On the fifth episode of The Multifamily Investing Show, Michael sits down with Michael Ochstein, the President and Owner of Price Realty Corporation.
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On the fourth episode of The Multifamily Investing Show, Michael sits down with Nick Fluellen, the Senior Managing Director at Marcus & Millichap.
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On the third episode of The Multifamily Investing Show, Michael sits down with Fritz Waldvogel, the Vice President at Colliers Mortgage.
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Welcome to The Multifamily Investing Show, your source for market forecasting, investment, and operational strategies. Your host is Michael Becker, a Principal at SPI Advisory and a Dallas-based multifamily operator who has purchased over 10,000 apartment units and manages over one billion dollars in assets. Join us as Michael interviews the top players in the world of multifamily brokerage, investment, financing, and economics. And here is Michael Becker.
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[0:35] Michael Becker: Welcome to The Multifamily Investing Show with Michael Becker. It’s the inaugural show. I couldn’t think of a better guest to have than Greg Willett. Greg, I appreciate you joining us.
[0:44] Greg Willett: Thanks very much for the invitation, Michael. I’m glad to be here.
[0:46] Michael: For those of you who don’t know Greg Willett, he is the Chief Economist at RealPage. He’s a guy that everyone in the business looks to for market information and to know what’s going on. So I thought we’d have a quick conversation today and go through the state of the market. It’s been a choppy year, for lack of a better term. It’s been up and down. Maybe we can start, Greg, with what’s the general state of the market from the 10,000-foot view, and we’ll work our way down into Texas? Maybe some general thoughts of where we sit today.
[1:18] Greg Willett: The market is actually in surprisingly good shape, particularly if you go back to what was happening in March and April as what we were afraid might develop here as the year went along. For the U.S., as a whole, the occupancy number has barely come down from the year-ago rate, and we were pretty much in line with an all-time high a year ago. That has certainly helped – rents: pretty bearable from one place to another. We’ll explore some of the overall markets. U.S., as a whole, down a little bit, but there are certainly some places where you get some pretty good rent growth still.
[2:05] Michael: Yeah, for me, it seems like – what’s Dicken’s book, Tale of Two Cities.
[2:08] Greg Willett: Tale of Two Cities. Yeah. What we’ve seen all year long and what we’re talking about, our theme tends to be bifurcation, and it really is different from one place to another, and to some degree from one segment of the market to another.
[2:27] Michael: Well, maybe let’s start here. Where were we going into 2020, and now here we are closing out 2020 and going into 2021. What has changed from occupancy metrics from a macro standpoint in the United States?
[2:42] Greg Willett: Yeah, we started from a good point on the occupancy side. Again, as I said, close to an all-time high, and I will point out that people were a little bit nervous about 2020, even pre-pandemic. They were playing defense and trying to get occupancy as high as they could because there was some fear of what would happen with the economy. Growth was beginning to slow down already. A lot of new supply was coming at us, so operators were really paying attention to those occupancy numbers trying to get it as high as they could.
[3:19] So, that’s given us some cushion, so we’ve given up a little ground, but we’re still at, overall, U.S. occupancy is 95% and change. To give you some perspective, the last recession that we had, the Great Financial Crisis, you got all the way down to an occupancy of 92% or so. So, we’re way better than what we had seen previously. Rents, again, not great pricing power, but some places still have some pricing power and are getting a little bit of rent growth, although the overall number is down 1% to 2% year-over-year.
[3:59] Michael: So, you say that we’re 95% nationwide from an occupancy standpoint. How much of that is actually people that are in these units that aren’t paying? So we have physical occupancy, but there’s an economic vacancy that’s baked in.
[4:12] Greg Willett: It’s a great question and something that obviously people were really concerned about as the pandemic hit. We are one of the companies that is participating in the National Multifamily Housing Council Rent/Payment Tracker. We provide our data for that effort. If you look at those numbers overall, it’s barely moved. The collection numbers for the U.S. as a whole are down 1% to 2% from where they were a year ago.
