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Walker & Dunlop brings you insights for life, unique perspectives from impactful
leaders. This is the Walker webcast with Willie Walker.
I love going and speaking at universities across the country and it's a real honor for me when
I go to universities that I could have never gotten into and in some instances that's a
debatable point but at MIT that's a very clear point that I could have never gotten into
MIT so it's a real honor for me to be here today and talking to all of you. The other
thing that I would say, my friend Charmiel Modi just walked in and Charmiel went to Harvard
College up the road but was he was his class day speaker at Harvard and if any of you get
a moment you ought to go take a look at Charmiel's class day speech because it's a great one.
With all that said it's really fun to be at MIT today and having gone to business school just
up the river. It's always fun to come back to Cambridge and see the Charles River with all the
activity going on and the cruise shells and I ran the marathon a number of times when I was
here and that was just last week and I had three of my business school classmates who ran with me
way back in the dark ages who all went and actually ran last Monday which was really great for the
three of them. So let me dive into the presentation. I want to get to signal versus noise.
I typically like questions during presentations but I guess from an AV standpoint it's better for
us to wait until the end when we have the mic that's going to go around so just if you got something
that comes up in the middle of it just hold the question and we can back up to the slide if you
need to but it's just easier from an AV production standpoint for us to do all the questions at the
end when we've got the mic going around the room. So title signal versus noise what are we?
It seems like there's a lot of noise in the markets today not just in the commercial real estate
markets but just sort of broadly and so the idea was to just kind of dive into a little bit of
the data that might be able to pull out signal versus noise and what we're seeing in the markets.
So let me dive in here. So what was expected in Trump 2? What was expected in Trump 2 is lower
energy prices, immigration reform, lower taxes, increased M&A and deregulation. Those are the
things that sort of everyone said this is what the second Trump administration is going to bring
to the world that we live in and on pretty much all of those the Trump administration has been
very effective at actually putting in policies that have sort of delivered on all of that.
You can see here M&A back and being bolder than almost ever hasn't quite hit the peak of 2021
that you can see in the middle there but you know number two over the past decade as it relates
to actual M&A activity. The other thing on that black line is that's the number of transactions.
So as you can see the transaction is actually getting bigger right as that goes down and the
aggregate amount goes up. It's just bigger companies, more M&A activity which was something that
we'd expected to see and 2026 from both an M&A standpoint as well as from an IPO standpoint
is looking like it's going to be a wildly active year in the capital markets. One of the big
questions that I have is as companies like SpaceX and some of the AI companies go public,
sort of where does that capital come from? If SpaceX goes public for a trillion five valuation or
a two trillion dollar valuation that's capital that has to come from somewhere. Are people selling
other holdings and migrating into it? Are they getting out of a private credit position to go
buy into those IPOs? Where's that capital come from and what does that mean for the broader markets
as you get trillions of dollars of IPOs coming out in 2026? Tax cuts. The big beautiful bill
gave tax cuts across the board to every level, every quintile of taxpayers has more in their pockets.
I think one of the big things that people were projecting for right now, if you rewind the clock,
when the big beautiful bill got passed last summer, many people were saying there's going to be a
tax refund that goes to a great number of Americans and they're going to get an average check of
$2,200 in May of 2026 and that's going to stimulate a lot of economic activity and then the
around conflict happened and sort of everything's kind of gone to the side. But in a normal course of
business you would have been getting these refund checks off of the big beautiful bill that would have
put a $2,200 on average into people's pockets, which is sort of like the stimulus bill that went
through during the pandemic, which would have driven a lot of retail spending. We'll see whether
all that plays out given the backdrop of the macro situation today. Border encounters, you can see here
the Trump administration clearly has been extremely, if you will, effective in implementing the
border security that they had campaigned on and said that they were going to get to.
I will show later on something that shows the implications of this as it relates to the demand
side of the equation on rental housing, not an insignificant issue. And then crude prices.
One of the interesting things on this is you can see back here when Trump came into office,
crude prices were at 80 bucks a barrel. They got down over here on the far right in January
down into $56, $57 a barrel. The back of the envelope number on what that means to inflation
is that for every $10 change in the price of a barrel of oil, you pick up about 20 basis points
in the CPI. So as you went from 80 bucks a barrel down to 60 bucks a barrel, you're picking up
$20 or you're picking up almost 40 to 50 basis points in the CPI because oil flows through everything.
And so in that, you could have seen from going up here down to there that
the probably new Fed Chair, Kevin Warsh, would come into his new role with a backdrop of inflation
sort of being under control. And then all of a sudden around hits and we see where oil prices have
gone. And so now you go to the other end of that. So from 60 to 100, do the math, you're adding
almost a percentage point to the CPI print if oil prices stay up at that level.
And on consumer sentiment, this is the one side do it all. You kind of look at the,
where the stock market has gone. I got a chart in the second on that. But this is the one that I
think probably confounds people in the Council of Economic Advisors as well as the president himself,
which is that they look at the stock market doing great. They look at all the innovation that's
happening in our country. They look at our country versus other countries and they say, man,
we are doing a great job. And then they look at this chart and they say, uh-oh,
but the consumer isn't sort of behind us. The consumer isn't feeling good. The consumer isn't
right now feeling any better off than they were when Trump came into office back here. You can see
it's actually fallen kind of off a cliff. And so clearly, forget about the politics of all that in
the midterm elections. This is one of those data points that I'm sure as they look at all the other
charts of what they set out to do and have delivered on. They look at this and they say, what are we
missing here? As I said, where are we on the equity markets? This slide's a pretty interesting one.
If you look at, you know, inauguration day where you had the 10 year is the black line and the
blue line is the S&P 500. And those two were inverted in the first year of the administration. They
drove the cost of debt down and they drove the equity markets up. And most people would look at
that and say, hey, we're doing a great job. Then all of a sudden, obviously, they converge
together at the beginning of the Ron conflict. And then, um, you can see the recovery that's happened.
