reliable path to financial freedom, despite market fluctuations.
  • Technological advancements are essential for operational efficiency in property management today.
  • The demand for rental properties is influenced by demographics and economic conditions.
  • Investors need to reassess their strategies to navigate current market challenges effectively.
  • It's crucial to understand local policies and market dynamics when investing in multifamily housing.
  • The future of multifamily housing looks promising but requires careful long-term planning.


Timestamps

(00:00) Intro to Real Estate Wealth Podcast

(09:21 Investment Demand and Capital Flows

(13:56) Navigating Market Challenges and Assumptions in Real Estate

(20:09) Analyzing Growth Trends in Key Markets

(27:22) The Future of Multifamily Housing

(29:49) The Future of Housing and Economic Growth



Connect

Ed Aloe

CALCAP

Transcript
Host:

While I may use medical terminology in this podcast, please note that I am not a licensed medical professional.

Host:

Any information provided is for general knowledge purposes only and should not be considered medical advice.

Host:

Always consult with a qualified healthcare professional for personalized medical guidance.

Host:

Welcome to the Real Estate Wealth Podcast where we explore real estate as the most proven way to financial freedom.

Host:

Join us for insights with leading experts and discover how vibrant health and an abundance mindset are the keys to true wealth.

Host:

So for these reasons and others like I was going to ask you still staying on sort of the build a rent product is a great, sustainable, long term, great product.

Expert Guest:

Absolutely.

Host:

You know, we're also seeing or hearing about either, to your point, both demographics.

Host:

The younger sort of millennial Gen Z pre kids who maybe, well, either can't afford to buy a home because of the affordability issues or choose not to because they want flexibility.

Host:

And same for sort of the older baby boomer retirees who are like, you know what, we're going to sell our house in Phoenix.

Host:

We got a nice little nest egg.

Host:

We just want to rent from here on out.

Host:

We're going to take Winnebago and tour the countryside.

Host:

Right?

Expert Guest:

Beautiful.

Host:

Beautiful.

Host:

And so I think for all those reasons, it is a product type that's very interesting.

Expert Guest:

Yes.

Host:

Let's talk a little bit about operational efficiency technologies, some of the stuff you're doing at Yardy Matrix with your business intelligence and how that might help customers manage costs or increase some of their efficiencies.

Host:

What are you guys seeing on that?

Expert Guest:

Yeah, so I'm going to separate this in sort of Yardy Systems, you know, because I'm a division of Yardy Systems.

Expert Guest:

Yardi Systems is one of the largest property management software companies.

Expert Guest:

Software and services that help support people who own and manage commercial real estate.

Expert Guest:

And then I can talk about Matrix as a division of the company.

Expert Guest:

We're a relatively small division of the company.

Expert Guest:

But on the software side, the fact of the matter is that the requirement to reduce cost on an ongoing basis is critical.

Expert Guest:

Costs are, expenses have been increasing significantly, we hope and we do think that they're beginning to come down.

Expert Guest:

The rate of growth is beginning to come down, but labor costs are up 20%, materials costs and supply costs are up, obviously insurance costs are up.

Expert Guest:

Taxes are still rising.

Expert Guest:

So, you know, we track the expenses.

Expert Guest:

So expenses have still been going up.

Expert Guest:

So what happens when you want to provide a better customer experience that's less intrusive and you have expense pressures all over the place?

Expert Guest:

Well, you do adopt technology, right?

Expert Guest:

Technology.

Expert Guest:

You do that and so we have 40 modules that basically comprise every component of operating a multifamily property where you can basically have a foundation in the property management of record itself.

Expert Guest:

And then there's all these different modules that plug in from marketing to utility management, to procurement to insurance compliance and vendor management.

Expert Guest:

There's a gazillion of them, but all of which is driving the expense down, providing still very positive customer experience and focusing your labor on things that are uniquely consumer facing.

Expert Guest:

That's the issue is if you're going to have people focus them on actually having an impact, not on basically back end.

Expert Guest:

Yeah, that has no value fundamentally to the customer experience.

Expert Guest:

And so a lot of the customer acquisition, lease management, even a lot of the maintenance activity is being the back end of that is all being automated, driving down costs.

Expert Guest:

Now also inside of those, the new development of artificial intelligence is basically being just driven into those existing products.

Expert Guest:

So when it comes to procurement, there's like an AI bot that basically helps you buy stuff.

Expert Guest:

There's a big, big move on the customer acquisition side where or the thing we call a chat iq, which is really a chat bot that has replaced a lot of the initial call center costs and yielded to the leasing professionals a high likelihood leasing person who actually needs to see somebody.

Expert Guest:

So you can basically digitize the entire transaction for people who just don't want to see somebody and are willing to lease completely.