[4:42] But if you think about the size of the job loss, that’s an incredible number that reflects – number one, I’ll circle back to the Cares Act that was put in place when the pandemic first emerged, and that provided some enhanced unemployment benefits for folks who had lost their jobs. So, they were able to make the rent and actually save a little bit for moving forward. Those payments have stopped now. We need some additional efforts to keep people afloat, but for the most part, particularly in this professionally-managed apartment segment, the payment numbers have been fine.
[5:23] Michael: And that’s what we’ve noticed because our portfolios, certainly, our delinquency is up, but it’s nothing that’s not manageable. A lot of the loans that we have are actually adjust for rate mortgages, so now our interest rates have gone down because of LIBOR and now we’re going to SOFR. It’s basically next to zero, so we’re actually probably making more money than ever before because of the debt service savings.
[5:46] Back to that tale of two markets or Tale of Two Cities kind of concept, what are the on-markets and what are the off-markets. You hear the headlines; no one’s going to live in the urban core anymore. Everything’s terrible, and everyone is going to go to suburbia. Is that really what’s playing out?
[6:04] Greg Willett: Certainly, the headlines are a lot of time blood in the streets, and they concentrate on what’s happening in New York and San Francisco. To some degree, that’s a true story for New York and San Francisco. You’ve had, I can see, drops sharply; you have people who are moving – leaving the metro, those metros. They’re bailing on the urban core, in particular.
[6:32] So, there is truth to that, but that is not what’s happening in the country as a whole, and particularly the Sunbelt markets are holding up fairly well. You’ve still got strong demand in these Sunbelt markets. In the Midwest, slow and steady, but that’s a great performance at this point when you compare it to some other places.
[6:54] Michael: So, New York, San Francisco, Chicago.
[6:58] Greg Willett: Chicago, to some degree. LA, Seattle, Boston, and to some degree, Washington D.C. Those are the struggling spots versus places that were doing well pre-pandemic are continuing to do well in terms of Texas, the Carolinas and Tennessee cluster of markets, Atlanta, Phoenix, Denver – those all look good.
[7:28] From the pre-pandemic, best performers, the Florida markets have lost some momentum because they do have heavy hospitality economic bases. But most of the places that were doing well pre-pandemic are continuing to do reasonably well.
[7:45] Michael: So, urban-suburban, is that a myth too, or is that market-by-market, or is that a general blanket. No one’s going to live in the urban core anymore. We’re all going to the suburbs?
[7:54] Greg Willett: Yeah, that’s extremely exaggerated, and particularly in the Sunbelt markets, the urban core, you still have positive demand for apartments and the urban core across the Sunbelt. It’s not huge, and the performance is not where it was pre-pandemic, but we’re here in Dallas. It’s not the case that everybody’s moving out of the uptown market and going to Frisco. That’s just not happening.
[8:23] Michael: So, supply has been a big thing, certainly in Dallas/Fort Worth, which is where we’re at, where you get a supply leader. Year-over-year-over-year seemingly, they keep putting 25,000 to 30,000 units a year and deliver every single year, and we keep seeming to think that supply might slow up at some point. It never seems to.
[8:41] Greg Willett: It never really does.
[8:42] Michael: What’s different, like this cycle versus the Great Recession 12 years ago. We had a big supply shock where supply dropped dramatically. Is that what we’re seeing coming in our future, or are we going to keep just going through this?
[8:58] Greg Willett: Well, the nation as a whole, obviously, it takes a while to deliver product from the time you start construction. Things that were started pre-pandemic, we’ve still got close to 600,000 market-rate units that are under construction across the country and will deliver in the next 18 to 24 months. In a lot of places, it’s going to be tough to get those through initial lease-up because while the demand is there, it’s not robust at this point.
[9:31] We think that the construction levels are going to pull back a little bit, but probably not a lot. What’s happening now is trades did not stop versus what happened in the last recession, so some of this new product, particularly suburban product is continuing to trade at the same prices that we’re seeing pre-pandemic. Developers are still making money flipping products. Unless somebody cuts off their supply of money, they’re going to keep going.
[10:09] Michael: Some of the headlines that you see is that we’re seeing lumber, concrete, labor, all these materials, all the inputs into building a multifamily project are going through the roof. Do you guys track that at Real Page? Is that going to have impact?