The question I would have right now is if you will, how real is that recovery? Like,
do these two charts continue to move away from each other? And S&P continues to go up
and the cost of debt continues to go down? Or do they turn around and get back to the two
convergence points you see on this in July of last year and then in March of this year?
K-shaped economy. You hear a lot about this. This slide back to January of 23 really shows you
what has happened as it relates to consumer spending on the upper portion of the economy and the
lower portion of the economy. So since 23 and the great tightening or the cost of debt went up,
credit card payments go up, um, the cost of flying on an airplane goes up, everything else.
You can see here that the top third of the economy earning over $250,000 annually,
that's actually a smaller than a third, are the ones driving the spending. And then the rest,
which is earning less than 75K annually, has sort of fallen off precipitously.
A lot of people have talked about the sort of the fatigue or that the the U.S.
consumer is going to kind of give up. So far that hasn't played out. You look at consumer credit
card default rates. While they have gone up significantly since the post-pandemic era,
where they got to historic lows, they're no different than they have been on a historic average
as it relates to both de-cused linkancies as well as default rates. And so the consumers actually
held in better than many people had thought, but the K economy here really does show you that the
majority of consumer spending is happening in the top part of the economy, not in the lower parts of it.
How has the K economy played into multi-family? This is kind of an interesting slide for two
reasons. One, you can clearly see here on the 76 basis point difference between class A and class C
multi-family, that there is a huge difference of the newer product, more amenitized, has a big
pricing advantage. But then look at vintage for a moment because I think vintage is really interesting.
You sort of ask yourself, how is it that assets that are newer or from 2020 until today
are trading at a higher cap rate, or as you all know, a lower value than a 2010 or 2000's vintage?
And the issue on that one is the fact that Core Capital has basically pulled out of the commercial
real estate market over the past couple of years. And it's been that value ad capital that has actually
been active in the market for the past couple of years. Hence, those investors of value ad capital
are driving down cap rates. And the pullback in Core Capital is what has made class A newly
delivered actually traded a higher cap rate for a lower value. But as you can see here,
I spoke to Avalon Bay's development group last week, and Avalon Bay is going right at that
higher end product. And what they're building and what they own is directly targeted at the
upper part of the K economy. And as a result of that, they're seeing rent growth and they're in
the right markets with the right clients. This is an interesting, this is on multi-family
investment sales volumes. So a couple of things jump out to me on this slide. First of all,
look how consistent the market was from 2015 to 2020. You sit there and you're like, oh,
there'll be one year that's good and one year that's bad and whatever you mean. It's literally
right on top of each other for an entire five year period up to the pandemic. And then obviously,
we have a big dip down and then we have this big spike back up. The thing to keep in mind here is
we're talking about kind of a recovery of the markets right now and you'll hear myself and other
CEOs of services firms talk about the markets are recovering. The market's pretty much recovered.
If you look at the average volume for the last year, it's back to pre-pandemic levels.
The thing about it is that a lot of us look at this and say, you know, investors and walker
and delop look back and they say, well, why aren't you back at these volumes? Who knows whether we
ever get back to those types of volumes? But from a normalized market standpoint, you can see the
hiking period, the trough and now we're in that recovery period. But as it relates to overall volumes,
we're pretty much as far as multi-family investment sales, we're sort of back to pre-pandemic levels.
This is a interesting slide which doesn't take all of you with your MIT soon to be degrees to understand.
This hindsight is obviously always 2020 vision. But go back and look at the spread.
So this is cap rates versus the 10-year. Light blue is the cap rates. The dark line is the 10-year
treasury. And then the bottom one is W&E track institutional sales. So this is multi-family
institutional sales and the volume of multi-family institutional sales. Obviously, you've got the
pandemic that comes in right here in this moment. And so you have no activity during the pandemic.
Everyone's gone home. Nothing's happening. But look at the spread between cap rates and
interest rates. It does not take an MIT degree to realize that this is a really good time to be
buying commercial real estate and buying multi-family. The spread between what you're paying
in interest rates and where you are from a cap rates standpoint. And then of course,
everyone sees this and they go, great, now it's time to buy. And look at what happens to volume.
Everyone gets the memo here and they get to a point here. The problem with that is you really
didn't want to be a buyer right here. And by saying what I just said, I'm insulting every single
walker and no-op client. Okay? So I know this is going out on our webcast and to everyone who's
going to be watching you know this. I'm not trying to be. I'm not trying to. But the hindsight's
2020 vision. And almost not all the deals that happened here are quote unquote in trouble.
But this is sort of a vintage of deals here where cap rates and interest rates are compressed.
Where that's not a great vintage. If you bought there, you're probably not getting into your promote.
And I just put this out here because as you go into your careers and you see a chart like this,
you just sort of say let's make sure we're looking at the data when we can see a spread like that
and say let's take advantage of it. And then you see this collapsing of the two and you sort of
say maybe now is not the time for me to be buying. What's amazing to me is the amount of institutional
capital that sees all of this and they say we need it on the party. Like got to go, let's go buy.
And they made a buy here or here that they now look back on and say maybe we shouldn't have jumped
into the party at that point. So this slide is on debt volumes. The thing I love to look at is that
we pull this from the Mortgage Bankers Association. So this isn't our data. But I will also tell you
I've been in this industry for almost a quarter century and I have yet to be presented with by either
my team or the Mortgage Bankers Association a slide that goes down here. It's always up into the
right. Somehow or another the future always looks nice. And it obviously doesn't always go that
way because back in right here where they were projecting it to continue to go to the right we fell
off quite dramatically. The one thing to keep in mind on this chart is that this is all based off
of maturity volume of maturity schedules. So it says there and says okay you did a huge amount of
debt in 2020 and 2021 right. A billion five between those two years. A trillion five excuse me
not a billion five a trillion five. And you sit there and you say okay most of it was 10 year paper
project out 10 years and you go 2029 and 2030 you got to redo all that paper. A lot will be
redone in between but you know from a maturity standpoint these two years are going to be
significant years given the amount of volume that went on in these two years. The thing to keep
in mind that is very different is the following. In 2020 just on our agency volume at Walker and
Dunlop we did $20 billion of lending with Fannie Mae and Freddie Mac and in 2020 at W&D we did not
do a single five year loan. Not one zero. Out of $20 billion in 2020 we did not do a single five
year loan. It was all 10 year paper some seven year paper and some longer than that but the great
majority of it was 10 year. So all that $20 billion that we did in 2020 is set to re-fi in 2030.