Expert Guest:

And we can verify their identity, we can take payments, you can do a virtual tour, you can do all the infrastructure, but there are people who actually want to see it and you can support them and that now you can increase the productivity of those leasing consultants and have fewer of them and have them more productive.

Expert Guest:

So that's a big deal.

Expert Guest:

And it also enables, I would say, some marginal marketing sources that otherwise wouldn't be cost effective to suddenly become cost effective, which is, which is helping on the sort of general.

Host:

Can you explain what you mean by that?

Expert Guest:

Well, you know, look, there may be, let's say some websites, right?

Expert Guest:

So let's.

Expert Guest:

There's a range of SEO, PPC and there's a whole range of these different sort of marketing channels.

Expert Guest:

So you may have a marketing channel which traditionally would have generated a lot of activity but very little yield, right?

Expert Guest:

And you'd say, look, I'm not going to advertise on that particular.

Expert Guest:

I may get an incremental one or two leases, but like all the crap I have to deal with to get to those one or two leases, the economics don't work, right?

Expert Guest:

But if the chatbot's dealing with all of that sort of sorting through.

Expert Guest:

And now you're only seeing the few people on site that actually will lease.

Expert Guest:

Suddenly that marketing source, that marketing channel becomes economically viable where before it wasn't.

Expert Guest:

So you're accessing more incremental demand because you're not paying the cost associated with the labor cost of clogging your pipeline to get, to get to the leases that you actually need.

Expert Guest:

And that gets rippling through every aspect of all the products.

Expert Guest:

Right.

Expert Guest:

Utility management, procurement and marketing and also moving all the payments.

Expert Guest:

So it's recurring revenue that's automated, that's already done.

Expert Guest:

So all that stuff is, you really have to drive the cost down.

Expert Guest:

But just, you know, Fred Smith at FedEx said this 40 years ago, as there's nothing new under the sun, you automate the routine, you humanize the exception.

Expert Guest:

That's what this is all about.

Expert Guest:

So when there is a problem, you get to a real person who can solve it, be empathetic, provide great service.

Expert Guest:

But all the, all the routine stuff should all be automated away.

Expert Guest:

And remember also it's harder to hire people in this labor market.

Expert Guest:

Harder to hire, harder to train.

Expert Guest:

You got to have a better technology backbone.

Expert Guest:

And the way the world works now is it's variable priced.

Expert Guest:

Okay.

Expert Guest:

So back in my day when I was running deals, we had large fixed cost systems.

Expert Guest:

Now they're all variable costs, variable cost systems.

Expert Guest:

Right.

Expert Guest:

So it ups, it moves up and down with your scale as an entity.

Expert Guest:

So because basically YARDI is the backend infrastructure that's bearing the sort of like fixed cost to keep the infrastructure up in place.

Expert Guest:

So you as an owner, operator or as a manager, you're only paying on a variable cost basis tied to your revenue stream.

Expert Guest:

It's a much better, much better sort of model.

Host:

Yes, we always joke, the yardi, let me guess, $2.50 per unit, whatever.

Expert Guest:

Right, right, right, right.

Host:

But it's a very good model and it works and we module after module.

Expert Guest:

Yes, it adds a lot of value.

Expert Guest:

Yeah.

Expert Guest:

And again Yardy matrix is the market intel module of Yardy.

Expert Guest:

And so we are also working on AI initiatives in our, you know, in our organization that are separate from what's going on elsewhere.

Host:

Right.

Expert Guest:

But again my whole system, my whole purpose for being is to save our clients time, help them make better decisions more quickly by doing a lot of the, the monotonous labor intensive work so that you as an investor are only focused on the things where you add value.

Expert Guest:

And a lot of the routine stuff is basically done for you.

Expert Guest:

And that's why?

Expert Guest:

Fundamentally, you trade money in order to get back time.

Expert Guest:

It's a basic trade, and it only works because I'm at scale and I can do things at scale, and then I can basically make an economic trade for my labor cost is less than your labor cost.

Expert Guest:

And that's how the economics work.

Host:

Yeah, no, makes perfect sense.

Expert Guest:

Yeah.

Expert Guest:

Most things do if they work.

Host:

Yeah.

Host:

Let's talk a little bit about, speaking of investors, about the investor side and capital flows into the business.

Expert Guest:

You bet.

Host:

Because we've been hearing for a long time that there's so much capital for multifamily on the sidelines.

Host:

Right.

Host:

Sitting on the sidelines.

Host:

Sitting on the sidelines.

Host:

I mean, are you seeing.

Host:

Because you mentioned earlier, and we're seeing it ourselves, you know, more movement.

Host:

Right.

Host:

More deals coming into play, starting to come in.

Expert Guest:

Yeah, yeah.

Host:

Like, for example, Jeff, we looked at a deal in Vegas a couple of weeks ago.

Host:

They had 30 offers on this deal.

Host:

30 offers, which I'm like, wow, exactly 15.