[10:26] Greg Willett: We pay attention to those numbers. We’re not producing those numbers ourselves, but yes. The costs of construction are certainly going up, and that’s going to make fewer deals work than would have earlier, but I still think that we’re going to get pretty substantial construction continuing.
[10:43] Michael: Got it. Then, before we get into more Texas-centric, because that’s where we’re based, is there a big difference between your different classes within multifamily – you’ve got you’re A, B, and C classes. You also have your towers, mid-rise, and garden-style product. Is there any one part of the market performing better than the others? What kind of takeaways have we seen the last several months?
[11:07] Greg Willett: Certainly, the part that’s struggling is the more expensive product. So that is urban core; that is the towers – a week of performance on both occupancy and on rents, whenever you’re talking about that product. To this point, the Class B product has held up really well, and so has the Class C. Class C is maybe a little bit of a surprise there. Usually, Class C struggles during a recession, but thus far, it’s holding up pretty well. The term we’re using is like to affordability. We’re seeing people – you’re renting right now, and you could afford luxury product, a lot of people are opting not to go that route, and they’re saving some money on rent and renting the B or C units.
[12:02] Michael: When say it’s holding well, the B and C, that’s from a physical occupancy standpoint and rental rates, both?
[12:07] Greg Willett: In terms of – we’ve certainly got rent cuts in the top-tier Class A product virtually everywhere across the country. B tends to be close to zero. You can have some slight cuts in some places, but it’s not extreme. C tends to be basically flat. Our last set of numbers for the month of October, it was the first time that Class C product year-over-year rent change went slightly negative, but it’s barely.
[12:42] Michael: Okay. My experience is we don’t ever work for workforce housing, the brand-new Class A. Our delinquency that the extent that we have it, a little bit more elevated, tends to be an older, more workforce housing space, so I don’t know if maybe that’s not flowing through to some of–
[12:57] Greg Willett: That is true, but isn’t that always the case, though?
[13:02] Michael: It is.
[13:02] Greg Willett: Yes, there’s a little bit more delinquency at that bottom tier at the market, but it hasn’t moved any differently than what we’ve seen at the top as well. They’re moving at about the same level, but the payment level is lower in Class C product.
[13:18] Michael: Fair enough. Let’s talk a little bit about Texas, where we’re based, where we focus on. A lot of people that are going to probably watch the show focus on too. Obviously, Texas has been the on-market for a decade or better at this point, you know, completely transformed after the Great Recession. We’ve seen a lot of corporate reloads. The population growth has been through the roof. And, as we just mentioned, developers like to build apartments here. It seems to be the center of the multifamily universe, pretty close to where we’re recording this right now.
[13:48] Maybe talk about Texas as a whole and compare and contrast some of the four markets because when we were going into COVID; I’ve talked with you previously and what I’ve observed as well. Dallas and Austin were kind of the two leaders. San Antonio has always been kind of slow and steady, and Houston has always been boom-or-bust with energy. What has happened the last seven, eight months now?
[14:12] Greg Willett: I think maybe just start out with the economies in that Texas is doing a little bit better on recovery than most places. If you go back to that March and April timeframe for the U.S., as a whole, employment got cut around 13% just in those two months.
[14:33] Michael: Oh, wow!
[14:34] Greg Willett: So, we’ve been filling in that hole, and for the U.S. as a whole, we’re about halfway there. The Texas markets have tended to do better. For Austin and Dallas/Fort Worth, the employment numbers are down about 4% relative to where we were in February.
[14:59] Michael: So, what is that? Like, 8% or so?
[15:02] Greg Willett: And they have basically the same size drops as the U.S. as a whole, so we’ve gone from double-digit declines to now we’re only about 4% behind in Austin and DFW, and 5% behind in San Antonio, and about 6% to 7% behind in Houston. So, it’s a little bit more of a struggle in Houston.
[15:26] But with better economic comebacks here, the demand numbers have stayed pretty robust over the past few months in the Texas markets. So, occupancy is in okay shape. Texas is never at the top of the list for occupancy because you’ve got so many properties that are going through initial lease-up, given all the construction. So, occupancy is okay.