Now go to 2025. Last year of our $16.8 billion of lending with the agencies 63% was five year paper.
63% was five year paper. So what you're getting here is you've got all of these
maturities in 2020 and 2021 as well as all the maturities in 2024 and 2025 that are all going to
pile up right here because the market is shifted. Now why did the market shift? A lot of people look
at where cap rates are right now and I'll show you a slide in a second as it relates to buyer
sentiment, seller sentiment and builder sentiment but they look at cap rates right now and they say
I don't want to sell at this elevated cap rate and so because they don't want to sell at this
elevated cap rate they say let's just kind of re-fi the asset but I don't want to put 10 year
financing on it because if I decide to sell it in year three I've got a lot of yield maintenance
that's left in the mortgage that I have on the property so I want to go shorter. Let's go five
and so first of all it's prepayment flexibility why they've gone five and the other thing is just
the steepness of the yoke curve five year borrowing has been significantly cheaper than 10 year
borrowing and a lot of the deals that need to get redone in 25 and 26 were bought you know back maybe
they were bought in 21 or 22 with a three or five year instrument on them and that cost of
financing has made it that the performance of the asset is such that they need every dollar they
can possibly get and so as a result that they're going shorter at a cheaper cost of capital than
going longer to a higher cost of capital and so that is made a very interesting dynamic in the
market a that everyone's borrowing short and b you're going to get this big pile up in 2030 and
potentially 2031 depending on what volumes are in 26 of five year and 10 year paper that all
needs to get redone at the same time one of things we're talking to a lot of our customers about is
you may not want to have a re-fi coming up in this window and you might want to try and push out
if you possibly can and not have it come up for refinancing at these at the same time
so here's the buy build sentiment slide for one second take a look here remember where we were in
21 and 22 when i was talking about that volume spike okay this should remind you of one thing
markets are made by buyers and sellers but if nobody wants to sell you really don't have a market
okay everyone back here was a seller all the dark blue is the sales everyone was a seller it's like
I love that cap rate let's go let's sell it okay and you could see the buyer sentiment is the light
blue which was you know a lot of people you say are you a seller or a buyer it was like no I'm
more of a seller today than I'm a buyer but obviously there are plenty of buyers to buy and as you
can see the build sentiment moved from q3 21 and pretty much went straight down until right here
in what is that q3 of 24 so everyone was I'm a buyer or a seller but I'm not a builder and now
all of a sudden you can see the build sentiment coming back out okay the interesting thing look at
how much is in light blue so there are all these buyers out there they're like I want to buy I want
to buy I want to buy but there are no sellers at the end of q4 of last year only 4% of survey
respondents were actually sellers and I have also we've bought 18 companies at Walker and Dunlop
and I've always said that companies are sold they're not bought if we want to go buy a company and
wildly overpay for it we can go buy a company but if you want to actually go make a good deal
you're going to find a willing seller who wants to sell their company to Walker and Dunlop and
become part of Walker and Dunlop that's how good M&A is done and so similarly in the in the
property markets you can see here right now we are in a buyers it's not a buyers market because
there are too many buyers who want to buy it's actually a sellers market but sellers right now don't
want to sell one of the reasons why we are getting let me go back real quick here one of the reasons
you've got this amount of volume in the sales market is because of this slide so this is capital
flows so capital called capital distributed in five year rolling net distributions cumulative
and as you can see on the five years net distributions cumulative we are way way negative
so what's ended up happening is that you know LPs who have invested in commercial real estate
private equity funds have sat there and they've said look you called all this capital
back here the light blue is all capital calls and you haven't redistributed any of that capital
back to me so you want to go raise private equity fund six private equity fund seven you need to
return capital to me before I'm going to give you another dollar for your next fund and so that
is what's driving you look at this buyer seller sentiment nobody really wants to sell yet you go
back here and you say but the sales market is actually reasonably active that's because investors
want their money back and it's that sort of forced transaction volume that's going on in the
market today that is really driving volume it's not because they're saying I love that caprate and
want to sell into the market it's because they need to return capital of their LPs and until they
do that they're not going to get capital for their next fund you can see here this slide is pretty
as it relates to private credit versus commercial real estate so you can see the light blue is
non-traded REITs the dark blue is non-traded business development corporations most of that is
private credit funds and you can see here that you know it was all commercial real estate in 2020
in 2021 BDCs or private credit started to come out but it was still predominantly commercial
real estate and then boom from 22 it was all commercial real estate that falls off a cliff and then BDCs
are private credit start to grow the real question now is what happens with the redemption
queues in private credit and does that end up flowing back into commercial real estate private equity
that's that's right now I would say to you that commercial real estate private equity will benefit
from the rotation out of private credit funds and this just shows you here the redemption queues
that are there and what I was just talking about you can see that the redemption queues on the
non-traded REITs have come down significantly and you can see the redemption queues on the
non-traded BDCs going up quite significantly this slide you've all seen it heard it you know
an effective or a functioning market is when you've got average starts and your average
completions relatively close to each other you know that's one of the reasons quite honestly
why you're back here with very consistent you know sales volume is because you've got supplies
and deliveries construction starts and deliveries all kind of paired up but obviously the
pandemic kind of turned everything on its head you get back to that quarter where everyone's like
wow I got to get into this market I'm going to go make an investment and boom we get lots of
shovels going in the ground and start start to spike and you're still with a delivery number
that's normalized and then all of sudden deliveries all these construction starts turn into
deliveries and what everyone sees in this slide obviously is that because you had starts come down
significantly you're seeing deliveries come down with the starts so that is going to create what
should be an under supplied market but what we've seen is that you're looking at this slide and
this is your multifamily demand slide okay and when everyone was looking at was okay starts have
gone down deliveries will go down and if you were looking at that back in here you're like demand
which is this coin bar demands just going to keep on going up so demand keeps going up supplied
and starts go down and it's a great market we can start to push rents except as you can see on
this for the last three quarters demand is falling off and demand is falling off significantly and