Host:

Best and final, by the way.

Expert Guest:

Okay.

Expert Guest:

Well, there's a fair amount of interest out there.

Host:

So there's a fair amount of that was in Las Vegas.

Expert Guest:

Right.

Host:

So I'm wondering what you're seeing, you know, is money, obviously there's a lot of money sitting on the sidelines still.

Host:

What's it going to take for that money to move?

Host:

You know, and kind of, where do you see that?

Host:

Where do you see the investment demand?

Host:

I mean, we know workforce housing is a great niche within the world of multifamily.

Host:

You know, where do you see investor interest there?

Host:

And kind of where do you think we are at this point?

Expert Guest:

So I'll call it the fundamental conundrum is this.

Expert Guest:

Okay.

Expert Guest:

It's very hard for people to buy below their debt cost.

Expert Guest:

Right.

Expert Guest:

Because you actually then have to.

Expert Guest:

You've got negative leverage, and you got to believe that you're going to get rent growth to get you out of that.

Expert Guest:

And again, the short rate is five.

Expert Guest:

Okay.

Expert Guest:

Tech that.

Expert Guest:

So you're talking about eight.

Expert Guest:

Okay.

Expert Guest:

Or seven or eight.

Expert Guest:

The long rate is now 4.3.

Host:

Pick four five this morning.

Expert Guest:

Four, five.

Expert Guest:

So, hey, put 100 at three and a half.

Expert Guest:

It all worked.

Expert Guest:

Okay.

Expert Guest:

At four, four, four, five, it doesn't quite work.

Expert Guest:

Okay.

Expert Guest:

Because you put 175 basis points to 200 basis points on that for a commercial mortgage.

Expert Guest:

Right?

Expert Guest:

Yes.

Expert Guest:

Remember, the residential mortgage is probably another 100 basis points on top of that for residential mortgages.

Host:

Yep, that's right.

Expert Guest:

So when you look at that, residential.

Host:

Homeowners aren't buying A cap rate.

Host:

So that's less important.

Expert Guest:

True, true.

Expert Guest:

But they still have their own financing issues.

Expert Guest:

So when you, when you look at that now, you're like, it's really hard to make the deals work unless you're getting an assumable loan.

Expert Guest:

Okay.

Expert Guest:

Because they're still out there.

Expert Guest:

Okay.

Expert Guest:

And then you can basically close the bid, ask spread.

Expert Guest:

Okay.

Expert Guest:

So that's, that's an opportunity.

Expert Guest:

You like a market in the Midwest, get a loan that still has eight years to run on it and it was at 3%.

Expert Guest:

Okay.

Expert Guest:

You could make that.

Host:

That typically is going to require a lot more equity.

Host:

Right.

Expert Guest:

There's equity in there.

Expert Guest:

There could be also some other fees and assumption fees.

Expert Guest:

So again, it's got its own issues or you have to have such level of conviction or your capital cost has to be low enough that you can tolerate that negative leverage and hope to basically earn your way out of it.

Expert Guest:

And you've got to project some kind of rent pop probably in 26, 27, back in the 20 in order to sort of like make it all work.

Expert Guest:

Okay.

Host:

Yes.

Expert Guest:

Or somebody's got to take a haircut.

Expert Guest:

Right.

Expert Guest:

In order to make this thing work.

Expert Guest:

Right.

Expert Guest:

Somebody.

Expert Guest:

Something's got to work here.

Expert Guest:

Okay.

Expert Guest:

And so the reason you don't see transactions like supercharged is like it's really hard to line up all of those unless, you know.

Expert Guest:

So the deals that are getting done tend to be somebody who's got a liquidity issue that they've got to resolve.

Host:

Okay.

Host:

And they'll sell at the market price today.

Host:

That.

Host:

Right.

Expert Guest:

In order.

Host:

Which is essentially a cap rate that's going to equal the tenure plus the spread.

Expert Guest:

Right.

Expert Guest:

I mean, it's a math problem.

Expert Guest:

Right.

Expert Guest:

Like.

Host:

Yes.

Expert Guest:

So, so, so you know.

Expert Guest:

Yes.

Expert Guest:

You're getting transactions because, you know, somebody's got an issue that they have to resolve and they're willing to basically take the haircut.

Expert Guest:

,:

Expert Guest:

But hail, we hit our numbers, things worked out okay.

Expert Guest:

And we live to fight another day.

Expert Guest:

Boom.

Host:

Yeah.

Host:

And now I can buy something at a more sane value going forward and.

Expert Guest:

Exactly.

Expert Guest:

So I'm not saying that that's why our deal is getting done.

Expert Guest:

Sure.

Expert Guest:

of the matter is the peak of:

Expert Guest:

The numbers don't line up there.

Expert Guest:

had enough rent growth since:

Expert Guest:

To negate the sort of reduction in values on the other side.