[15:57] We look at rent growth, Dallas and San Antonio are basically flat, moderate price cuts in Houston. I think year-over-year, it’s around minus 3%. The surprising one is Austin, which is really underperforming, which you would expect to be happening given the nature of the economy there. We’ve got rent cuts of about 5% in Austin.
[16:24] Michael: Across the board?
[16:25] Greg Willett: In Austin. Yeah, we’re losing momentum really across all product classes there.
[16:32] Michael: Speaking of Austin, we own suburban Austin, both north and south, but we don’t own in the urban core. Is a lot of the being driven by the urban core and all the giant towers at $3, $4 rents? With a homeless problem that we have in Austin that you don’t necessarily see as much in some of the other major metros in Texas?
[16:52] Greg Willett: I would say urban core in Austin is struggling a little bit more than in the other Texas markets, but there’s lots of construction in Austin in virtually every neighborhood. That’s holding back the performances a little bit. It’s not just the urban core. There’s a little bit of a general softness in Austin.
[17:13] Michael: Austin has what? Somewhere around 17,000 units under construction? Something like that?
[17:18] Greg Willett: Yeah. It’s a sizeable block, and whenever you look in terms of the inventory growth rate for there, Austin is alongside places like Charlotte and Nashville as the most aggressive pays of construction, although the absolute number is not as big as what you see in Dallas/Fort Worth.
[17:40] Michael: Because the base is something like 200,000 market-rate apartment units. So, you’re adding 8% to 9% of the supply over the next two years, roughly. That makes sense. Going back to talking more about Houston, first, and then go to San Antonio. Houston, boom-bust, oil, so we have a little bit elevated vacancy there. Rents are down there. Do we see more concern for Houston, or do we think as soon as oil comes back, Houston is going to be right back and is going to be there? It seems the supply number has tapered off in Houston, as well.
[18:16] Greg Willett: As soon as oil comes back, that’s a dramatic statement there. [Laughter] It’s: does oil come back? Our baseline forecast is kind of middle-of-the-road on this one. We don’t think the economy in the near term is particularly robust. It’s done better than we would have expected thus far, but it’s not in great shape.
[18:44] On the construction, it’s not off the charts relative to what Houston does sometimes, but it is double what it was a couple of years ago. And, it’s still pretty concentrated in a handful of spots versus – I’ll do the contrast to Austin and DFW, where there’s construction everywhere. In Houston, it’s just certain neighborhoods, and those neighborhoods are going to struggle.
[19:14] Michael: Well, maybe go to San Antonio. That’s always been the slow and steady and kind of boring market. My recollection of San Antonio is it certainly had quite a bit of supply delivered in ’16, ’17, ’18. The market seemed like it got a little bit soft. Has the supplied tapered off? Are the market fundamentals improving? What’s your outlook going forward on that?
[19:37] Greg Willett: You’re right on the supply number. That’s the outlier for Texas that the current construction volume in San Antonio is the smallest it’s been in a decade. That’s going to help this one as we move ahead, and particularly some of those traditional performance leader neighborhoods in San Antonio, when you get out on the far northwest side of the market and on the west side, they really don’t have anything under construction at this point, and so there’s the potential for those areas to do pretty well.
[20:12] Michael: Yeah. That makes sense. Now, coming back home, Dallas/Fort Worth is where I own most of the properties that we have today. We tend to be suburban, spread out all across the board. As you mentioned, it seems like we’re building apartments everywhere. Four or five years ago, the headlines were just Plano, Frisco, and uptown seemed to be where the supply was. What’s the story here for supply store, and then what do you see Dallas/Fort Worth playing out in 2021 and forward?
[20:42] Greg Willett: We’re still building a lot, although it has scaled back a little bit. I think that in the current numbers, we’ve got around 40,000 units under construction. A couple of years ago, we were at 43,000, 44,000, so it’s off a little bit, but that’s not exactly a huge pullback. So, we continue to build. The most aggressive spots we’re building are the urban core and Frisco, Allen, McKinney, but in those development hotspots, it’s not quite the volume that it was a couple of years ago. It’s very active, but not quite as extreme.
[21:25] We are having construction pop up in places where we hadn’t been building today. I was looking at the leading submarkets a few days ago for construction in Dallas/Fort Worth. I can’t remember when Haltom City would have been on that list or maybe a place like Garland. Yes, Plano was on there, but it’s East Plano. So, a little bit of movement around, and we like that. That does help us to digest that product if we don’t build it all in one place.