one of the big questions there is why has demand fallen off when the price of multifamily housing
is so much cheaper than single family housing so that's not the market losing in the competitive
battle with single family let me let me just show you really quickly on single family versus multi
family so and I'll come back to that other slide so this this darker line is what the cost of
home ownership is on principal and interest on a mortgage payment the the bar charts are the
the median price of a single family home in America okay and the blue is the average cost of
renting in America okay so you go back to 2019 2020 and you were much better off much better off
buying a single family house right here for an average price back then of $280,000 much better off
buying your $280,000 home putting a mortgage on it and your principal and interest were down here
at less than $1,200 a month and to the average rent in the United States back then was $1,400 a month
you were $200 in the in the black on a monthly basis for having your single family home and paying
your P&I on your mortgage then you were renting and then all of a sudden as you can see because of
the pandemic the cost of single family homes started to skyrocket and that's the this bar chart
going all the way up where you move from the average median price being at 270 all the way up to
what was that 430 over that period of time well to buy that 430,000 home and pay principal and interest
on your mortgage as you can see on this line it skyrocketed and you went upside down on your cost
of home ownership versus the cost of renting and look the cost of renting went up significantly from
21 to 23 but then it's basically plateaued since then but the important thing about this is to
think about it from a structural standpoint that right now it is significantly cheaper to rent
than it is to own a home and until mortgage rates come down and this bar chart continues to fall
down and no one's wishing that we lose value in single family homes in America but until the values
continue to come down and the cost of borrowing continues to come down it's still going to remain
much much cheaper to rent than to own a home so if that's the case multi family is holding up really
well against single family people aren't like saying oh it's cheaper for me to own a single family
home than to rent so then what is it that's making that chart as it relates to demand come down
and the only thing that you can come back to really is immigration and the fact that the border has
been closed that there isn't a huge amount of illegals coming in and that legal immigration numbers
have not gone up and so I think this slide is a very important one to keep in mind as it relates to
household formation demand drivers for multi family as well as single family and until the government
does something as it relates to increasing the amount of legal immigration in the United States
that demand side of the equation is going to be questionable let's dive into a couple specific
markets and then I'm going to open it up for Q&A in a sec so before we started I was asked about
sort of what markets are hot and what markets are not and the oversupplied markets so if you
look at this slide and you look at these MSAs of you know this is the top 10 markets right now
and you sort of said I see here all of you know the Sun Belt job growth companies relocating from
California to Texas you would sit there and say okay that would mean that San Francisco isn't a
place that I want to be happens to be at the very very top of the list San Jose is a place I don't
want to be happens to be number two on the list look at the cities here that are doing really
really well right now and oh by the way look at the trailing five year population growth
negative 4.5 negative 1.2 negative 0.9 look what who's the winner on this list we've got a whopping
2.8 percent growth in Cincinnati Ohio over the last five years not exactly boom from a population
growth standpoint okay but none of these markets had any real new supply into them over that five
year period so they don't really need the new population to come in to get the type of rent
growth that they've been able to get so these are right now are the darling markets that while
2 percent rent growth doesn't sound that great in comparison to this list it looks really good
so now look at all these these these markets these are all your oversupplied markets these are
all the markets that all those shovels back in that previous one of starts into deliveries
this is where they all went okay and as you can see here I mean look at the population growth
in all these so at this one our winner here was 2.8 percent look at these population growth numbers
almost all of them in double digits it's where the jobs are it's where the people are moving
except for the fact that they've all been wildly oversupplied and so you know you might sit
there and say well I like the long-term growth of Austin Texas no doubt I think you've got to like
the long-term growth opportunities for Austin Texas except for the fact that in real estate when you
have oversupplied to the degree that Austin Texas has had you're going to have negative 7.7 percent
trailing 12 rent it's not rent growth it's negative rent over the last year denver Colorado
number two negative 7.4 percent to really really hard markets to be an owner in today do they both
have Austin more than Denver do they both have really really good fundamentals to them without a doubt
has Austin turned into a really affordable market almost overnight 100 percent single-family
and multi-family Austin if you were if I was starting walker and all up today and I had to pick
a city to move to Austin has so many things going for it including it's super affordable today
super affordable so if you say start today and go forward Austin's a great market except for
the fact that you're probably going to have to feed that asset if you went and bought one for a
period of time because we're still trying to absorb all the oversupply that was in that market
so you know one of the big things that Peter Lenneman who comes on the webcast on a quarterly
basis and I constantly debate is Peter is very much you know prone towards Cleveland Ohio and
Cincinnati Ohio sort of kind of boring midwestern markets and to anyone who I just defended by calling
Cincinnati and and Cleveland a boring market excuse me but you know it's kind of steady atty
you're never going to get this big surge in supply and as a result of it if you buy well put low
leverage on it it's going to turn into a really good investment for you these markets are the
ones that you know there's a lot of what I call brass and glass there people like man I can go
into Austin and I can buy it and I'm going to sell it at like a three two cap rate at some point
and by the way I got a lot of clients who were investors in Austin either built or bought back in
2013 and sold in 2018 or 19 at a three two cap rate and made just enormous returns on multiples
on their money so a lot of these markets you can make a lot of money but right now is it relates to
do you want to be an owner in them I was just in Phoenix two weeks ago Phoenix is still way over
supplied the one other thing about Phoenix the building of the new Taiwan semiconductor plant there
fascinating to see the amount of work and the kind of ecosystem that's going on in Phoenix right
now around that investment and it's obviously not just that they're going to build a chip
manufacturer there it's all the ancillary services that need to be built out there I met with a
gentleman who is working with Taiwan semiconductor is it relates to all the other kind of services
that they need the plants and how the plants feed products into the actual chip manufacturer but
then the multifamily and the retail and the office and everything that needs to be around that
huge investment of tens of billions of dollars it's really quite something and will be a great
growth driver for the Phoenix market over the next couple years so in summary before we go to Q&A