Expert Guest:

Okay, so, so I would say that's what I'm saying is like there's a stress play of those deals bought at the peak.

Expert Guest:

We're like, I don't know how it's going to, I don't know how that's going to get resolved.

Expert Guest:

Okay.

Expert Guest:

So somebody's got to take a haircut.

Expert Guest:

Again, deals bought earlier or pre Covid, they won't make as much money as they could have, but okay, they'll do.

Expert Guest:

Okay.

Expert Guest:

All right.

Expert Guest:

And so those deals will sort of move forward.

Expert Guest:

Look, there's plenty of capital that would like to come off the sidelines, but obviously there's a return expectation and it is reset at the new cost of capital.

Host:

Well, and the buyer now is going to have to make assumptions to your point on rent growth to probably make it work.

Host:

And.

Host:

Or what's my exit cap rate which I'm hearing guys are exiting at the.

Host:

Going in or less.

Expert Guest:

Okay.

Host:

In the old days we don't.

Expert Guest:

Going in.

Host:

Yeah, yeah.

Host:

Going in we were adding 10 basis points a year for hold.

Host:

Right.

Host:

If we held something seven years, we'd add 70bps to what we were going in.

Host:

And that was our exit.

Expert Guest:

That's right.

Host:

But now you do that today.

Host:

It doesn't work.

Expert Guest:

That's right.

Expert Guest:

So you have to buy anything.

Expert Guest:

You have to buy anything.

Expert Guest:

So you have to play around with someone's assumptions.

Expert Guest:

But you also have to retain the essence of reality.

Expert Guest:

Right.

Expert Guest:

You can't otherwise you're buying into a new problem.

Host:

Correct.

Expert Guest:

That doesn't work.

Expert Guest:

And when I think about long term, I just don't see a ten year anywhere below three and a half.

Expert Guest:

Like I just don't see it.

Expert Guest:

I don't see how you get.

Expert Guest:

So then I don't see.

Expert Guest:

Therefore I don't see a mortgage rate on a ten year anything below five and a quarter ever.

Expert Guest:

Like Again, for a number of periods of time.

Expert Guest:

I just don't see that happening.

Host:

Which historically that's probably right.

Host:

In the last 30 years, that's where it's been.

Expert Guest:

Well, again let's say you get 2% ish inflation.

Expert Guest:

Right.

Expert Guest:

And then 100 basis points of real yield on the 10 year.

Expert Guest:

Okay.

Expert Guest:

It sort of works.

Expert Guest:

And you need to get the short rate down to about two and a half with a three and a half to sort of get.

Expert Guest:

Have an upward sloping yield curve where we're sort of like that's, that's normal.

Expert Guest:

Ish.

Expert Guest:

Okay.

Expert Guest:

Now we're not there and we Were getting close.

Expert Guest:

We were at a 3, 6 for a moment, for a hot minute, and then it ran away.

Expert Guest:

Okay.

Host:

Yeah.

Expert Guest:

And that's really based upon.

Expert Guest:

Okay.

Expert Guest:

You know, the election, by the way, interest rates started to move before the election, but it was based upon an understanding that neither candidate was going to do anything about the deficit and the amount of debt that's out there.

Expert Guest:

And that debt has to get either monetized or it has to have a higher yield.

Expert Guest:

Right.

Expert Guest:

And anything I'm seeing on inflation, inflation does look like it's coming into that two, two and a half percent handle where it can work.

Expert Guest:

And we are seeing that in a reduction in the quits rate, a movement lower in the eci, which is the employment cost index.

Expert Guest:

So all these numbers are sort of lining up.

Expert Guest:

We're seeing some level of productivity increases and unit labor costs being 2ish, maybe sub 2%.

Expert Guest:

So all that, you know, from an inflation standpoint, I can see two to two and a half percent because we have some deglobalization going on, reconfiguration of supply chains.

Expert Guest:

That's kind of inflationary.

Expert Guest:

But we are seeing out of China goods deflation like crazy.

Expert Guest:

So that's helping the task move a little easier.

Expert Guest:

Okay.

Expert Guest:

Anyway, like, so when we talk about rates, that's, this is the conundrum of like trying to get all this stuff to line out again.

Expert Guest:

Special situations, yes.

Expert Guest:

Broad based, you know, happy days are here again.

Expert Guest:

It's hard to see that sort of work its way out.

Expert Guest:

But again, you look forward past the supply surge.

Expert Guest:

Right.

Expert Guest:

You do see the ability to have consistent rent growth at 4 to 5%, 3 to 5%.

Expert Guest:

Again, historically, by the way, if you got one point over inflation on rents and expenses grew at 2, 3%, everything worked, all the numbers worked.

Expert Guest:

Right.

Expert Guest:

And that is the historic norm, one point over inflation.

Expert Guest:

That's where I learned for Renko.