[22:00] Michael: So, you tell me all the easy sites are gone, and now they’re going to a second and third type of sites, or are they just going away because the developers didn’t get their returns? In Frisco, they developed, so maybe they’re looking to a place that maybe doesn’t have all the supply.
[22:15] Greg Willett: Well, yeah. I think it is that returns are decent, or you wouldn’t keep building, but they’re certainly not where they were earlier in this cycle, so that does make some places that you would not have built for are acceptable choices now.
[22:33] Michael: Wrapping this part of the conversation up, what do you see 2021, going forward. You mentioned when we first started talking that there’s quite a bit of capital out there. It seems like the sales are going. I’m looking around day-to-day. We actually just bought a property today, this morning. We were in a knife fight with a bunch of people. It’s like pricing is as expensive or more than what it was at the beginning of 2020.
[23:06] It seems like we’re starting to see a lot of new market participants come in that weren’t necessarily here a year ago, coastal money coming in, people from other asset classes coming in. Do you guys track the cap rates, or do you have any thoughts around where you guys see cap rates are today and what that looks like going forward?
[23:25] Greg Willett: Yeah. I’ll echo everything you just said. The capital is still there. It is coming in from the coastal markets. It’s coming in from groups that had been investing in other real estate types. That is going to keep the pricing pretty hefty. So, we think the cap rates are probably going to stay about where they are, but I wouldn’t rule out that you actually in some of the suburban locations, you’ve got a little bit more cap rate compression over the next year or two.
[23:59] Michael: Yeah. That would make sense. Unless you can tell me that J-PAL is going to start raising interest rates, I don’t see what’s going to drive cap rates up, especially in suburban Texas markets, or Arizona, or Florida, or some places similar to that.
[24:14] Greg Willett: And you mentioned the low-interest rates, and that’s making these deals work whereas they wouldn’t if we were in a little bit more of inflationary times.
[24:25] Michael: You guys have your basic case projections going forward. When do we kind of get make to “normal” collections? When do you guys have any sort of sense of when we can actually start evicting people and get more to a normalized market?
[24:40] Greg Willett: We think that what we’re seeing now, by and large, holds really through most of next year. It’s a little bit of a struggle, and then momentum returns whenever we get into 2022. And that’s specifically for looking at most of the Texas markets in the Sunbelt area. I think it’s a much harder call on: when do these coastal markets really get going again, and how long will it take them to get that momentum established once more?
[25:18] Michael: Yeah, when you say that, that reminds me of something I observed the other day. I was looking at what the caps rates on Manhattan Island are, and it was like right now at this moment in time, you can buy a property in Hurst, Texas, on a lower cap rate than what it would be in Manhattan Island.
[25:34] Greg Willett: Right.
[25:34] Michael: Whenever has that been a thing? It’s kind of a backward world. I guess that’s the uncertainty of the political and business climates in some of these different markets makes it harder to go put your money into an environment like that.
[25:49] Greg Willett: And you mentioned the political climate. That does help Texas and the Sunbelt, whereas, still, who knows what the legislators on the local end State level are going to do in some of these coastal spots?
[26:04] Michael: Speaking politically, do you have any thoughts on the pending change in administration. It seems like Biden is going to be in there. Hopefully, by the time this is released, maybe we’ll have more certainly to that, and it seems like the Republicans are likely to hold the Senate. Any thoughts on what that would do on our industry?
[26:24] Greg Willett: I’ll circle back. The economy and the pandemic are two sides of the same coin. You can’t fix one without fixing the other. So, certainly, the assumption is that the Biden administration will be more proactive in trying to get a handle on what’s happening with the health crisis. So, that is probably good for us in the big picture.
[26:49] If you have concerns about the Biden administration, it’s some of the preferences that have been expressed on raising taxes and particularly for capital gains, and let’s get rid of the 1031 exchange program. But if you have the Republicans controlling the Senate, can you get those tax changes through? So, from my perspective, I think the consensus that you would hear from a lot of the economists is this was probably the best possible result.