a couple things on noise you hear a lot about two hundred dollar barrel we're not going to two
hundred dollar oil on a barrel trump won't let it happen period the president will stop the conflict
before we even get close to that so there's a lot of scare might fear mongering about that that
ain't going to happen run away inflation one of the big things to keep in mind is that one of the
main reasons the inflation print has stayed as high as it is is because of owners equivalent rent
and because of multifamily rent growth that for whatever reason the CPI continues to get a false
read off of but owner equivalent rent is 25% of the CPI and nobody's ever paid owner equivalent rent
ever you don't I own three homes and I don't I don't pay rent to anyone I pay a mortgage
but that owner equivalent rent of what would you rent your house to someone else for today
no one's ever paid it it's a completely made up number so if you call me today and say what
would you rent your house in Denver Colorado for I'll come up with some number and I'm going to
kind of triangulate off of some number I heard down the street they'll tell me last month you said
it was X this month is it uppers it down and I'll give you my gut reaction of I should charge more
I should charge less that's the way they go about determining owners equivalent rent and it's
25 23% of the CPI makes no sense so in the CPI number that is stayed elevated is an elevated
owner equivalent rent number that shouldn't be there I'd be interested to see whether Kevin
Worsh when he comes into the Fed thinks about doing something to adjust it it's one of the reasons
why so many economists don't focus on the CPI but focus on the PCE because the PCE has a lower
weighting on housing than the CPI but the bottom line on all this stuff is I told you about oil and
the impact of oil oil stays high for a very long period of time it will have an impact on the CPI
but I don't think we're going to have runaway inflation as many people are fearmongering
higher interest rates I don't predict interest rates okay but what I would say is the following
you have a new Fed chair who's coming in and there's no doubt that he has heard the president
clearly that he wants to get the cost of borrowing down the second thing on all that stuff is
you are either going to have Kevin Worsh being successful at lowering rates or you'll have a
sell-off in the equity markets that should have people move to safety in treasuries the interesting
thing since Iran is that you actually didn't see that happen typically when there's an international
conflict like Iran people flee into they jump into safety and you would have seen yields on the 10
year go down that didn't happen this time which is a little concerning and at the same time if
you do get a significant sell-off in the equity markets there's no doubt that you're going to get
the 10 year going down death of the blue states and blue cities I just showed you numbers on
why they're not dead and probably aren't going away there's lots of talk about all this great
migration to the you know lower tax high-growth states but you know from a real estate standpoint
those states are still struggling and then transaction volumes remain muted I showed you there
might be a narrative out there that says transaction volumes are muted but at least in multi-family
on the sales side it's sort of back to the normal on the signal CRE capital flows will drive
transaction volumes up and cap rates down okay I showed you that rotation of capital from LPs
that is going to continue that doesn't stop the capital hasn't gone back to them they'll continue
to ask for their capital and fund managers who want to raise their next fund are going to have to
recycle that capital that recycling of capital means that they're putting it into assets as they
sell them and refinance them more capital flows mean cap rates come down you then go from a I
don't want a sell market to I'm ready to sell market and transaction volumes come that's the way
it will happen multi-family significantly more affordable than single-family that's there that's
structural right now that doesn't change quickly prices of single-family have to come down
materially and the cost of borrowing has to come down materially for that to change so for quite
some time multi continues to win over single some belt will continue to attract jobs and families
no doubt about that you saw the job growth numbers that I put up there they are the long-term
winners right now unless blue states can figure out how they can get their tax policies in place
to retain and attract new investment population growth problem without increased legal immigration
that that saw that is a really important one and by the way the administration can can work on
that they can say we only brought in 700,000 legal immigrants last year let's bring that up to a
million let's bring that up to a million two and start processing more legal immigrants to the
United States and then the final rates will come down due to cuts or the sell off in the equities
pretty you know again I don't try and predict where rates are going to go I get asked about it all
the time I'm smart enough to leave that to economists and not myself but you just think from a
signal standpoint there'll be plenty of noise in there but from a long-term outlook standpoint
we should be in pretty good shape where rates should come down either from the sell off in equities
or that Kevin Worsh is effective as the Fed Chair and bringing down the short end of the curve
and the long end should follow at some point that is it from my prepared remarks I am up for
any and all questions so let's dive in
Hey Willie Michael came us on my TMS red thanks again for coming out today
you're native Washingtonian you've long been a proponent of the city
and it's great a real estate market you recently had Mayor Bowser on the webcast and
she's communicated her and her team are all in on dc to bring business and investment back to dc
but there's obviously been some hesitance hesitancy from investors in re-entering the dc real estate
market and I'm curious if you're still bullish on dc and what do you think needs to happen to make
those investors more comfortable to re-enter so a couple things on that the big story of 2025
that has not been covered widely but that Peter Lenneman has underscored not only in our last
conversation but in the Lenneman letter is that the federal government shed almost 250,000 jobs
last year almost 10% of the federal workforce was shed in 2025 and Peter's comment is that like
the Trump administration hasn't jumped up and down and said look we actually did what we said
we were going to do as far as things out Elon Musk came into town to do his doge stuff and left
town and everyone sort of said that was an effort that we're not going to follow up on but that
shedding of federal workers is a very very significant economic driver for the greater dc area
though if you think about it theoretically those people will then go find jobs in the private sector
which if you're a libertarian as my friend Peter Lenneman is you're like that's great they're
going to go into productive jobs rather than just redistribution jobs those are Peter's words
not mine but that does put pressure on the dc employment market the other thing that when doge
came in one of the big concerns I had was all of the consulting firms that sort of if you will
feed off of the federal government apparatus from a defense contracting standpoint from a process
engineering standpoint the likes of booze Hamilton booze Allen and other big consulting firms
they were very much sort of under target for redo or elimination of their contracts from
what I have seen that sort of came and went pretty quickly with doge so that they are still doing
as much business and the other piece to it is you got to remember we're going to print a what two
trillion dollar deficit in two thousand twenty six two trillion dollars so the bottom line is the
federal government still spending money hand over fist so it's sort of a tale of two cities if you