Expert Guest:

I learned at the knee of Terry Considine, a great investor.

Expert Guest:

He taught me everything I know about multifamily real estate.

Expert Guest:

He said that's the way the world works.

Expert Guest:

You just have to like.

Expert Guest:

And if you get anything above that, you are blessed.

Host:

And we got well above it for many years.

Expert Guest:

Right.

Expert Guest:

So anything above a three, you're, you're, you're in fact city.

Expert Guest:

Okay.

Expert Guest:

You know, that's amazing.

Expert Guest:

And again, you got to keep your expenses so that your NOI, you get operating leverage.

Expert Guest:

So you get a 5% NOI increase and then you lever that up, you know, at 65% leverage, you're at a 15 ROE boom.

Expert Guest:

Everything works.

Host:

And if cap rates compress, then it's really a home run home.

Expert Guest:

Right.

Expert Guest:

You go from everything works to a home run.

Expert Guest:

Right.

Expert Guest:

And so that's.

Expert Guest:

But even if cap rates don't compress, if you hit those numbers, you're still going to do fine.

Host:

Yeah.

Host:

It'll be historically the way it was meant to be.

Host:

You operate a property.

Host:

Right.

Host:

And you've done very well.

Expert Guest:

Right.

Expert Guest:

You get rich slowly.

Expert Guest:

I mean, remember, multifamily real estate was not designed to get rich quick.

Expert Guest:

No.

Expert Guest:

It was to get rich slowly.

Host:

I call this business my get rich slow scheme.

Host:

That's what.

Expert Guest:

Right.

Host:

I want to write a book called the Get Rich Slow Scheme.

Host:

It's just no one will lie because everyone wants to get rich quick.

Host:

Right.

Expert Guest:

These market conditions have been ahistoric.

Expert Guest:

Okay.

Expert Guest:

Both in terms of capital market costs coming down as well as rent growth that has been outside of the historic norms.

Host:

Yes, no question.

Host:

But to your earlier statements, you still think sort of in spite of some of these, we're kind of in between in many ways, right?

Host:

What you're saying?

Expert Guest:

Yes.

Host:

But in spite of that, you feel like now is a good time to buy even though there's a little bit of pain in some of these markets with oversupply.

Host:

Yeah, rent's flattening, maybe rent's going down.

Expert Guest:

I mean, I think you just have.

Expert Guest:

I think you have to underwrite reality and say, look, yes, if I'm going to buy in Charlotte and Raleigh, Atlanta, Dallas, these are great economies, business friendly economies.

Expert Guest:

They're going to grow.

Expert Guest:

They've been dynamic.

Expert Guest:

I actually did the data back 50 years just to look at population growth and supply response.

Expert Guest:

And they are more cyclical in nature, but the cyclical is with an upward trend.

Expert Guest:

Okay.

Expert Guest:

It's just that this particular cycle, the rent pop was big, the supply pop was big, and now the downside's big.

Expert Guest:

But they've always, always had had supply responses that come in waves.

Expert Guest:

Just the ways haven't been that big, but they've always done well because the economies and the public policy consensus around growth have been solidified.

Expert Guest:

Those cities have grown, they've expanded.

Expert Guest:

Right.

Expert Guest:

Heck, Dallas is like up to the white, up to the Oklahoma border now.

Expert Guest:

Okay.

Expert Guest:

And quite frankly a little bit beyond it.

Expert Guest:

And they have consistent public policy consensus around growth.

Expert Guest:

They're making infrastructure investments in their areas.

Expert Guest:

They can handle the population growth.

Expert Guest:

The key thing that I look for, and we've done analysis around it, is when the public policy consensus on growth breaks and when the infrastructure investment stops, then you can see that within 10 years that city is gonna blow up, right?

Expert Guest:

Because it can't handle.

Expert Guest:

And then everything's gonna be about allocating scarcity as opposed to facilitating abundance flat out.

Expert Guest:

And so those are the.

Expert Guest:

Again, growth requires a public policy and private market consensus, right?

Expert Guest:

That the community wants to grow.

Expert Guest:

Once it decides that it doesn't want to grow, then it's allocating scarcity.

Expert Guest:

And that usually is not a good place for multifamily investors over the long run.

Expert Guest:

For a short period of time, sure, it's great.

Expert Guest:

What I have seen again and again and again is while you can make money in a society, community that allocates scarcity, okay?

Expert Guest:

At some point in time, the community is going to revolt, particularly around housing, and say, we don't think it's appropriate from a public policy consensus for people to make money on housing, forgetting that housing facilitates growth and is a piece of infrastructure.

Expert Guest:

That's why it works.

Expert Guest:

That's why the US is the largest and best and most liquid housing asset class in the world, which is why it attracts a tremendous amount of foreign capital.

Expert Guest:

I deal with folks from Europe, Canada, South America, Asia.