[27:22] Michael: I’ll probably echo that too, and I do think if they are able to get rid of the 1031 or increase capital gains, you’ll probably see transaction volume grind to a halt. I don’t know what percentage the 1031 sellers are, but it’s probably 25% to 30% of the marketplace.
[27:37] Greg Willett: It’s significant, and yes, there will be a bump there, but also, what I would really say is what we really want is to get rid of the chaos and uncertainty. If you change the rules, and I don’t like the rules, I’ll still know what to do and can move forward, but if I don’t know what the rules are, then that’s a problem.
[27:59] Michael: So, any other things that you’ve noticed now that we’re in a different world? A lot more remotes, a lot of the functions that we’re doing onsite, some of those functions are now becoming offsite on the property. You guys at RealPage are a technology company. You have how many lines of business? 120?
[28:16] Greg Willett: We have a lot.
[28:17] Michael: More than you can probably count, and you add them more and more by the day, I’m sure. I probably pay for four or five of your guy’s services in some form or fashion at minimum. Have you noticed any sort of changes from your view within the major technology provider for industry? Has anything changed or is different from a year ago?
[28:39] Greg Willett: On the operations side of the business is very different from what it was. And, I will say, we were moving in a certain direction, and this just accelerated things, particularly in terms of virtual leasing and operations, and that’s pretty much a requirement now that you have those capabilities. You want to get people on automated payments.
[29:06] You want to pay attention to the resident risk profile as you’re doing some renting at this point. And pay attention to the things that can help manage your expenses because you’ve got a couple of things in property taxes and insurance that are out of control. So, you’re looking at other things on the operations side of the business that maybe you can manage a little bit more proactively.
[29:35] Michael: One thing that I know you’re a big proponent on because we’ve had a conversation prior about it is revenue management. Anytime someone tells you, “I want to deviate from revenue management,” you’ll probably say that revenue management is always going to be right because it’s there for a reason. Have we noticed that change, or that to be effective, or that’s working? Any sort of comments around it? You guys have LRO and Yieldstar within the family of products.
[30:04] Greg Willett: Certainly, the feedback that we’re getting from our clients in this market disruption, they’re still happy with the way these revenue management programs are working. I will point out that we’re in the process of introducing a new generation of revenue management that has some artificial intelligence built into it that we think is even a better product than it was a couple of years ago?
[30:30] Michael: What exactly will it look like, or at least the headline version of that?
[30:34] Greg Willett: It takes you beyond just juggling occupancy and price and brings into consideration your marketing efforts and some resident screening background products. So, it brings additional levers in there. Really, at this point, we’re getting great results from the early adopters of this new generation.
[31:02] Michael: That’s neat. Anything else or thoughts on your mind before we wrap-up here. Any other kind of thoughts as we go into 2021 – things that people should be paying attention to or anything that you’re particularly paying attention to either from a market standpoint or a technology standpoint?
[31:20] Greg Willett: Certainly, I think the big picture is people are just relieved, given where we are versus where we could have been at this point. People are thinking about their strategies, what have we learned during the course of this? And also, something I would really encourage people to think about when they’re considering strategies is, understand what you actually do well. If the market is telling you to go in a certain direction, but you don’t know how to do that, then that’s probably not the route that you should go.
[31:54] Michael: Yeah. Well, good. Greg, I definitely appreciate your time today. If people want to find out more information about you guys, what’s the best place for them to go? Maybe plug your blog. I go to your blog on a regular basis to get some information.
[32:07] Greg Willett: Certainly, there’s great technology information out there on the RealPage website, which is RealPage.com. If you want to talk about some of the things that are happening in the marketplace, go to RealPage.com/analytics takes you to our blog, and we’re putting out new information on what’s happening in the market virtually every day.
[32:27] Michael: Yeah. Greg’s on various webinars, various webcasts, weekly, at least.
[32:34] Greg Willett: I talk a lot, Michael.
[32:36] Michael: If you guys want to know what’s going on in the middle of North Carolina, Greg’s going to be your guy. We’ll have a video shot every quarter, probably on that. In all seriousness, I appreciate you coming in today. It’s Greg Willett from RealPage. I’m Michael Becker. I appreciate it. Thank you.
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