will in the sense that you actually had two hundred fifty thousand job cuts out of the federal
workforce which is big downward pressure yet you have a federal budget that's running a two trillion
dollar deficit and is spending money on everything over and over and over so the question there is
what does that all that mean for the DC area DC is struggling and they have a new mayoral race coming
up and Muriel is stepping down from her role and we'll see who the mayor is northern Virginia is
doing extremely well and suburban Maryland is also struggling in a very big way and governor west
more of Maryland has a as a big challenge in front of him as it relates to getting that state in
a position where it can attract jobs and attract companies will you thank you that was an amazing
presentation I am thinking about the recent regulation on private equity ownership of single
family homes and I'm curious what your thoughts on on how that affects the rent versus own math so
the the legislation that went from the senate to the house has in it a provision on build for rent that
requires anyone who creates builds a build for rent community to sell the community in seven years
that's really bad legislation in a in a bill that is designed to try and increase the amount of
supply of housing in america they put in there a paragraph that does exactly the opposite and the
bill for rent market has been frozen since that since the senate passed that legislation and by the
way they passed it ninety one eight one person didn't vote ninety one eight they haven't passed
anything in the senate ninety one eight in a long time when when you have you know senator Tim
Scott from South Carolina and senator Elizabeth Warren from Massachusetts both fighting for the same
legislation you know something sort of gone wrong to be honest with you I mean honestly they should
be on different sides of most issues and this one they both jumped in on and unfortunately that
paragraph on bfr is going to set the bill for rent industry back a lot senator Warren is very
specific in saying it only applies to those who own over three hundred and fifty homes
okay and that is only seventy basis points of homeowners in the united states okay so she's
pretty careful with her numbers here she's like it's only impacting seventy basis points of
single-family homeowners except those seventy basis points are the only people who have the capital
to build new homes everyone else just a single-family homeowner it's those companies that actually
build bill for rent that create the bill for rent supply that then feeds into the single-family
rental market so this seven-year provision is a real problem I got something last night that there's
actually some real progress going on and a number of congressmen and women have signed on to basically
say this provision needs to be changed and I actually also heard that the speaker of the house
understands the problem is asked the chairman of the house financial services committee french hill
to focus in on this and and and potentially change it in the house legislation so
we will get that law passed as it relates to the other provisions in it
and the president and his executive orders to try and create more supply and bring down the cost
of housing in america but that one provision on bfr have to sell after seven years hopefully gets
pulled out in the actual legislation but for right now there is not a big institutional investor
that will put a dollar into a bfr community right now given the potential regulatory risk around it
hi chip wine truck thank you for coming here and so I just wanted to ask about rates and inflation
a couple things you didn't really spend a lot of time talking about was the national debt
the demographic trends and trade all of which in my view are highly inflationary and changed
dramatically over the last five years wondering if you could sort of and that's a very large question
but if you could sort of comment on those within the context of your what you'd said before thank you
so sure and I'll give a big disclaimer before I say anything on it I am not an economist I'm not
a trained economist but I will tell you from having done now almost six years of quarterly
walker webcast with Peter lineman who is one of the truly great economists of our time I do feel
like I've gotten a PhD in reading the lineman letter on a quarterly basis and being able to go to
Peter with lots of questions and so I will say everything I'm about to say is a hundred percent
from Peter lineman okay so this is not my thinking this is all out of lineman lineman is spoken
extensively about the fact that he doesn't think that the national debt is a big issue and I don't
want to dive into Peter's reason although one thing that I would say is just he goes to our overall
national net worth what this country is worth how much GDP we are developing and growing and he
basically says if you're adding three to five trillion dollars a year of net wealth to the United
States you can easily afford to be printing two trillion dollars of deficits on an annual basis
so as long as you keep that GDP growth going and we're creating three to five trillion dollars of
additional net wealth the United States every year you can run two trillion dollar deficits and
it's not going to catch up with you the one thing that you know very well on that one is that's
as long as we remain the reserve currency and if we lose that position we're in real trouble the
issue with it is is go back and think about this China is now squawking about that they want to
you know create the reserve currency and their obviously was some you know some thought that Bitcoin
and other crypto currencies were going to be a better store of value than the US dollar as the
reserve currency the euro had every opportunity to become a real competitor of the US dollar
except for the fact that they never got the UK into it and they never got Switzerland into it
two of the larger economies from the financial services standpoint and because of that it's never
really had the chance to be a real competitor to the dollar as it relates to a reserve currency
and then think about how long the euro's been out there and how long they've been trying to make a
run of making the euro be any kind of competitor to the dollar we're talking about things that take
decades quarter centuries half centuries to get developed and so yeah right now there's a lot of
talk about you know the debts too high lots of our allies or you know there was the big narrative
last year that actually is another one on noise versus signal there was a lot of talk last year
about all of our allies dumping their treasury holdings because they wanted to kind of give the
finger to the United States didn't happen you look at treasury holdings of foreign countries
they're going to go work for yield and safety they can sit there and listen to politicians say we
don't like this we don't like that they're going out they have a fiduciary responsibility to get
for their investors what they need to they weren't dumping treasuries so I would just say as long as
we remain the reserve currency of the world unfortunately we continue to we can continue to
be profligate spenders and not treating tax dollars the way that they ought to be the one other
thing that I would throw out there is this kind of blue state red state and tax policies
has a huge impact on sort of you know decades worth of growth and where companies are going
I happen to live in the state of Colorado Colorado is 4.4% income tax which is actually quite low
relative to other states that have income taxes there's a ballot initiative in Colorado right
now to try and overturn the taxpayers bill of rights that holds that at 4.4 and I've been talking
extensively with legislatures about how damaging that would be to Colorado and if they were to
take it from 4.4 they've been talking about 8 to 9% if they were able to overturn it and one of