Expert Guest:

They're investing in the US multifamily because it is a deep asset type.

Expert Guest:

And you can't invest in this kind of asset type in many places around the world.

Host:

And especially with the kind of financing.

Expert Guest:

You can get, it is just not available at scale to allocate the kind of capital that can be allocated, which is where you have Australian money, you have Korean money, you have Japanese money.

Expert Guest:

For a time, you had Chinese money, you have European capital, you have Middle Eastern capital, you have an amazing amount of Canadian capital all focused on U.S.

Expert Guest:

multifamily in addition to the normal amount of U.S.

Expert Guest:

domestic capital.

Expert Guest:

It is a very deep capital market.

Host:

And the GSEs provide such a stable source of financing that no other countries really have.

Expert Guest:

Right?

Expert Guest:

And the GSEs have chosen to use it wisely.

Expert Guest:

Now, I will tell you, just to be honest, between you and me and the fence post, the thing that gave me the biggest scare, the biggest scare was the proposals that were floating around, which we worked on and combated, was to basically attach rent control to GSE financing.

Expert Guest:

It was that close.

Expert Guest:

Don't kid yourself.

Host:

Well, and depending on the administration who won last night, it could have been even closer.

Expert Guest:

It was that close.

Expert Guest:

The current, when we were.

Expert Guest:

When they.

Expert Guest:

And we knew, I knew in 20, mid 23, all the RFIs started coming out for the administration from the White House, from the fhfa, they were all pushing to basically do something where they could run on fixing, quote, unquote, housing.

Host:

Yes.

Host:

And they could use the lever of the GSEs, which is a big one.

Expert Guest:

Because 60% of multifamily to the ever living credit of the NMHC and NAA, they were able to basically beat that back.

Expert Guest:

And there was some acceptance on fee structures and disclosure, which was fine.

Expert Guest:

Right.

Expert Guest:

You know, of all the things that could have happened, the actual proposals that came out of the administration were the least bad thing.

Expert Guest:

And if you recall, Harris and Biden talked about rent control and they tied it to depreciation.

Expert Guest:

That really was a gar.

Expert Guest:

That was a.

Expert Guest:

That was.

Expert Guest:

That was not a serious proposal.

Expert Guest:

That honestly, that was a press release and everybody knew it and they knew it.

Expert Guest:

The stake through the heart, and they did not need a law to do it, was to tie rent control to GSE financing.

Expert Guest:

There's nothing that prevents that from happening.

Host:

Yeah.

Host:

Well, and having said that, they set the precedent during COVID as you know, by start starting to encroach and saying, okay, now you have to offer an additional 30 days before you evict and.

Host:

Right.

Host:

So.

Host:

And that never went away.

Expert Guest:

Right.

Host:

By the way, that's still in play because I'm a big user of GSE capital.

Host:

So it does scare me because they have a lot of power and leverage and with a swipe of a pen.

Host:

Right.

Host:

Can instant policies.

Expert Guest:

Yeah.

Expert Guest:

So my point is public policy does matter in multifamily.

Expert Guest:

So you are.

Expert Guest:

So you have a modicum of exposure.

Expert Guest:

It is a modicum.

Expert Guest:

It could be a lot worse other ways.

Expert Guest:

But that was a close call.

Host:

That.

Expert Guest:

That was a close call.

Expert Guest:

And it's bad public policy.

Expert Guest:

It's bad for the renters.

Expert Guest:

It's bad long term.

Expert Guest:

It's just every possible way you can imagine.

Expert Guest:

It's just horrible.

Host:

So, yes, I know you're preaching.

Expert Guest:

Yeah.

Host:

And so thank you for working and beating back that initiative.

Expert Guest:

I had a very small.

Expert Guest:

I had a very small role to play.

Expert Guest:

Mostly was the NMHC and na.

Expert Guest:

They did an amazing job.

Expert Guest:

So as your members of those organizations, your contributions were well spent.

Host:

Yeah, no, they always do.

Expert Guest:

By the way, I didn't hear what happened to Prop 33 in California.

Expert Guest:

I haven't checked that.

Host:

It got defeated by a lot.

Expert Guest:

Wow.

Host:

The last count was about 60.

Expert Guest:

40.

Host:

Yes.

Expert Guest:

Wow.

Host:

Well, what do you know that means correct sanity in California, which is an insane place, as you know.

Expert Guest:

Okay.

Host:

And a bipartisan sanity.

Host:

Right.

Host:

So that means a lot of renters themselves realize there was not a policy.

Host:

It's bad again.

Expert Guest:

It's a It's a supply.

Expert Guest:

It fundamentally is adding supply.

Expert Guest:

That's, that's really the issue.

Expert Guest:

And I'm thrilled that, that the voters of California.

Host:

Yeah.

Host:

Now as am I, because you know, as California goes, some of the crazy ideas spread.

Expert Guest:

Yeah.

Host:

And so I don't own anything here by choice other than the office building I'm sitting in.

Expert Guest:

Yes.

Host:

But I know other city states were looking at Prop 33.

Expert Guest:

Yeah.

Host:

Let's see if it passes all horrible.

Expert Guest:

Okay.

Host:

Yeah, so it's all good.

Host:

So listen Jeff, we're bumping up on just over an hour here, so I think we probably need to wrap.

Host:

But I guess one, one sort of final question.

Host:

If you could sort of look in your crystal ball in the multifamily industry and specifically, you know, kind of workforce housing, now that we've had really a historic President Trump getting elected last night.

Host:

Again, it was an unprecedented event.

Host:

I mean where do you kind of see, where do you see the industry playing out if you had a crystal ball over the next say five or ten years?

Expert Guest:

Well, fundamentally I love multifamily.

Expert Guest:

I've been around it 20 years.

Expert Guest:

I've seen it, how it grows.

Expert Guest:

I'm very optimistic about it as both for meeting a consumer need and as an investable class.

Expert Guest:

There's not a, it's a false trade off to say you can't do both.

Expert Guest:

I do believe that you have to look, you have to really look past the next year, year and a half of new supply being delivered.

Expert Guest:

Okay.

Expert Guest:

So let's, let's look past that because there will be short term pain in these 20 markets as this stuff gets absorbed.

Expert Guest:

There's no question.

Expert Guest:

But let's look beyond that.

Expert Guest:

Right.

Expert Guest:

Most folks are looking into a five to ten year horizon.

Expert Guest:

Okay.

Expert Guest:

There we still haven't resolved the housing shortage, hasn't been resolved.

Expert Guest:

If interest rates stay as they are, then it's unlikely you're going to have a boon of single family sales, which means that retention in multifamily will still tend to be pretty good.

Expert Guest:

Okay.

Expert Guest:

So all and again going past 27, a lot of deals don't work in terms of development.

Expert Guest:

Okay.

Expert Guest:

Now to the extent that there is a true radical change in local zoning permitting and requirements, and that could happen.

Expert Guest:

Okay.

Expert Guest:

But that will take time.

Expert Guest:

I continue to see the ability to have rent growth in excess of inflation, 1 to 3% in excess of inflation.

Expert Guest:

That's rather durable.

Expert Guest:

Right.

Expert Guest:

Remember, if housing costs are 30 ish percent or 35% of incomes, if you have modest 3% wage growth, you can easily have 3 4% rent growth and not crowd out the rest of the consumer budget.

Expert Guest:

So I view that as absolutely sustainable and we've seen it before.

Expert Guest:

So the economics of the fundamentals all work in terms of it being an investable class where both the revenue and the expense structure are an operating basis can work where unless there's a radical change in planning and zoning policy and even if it did, it would take five to seven years to work its way through the development cycle.

Host:

Yes.

Expert Guest:

So I continue to think that this is a.

Expert Guest:

You can continue to see rent growth.

Expert Guest:

I do believe in dynamic economies that have a consensus for growth.

Expert Guest:

I believe in a lot of smaller markets.

Expert Guest:

I believe in the Midwest.

Expert Guest:

I'm looking at demographic changes, deglobalization, really the build out of the energy infrastructure all along the Gulf coast and the growth of the petrochemical industry and manufacturing.

Expert Guest:

They won't be as labor intensive as maybe some people would hope.

Expert Guest:

But there's a radical amount of reindustrialization that's going to occur.

Expert Guest:

It starts with the oil and gas industry, goes into petrochemicals, goes into plastics and follows from there.

Expert Guest:

So fundamentally I believe in, you know, kind of the Southeast Texas, the Mountain west and to a certain extent smaller cities in those areas because they will continue to grow at the margin.

Expert Guest:

You know, among the major kind of, you know, global centers are we call our core cities.

Expert Guest:

That will depend upon the level of commitment that they have to re energizing growth in their metropolitan areas.

Expert Guest:

They're going to have to get control of their public safety issues first.

Expert Guest:

Security always comes first.

Expert Guest:

Then they're going to have to sort of actually encourage business to be there.

Expert Guest:

I think New York has a bit of a leg up in that regard.

Expert Guest:

Boston's not so bad, Chicago's.

Host:

I think San Francisco and Oakland need a little help in that regard.

Expert Guest:

And that really is just are there enough.

Expert Guest:

I grew up in New York in the 70s and things got really bad before there was a public policy consensus around that growth was desirable.

Expert Guest:

I don't think maybe California is beginning down that road and there may be some great opportunities to buy because remember, fortunes were made in New York City right around the late 70s, early 80s when the public policy consensus turned.

Expert Guest:

Now I can't tell you whether that condition is the same in California or in Seattle or in Portland, Oregon.