the things I've been advocating is why don't you all think about going to zero and every time I say
that they're like what do you mean like well we can't go to zero we've got a billion dollar deficit
this year and I said well the bottom line here is think about the type of growth you would get of
companies moving from California to Colorado if you dropped it from 4.4 to zero and what that would
do to your overall fiscal position the thing that Colorado has that may other states like New
Orca California don't have is that because California in New York get about 50% if not more of
their income from income taxes they can't do away with it they can't go to zero Colorado only gets
20% of its income from its income tax so there are lots of ways to make up for that nine billion
dollars of income tax that they bring in property taxes fees other things that you could put there
the bottom line that I'm trying to put out there is that until state governments and local
governments understand that they are constantly competing for residents zoom in the pandemic changed
everything you used to not like I moved from Washington DC we're walking all up is based to Denver
Colorado in 2019 pre pandemic okay it was a huge decision I was like we got 250 people in
headquarters I'm going to be leaving going out to Denver Colorado I'm going to be back here every
two weeks and that was my plan to constantly commute back to the DC area because that's where my
team was my senior executive team was our headquarters were and even though we have 45
offices across the country I was like I got to get back to headquarters boom pandemic happens
my senior management team goes all over the country we learn how to do zoom calls and it literally
today does not matter where I am and where my executive team is every company in the country has
that dynamic today everyone so you don't have to be somewhere Jamie Diamond talks about the fact
from when he joined JP Morgan Chase to today they've gone from 45,000 jobs in New York to 35,000
jobs and in the process they've gone from 5,000 jobs in Texas to 30,000 jobs in Texas
it's like Marimom Donny can tap on the camera and be like haha we're going after you can
Griffin and just watch all that money move away and so one of the things that I'm trying to get
in Colorado than to focus on is don't go raise the income tax raise property taxes because the
property in Vale and the property in Aspen isn't going anywhere you can't move it that billionaire
who owns their 50 million dollar home in Aspen they may not like the fact that their property taxes
go up a little bit but they're not going to Jackson Hole so I think governments need to shift
on what they're taxing and how they're taxing it to try and keep the revenues in the state
because if they're just going at we're going to chase some billionaire out of California
they're going to move to Florida or Texas tomorrow and it's at almost no switching cost
so that's a big issue I think from overall growth in the coming you know decades and what
quite honestly booth states and blue cities need to do to retain and attract jobs and people
hey thanks Willie for a really informative discussion there I'm Tanner Mix I'm an incoming
student class of 27 my question a little bit more of a niche market but the senior housing that
I brought up before we started today demographic shifting wise we're seeing probably a doubling of
that market over the next 10 15 20 years and the market itself is already undersupplied estimates
somewhere in the neighborhood of 500,000 units my question to you is from your vantage point
how should sophisticated capital be positioning itself today in order to meet that demand
and what type of challenges are there still to be overcome when it comes to meeting the scale
that we need to meet maybe capital structure and then also like operationally how can we improve
our efficiency to make it affordable and beneficial to investors so I'll ask you a question what
what do you think the percentage and keep the microphone for a second because I can ask you this
question what's your handy cap us having another pandemic within the next 10 years
very unlikely and another pandemic in the next 20 years
still unlikely I would say and when you say unlikely 5% chance 50% chance 49 less than 50
as far as pandemic scale if you take a 200 year vantage or vintage on it it's happened twice
ish so maybe 1% okay the reason I ask that is that if I ask you the same question about the great
financial crisis right after the great financial crisis I think you would handicap the chance of a
great financial crisis similarly to what you just did on the pandemic okay so great financial crisis
is over generally speaking in 2010 okay and I was certain that the CNBS market commercial
mortgage backed securities market would go back to sort of the silly math that created the great
financial crisis that liquidity to come back a lot of the bankers had moved from one bank to
the next bank and they would get back to the same lending habits that they had and until today
16 years later CNBS hasn't gotten back to the same practices that caused the great financial crisis
those memories last for a long period of time okay even though the chance that we were going to have
another you know great financial crisis due to over leverage on CNBS and you can either go CNBS
or the mortgage single family mortgage market as the drivers of the great financial crisis
I would say to you that the reason I'm trying to bring this up is because the pandemic I think
materially changed people's views of senior's housing the amount of death that happened inside
of senior's housing communities was something that scared people my age who had parents who might be
in senior's housing to their bones okay and so there's been a big move for people to say
sort of anything but and yet at the same time the demographics behind it are unbelievable
you just sit there and look at the numbers you're like this asset class is going to be full and
it's going to crank for years and years so I would say to you you look at the math and you say yeah
you should go build there and it's going to be a great asset class to own in and it's going to be
full but I go back to the GFC and CNBS and the long memories that stayed in place after that
and I sit there and say it might take longer than you think to get people to go back into that
type of living and there are some great companies that are making a lot of money right now
and my friend Deb Kaffaro runs one of the largest publicly traded seniors housing reeds out there
and they've got a great they've got a great business but that that asset class had huge losses
in 2021 and 2022 huge and those memories are still there from a lending standpoint
Fannie Mae and Freddie Mac the only real losses they had in 21 and 22 were in their seniors
housing portfolios and so people underwrite more conservatively and they look at that risk with
a little bit you know am I going long there or am I staying short and I think that will
impact seniors housing for the next couple of years thank you yeah I think we have time for
one or two more yeah thanks Willie my name is Ryan Othman I'm MIT MS red you spoke about private credit
I understand the SaaS spook you know because of the AI and vibe coding age
why do you think investors are spooked by real estate private credit and why also on you know
one thing you mentioned in the presentation you said that fleeing from private credit might go
into private equity what you know commercial real estate private equity so yielding private so one
of the big issues there is yield okay so one of the reasons why the private credit market has
attracted so much out of the retail distribution network is because there are a lot of retirees
who want that coupon that comes off of their investment in private credit as they get concerned
about private credit they're like maybe I'm going to pull that back and reallocate it somewhere else
they can't go to just a normal private equity vehicle because private equity vehicles don't have