Expert Guest:

But I can tell you is local investors who are clued into their local economies and can see that inflection point and then can invest into it will have legendary wealth opportunities.

Expert Guest:

But it really same thing with Minneapolis.

Expert Guest:

Will these Cities fundamentally hit that inflection point where they want to grow again and are willing to do the things necessary to grow.

Expert Guest:

I don't know that.

Expert Guest:

I can't tell you that.

Expert Guest:

But someone who is local and is close could do incredibly well in that investment strategy if they can pick that inflection point.

Expert Guest:

And that's where I'll leave with.

Expert Guest:

I'm optimistic about multifamily as an asset class and housing as an asset class.

Expert Guest:

It's got tremendous opportunities, it's imbued with the public interest.

Expert Guest:

So I think it's good for society, I think it's good for the investor.

Expert Guest:

And the best run organizations provide great services to their clients, create value.

Expert Guest:

And we've seen this again and again and again and again.

Expert Guest:

That government run housing doesn't work.

Expert Guest:

Doesn't work.

Expert Guest:

That the private sector has to be engaged and activated in order to provide housing for Americans.

Expert Guest:

And that's what I would argue with.

Host:

Which is why what makes, you know, what we do, what I call affordable with a small, a compelling and great business.

Host:

Yes, yes.

Expert Guest:

And providing high quality at low cost to provide clean, basic quality housing.

Expert Guest:

Right.

Expert Guest:

Keep the community safe, have high resident quality standards, expect people to pay their rent because it raises the standards within the community that people will meet their obligations and their responsibilities.

Expert Guest:

And it's incumbent upon the owner of the property to provide a safe, clean and stable housing environment.

Expert Guest:

At AIMCO, I operated 100,000 workforce housing units.

Expert Guest:

And that was in my mind, the moral foundation of what we did.

Expert Guest:

Okay.

Expert Guest:

And we were able to energize our entire operations team around that mission.

Expert Guest:

Okay.

Expert Guest:

That we provide something positive for the world.

Expert Guest:

We expect our residents to meet their commitments and we commit ourselves to providing a great living environment for them to reach their potential.

Expert Guest:

And I'm very proud of what we did, what my team did at aimco to provide that kind of housing.

Expert Guest:

And I think our industry can feel very proud about what it does and again, imbued with the public interest and you know, a great public service and a great revenue and wealth opportunity as well.

Host:

Yes.

Host:

Amen, Jeff.

Host:

Very well said.

Host:

So I want, I want to thank you for joining me on the show today.

Host:

I think there were some great insights you provided in what we know is a very compelling asset class.

Host:

Even though there's some short term oversupply issues.

Host:

Right.

Host:

It is not systemic at all.

Host:

And I like you, I'm convinced that workforce housing not only holds an important spot in overall affordability landscape.

Host:

Right.

Host:

To provide housing in that realm, but should deliver outstanding long term results.

Host:

For investors as well.

Host:

So thanks again, Jeff.

Host:

Appreciate your time.

Expert Guest:

Thank you.

Expert Guest:

Bye bye.

Host:

You're welcome back anytime, my friend.

Expert Guest:

My pleasure.

Host:

I hope today's show inspired you just a little bit, and I would like to thank my guests once again.

Host:

I'm excited to bring you more episodes with interesting and informative experts to help you navigate your way to wealth and health.

Host:

Thanks for listening to the Real Estate Wealth Podcast.

Host:

The Real Estate Wealth Podcast is produced.

Expert Guest:

By Truth Work Media.

Host:

Our producer is Seth Creekmore with support from McKenna Smith.

Expert Guest:

For show notes and more information about this podcast, visit edeloy.

Expert Guest:

Com.

Host:

For more information about CalCap Advisors, visit us at calcap.

Host:

Com or follow us on Twitter at calcapadvisors.

Host:

I'm your host, Ed Alloy, and thank you for listening.

All Episodes Previous Episode

About the Podcast

Show artwork for The Real Estate Wealth Podcast with Edward Aloe
The Real Estate Wealth Podcast with Edward Aloe

Listen for free

About your host

Profile picture for Edward Aloe

Edward Aloe

Ed founded CALCAP Advisors in May 2008, at the height of the economic crisis. He believed that the disrupted environment presented incredible opportunities for those who could recognize them.

Since founding CALCAP, Ed has been involved in over $1.5B worth of transactions. The Company currently manages over 5,000 units and 65 properties. CALCAP operates in 16 states and has over 140 employees and over $700 million in assets.

Ed graduated from the University of San Diego with a B.B.A. degree in Business. He has served on the Board of Foothill Family Services, a Non Profit, and has actively raised money for Children's Hospital Los Angeles, and the UC San Diego Foundation He also served on the Real Estate Committee for the University of San Diego Burnham-Moores Program, and is currently a founding Board Member of Bridge21 Park City. Ed resides in San Marino, CA with his wife and three children.