a current return whereas commercial real estate private vehicles particularly credit vehicles
have a current return and so it's something that a RIA can sit there and say okay we're going to
pull you out of that private credit fund we're going to put you into that real estate fund so
that's the reason I believe that it competes quite well in any reallocation of dollars
because people need yield and the one other piece to it is there's seven trillion dollars
of capital right now seven trillion sitting in money market funds okay if wash comes in it starts
to cut the short end of the curve people will rotate out of money market funds by the way they
will not go from seven trillion to zero back when the Fed funds rate was at zero in 2012 and 2013
there was still three trillion dollars of money that sat in money market funds so don't think it
goes to zero there's a certain amount of capital that will always sit in those money market funds
but you could see seven trillion go to five trillion and where's two trillion dollars of capital
go by the way we used to talk about billions being real money now it's trillions okay so where's
two trillion go that's real money okay and so if you take two trillion out of money market funds
because the short end of the curve gets lower and you get any kind of rotation out of the private
credit funds I think net net that's probably beneficial for commercial real estate because it's a
yielding hard asset the final piece I'd say on that is look who knows where AI goes who knows whether
these SaaS companies get just obliterated by AI or whether they actually live for another day
that's way above my pay grade but in commercial real estate you have yielding assets
their hard assets and so in a world that has a lot of shifting and moving parts to it people
have got to live somewhere so multifamily hangs in there pretty tough okay people don't actually
need a place to work people bricks and mortar retail okay what percentage of US retail sales
today goes online versus through bricks and mortar I'm going to ask you directly what percentage
is online versus through bricks and mortar yeah but let's swag it what percentage is online what
percentage is through bricks and mortar you're going to say 40% online and 60% through bricks and
mortar other way around 60% online and 40% bricks and mortar 16% online 84% bricks and mortar
84% bricks and mortar 16% it got to a high of 20 during the pandemic and has come back down to
16 so your impression is 100% where most people are everything is Amazon and everything's UPS and
FedEx that's what you think so retail is actually still a very important part to the retail channel
is bricks and mortar so retail is a good place hospitality if AI puts all of us on the beach
we can all make huge amounts of money on our investment in open AI and we can just put our
feet up on the table and go go go do something else high end hospitality does really well in that
scenario okay the hotel I'm staying in here in Boston for work probably doesn't do that well okay
but high end hospitality if me go into the beach that's going to do really really well okay
and then you know data centers the one thing on data centers I asked Liniman this a year and four
months ago in our conversation in Philadelphia I said so if you had to pick one asset class
that you would invest in and obviously locations important all that stuff but just one asset
class that you'd invest in right now what would it be and Peter looks at me he goes well if I wanted
to stay rich it would be multi-family so I said to him okay well then if multi-family is the
one that you would stay rich in what would you get rich in and he goes office I was like interesting
he goes yeah there's some really great office deals if you if you'd heard that from Peter and you
invested in San Francisco office you've made a huge amount of money huge amount of money okay and so
I said okay you said stay rich and get rich how about get poor and he goes data centers okay now
Jeff Blau is just on CNBC yesterday morning and he was talking about this 36 billion dollar data
center that related his building for Oracle who's gonna lease it out to open AI there are a couple
things to keep in mind there first of all the JP Morgan headquarters that they built in Manhattan
that they talk about it costing three billion it's more like it costs them five billion
but that's like the most expensive office building ever built in the United States of America okay
three to five billion dollars Jeff Blau is talking about a 34 billion dollar investment in a data
center this is orders of magnitude bigger than anything we've ever seen okay one of the other
interesting things that he said yesterday was that they went through the 144A market to raise
capital for it rather than going to the bank market super interesting basically this market has
gotten so damn big that banks don't have the ability to even syndicate out the loans on there
they've had to go to the securities markets in 144A registration to go raise the capital on it
then the final thing that I have thought for quite some time is if data centers are fundamental
to the future of companies like Amazon and Microsoft why are they doing it all off balance sheet
just a question if it's fundamental to their business in 10 years and 20 years why are they
putting it off balance sheet rather than actually owning it and so there's no doubt we're going to
have oversupply in data centers there's just no doubt look at that slide that I had is it relates
to everyone's like let's go buy multi-family well we got to put it a shovel in the ground and go
build it we're going to get oversupply the question is what's the what are the repercussions of the
oversupply and how does that then filter out into the valuations of the hyperscalers the valuations
of the oracles of this world and the valuations of companies like related that are actually building
the data centers and it does seem a little bit like everyone's getting really careful on how they're
structuring these things because there's kind of a sense that at some point everyone grabs and you
want to have the proper structure that makes it so when everyone grabs you're not left out in the
cold all right hey Willie thank you again for being here manual shumya MIT real estate student you
touch a little bit on immigration I had a question about how that relates to the construction
labor supply market immigrant workers are like a third of it and it goes up to anywhere to like
two-thirds for certain trades like drywallers and more so you'd also towards single-family
home construction so I guess to what degree is that our new starts impacted by current
immigration policy and constraints supply of workers that can do new construction I'm going to
surprise you zero zero it's unbelievable I have asked that question at almost every single
meeting I've had with either a merchant builder on the multi-family side or a single-family
home builder and I know lots of the CEOs the big single-family builders it is it is not only not
impacted it as it relates to the supply of labor but the cost of the labor has actually come down
so you're seeing deflationary forces from a labor input on construction which is
complete counter narrative to what you would think it would be and so it has not impacted access
to or the cost of construction labor one Iota and that's an anecdotal comment in the sense that
I haven't looked at some actual study that says we've gone and studied everyone in the industry
that's from me meeting with the very big merchant builders the very big
single-family development companies and just saying how's it going and to a person they all
said hasn't impacted us for one a bit so it's a very interesting back to noise and signal the
noise is that you're not going to get people showing up on the job site you're not going to be able
to get labor cost of labor is going to go up hasn't impacted it one Iota so thank you all for
taking the time it's been a real pleasure thank you
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