Get Ready For Another Shock to Housing Affordability

One of the primary drivers of elevated inflation — and the high cost of living in general — is the price of shelter. Whether you're buying or renting, housing is very expensive. Thankfully, over the last year, some of the increases we've seen in rent prices have slowed significantly, and we're not too far away from the pre-Covid pace. The bad news is that this might not last. A confluence of factors is coming together that may cause yet another shock to housing affordability. On this episode of the podcast, we speak with Lee Everett, the head of research and strategy at the multi-family operator Cortland. He talks about how the increase in interest rates caused new development of apartment buildings to plunge, meaning supply will be increasingly scarce again in 2026. Then add in deportations of construction labor, soaring insurance costs, plus industry consolidation, and you have the recipe for another big shock to housing affordability coming quickly down the pike. Read More:LA’s Backyard-Home Boom Offers Wildfire-Hit Residents New OptionUS Housing Starts Top All Forecasts on Multifamily Construction Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 0:58Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:41Speaker 02

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:57Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:03Tracy Alloway?

  And I'm Tracy Alloway.

• 2:04Joe Weisenthal?

  Tracy, you know, one of the big themes, obviously, in American life and the most recent election was inflation. And there are a lot of things that people think of when they think of inflation. Maybe they think of egg prices that's in the news these days. Maybe they think of gasoline prices. But a big story is like, the cost of living is the cost of housing.

• 2:24Tracy Alloway?

  Yes. Actually, it's kind of funny. Everyone has their own personal benchmarks for inflation. And mine is probably the cost of mayonnaise, because I've been tracking that for a long time. Not because I eat that much of it, but I just find it interesting because it contains eggs and oil and packaging and labor and all that stuff. And rent. And guess what, Joe? My rent's going up again.

• 2:47Joe Weisenthal?

  What about your mayonnaise consumption? It's funny to me. Sorry, when you said mayonnaise, I have to admit, the first thing that came to my head was like, just like imagining you in your apartment with the gigantic-

• 2:57Tracy Alloway?

  Storing buckets of mayonnaise.

• 2:58Joe Weisenthal?

  A gigantic tub of Costco mayonnaise, eating it with a spoon. I'm sorry. And I was like, wow, you're really consuming a lot of mayonnaise if this is what comes to your mind when you think about the cost of living.

• 3:08Tracy Alloway?

  Well, as part of my research for this, I can tell you, you can buy buckets of extra heavy mayo off of Amazon.

• 3:15Joe Weisenthal?

  Sounds good. We're actually not doing a mayonnaise episode. We're talking about the other one. We're talking about-

• 3:20Tracy Alloway?

  I tried to throw in my rent stat.

• 3:22Joe Weisenthal?

  Yeah, I know.

• 3:23Tracy Alloway?

  To keep you on topic. But you wanted to talk about mayo.

• 3:25Joe Weisenthal?

  We'll do a mayo episode at some point. But rent is really interesting. Actually, in the government's measure, there's so many moving parts with anything housing. But most recently, actually, the government's measure of rent price growth, which has been a key contributor to overall inflation, et cetera, actually has been moderating lately. We're sort of getting back to the point where we're like at pre-COVID levels of rent price growth.

• 3:48Tracy Alloway?

  Right. So it's still going up, but just not as much as it was before.

• 3:52Joe Weisenthal?

  But the perversity, perhaps it's a perversity, is that obviously the Fed jacked up interest rates quite aggressively to fight inflation. Inflation has come down, took a little longer than people expected, but you know, it has come down. But one of the things that we do know that happens is that when the Fed jacks up interest rates, that really has an effect on housing development, which of course requires a lot of capital and leverage, et cetera. And if you look at a chart of, say, multifamily housing starts, buildings, five units or more, that's come way down since its peak, like in 2022.

• 4:26Tracy Alloway?

  Yeah. So we had this huge wave of supply in sort of late 2021, 2022. As you said, it's fallen quite a lot. The interesting thing that I see here is like yields on bonds are still going up.

• 4:39Joe Weisenthal?

  Yeah.

• 4:40Tracy Alloway?

  So we're at 4.55% or so on the 10-year, and that is higher than when the Fed started cutting rates.

• 4:48Joe Weisenthal?

  Yeah.

• 4:48Tracy Alloway?

  So the cost of financing these projects is still going up and there's not that much activity.

• 4:54Joe Weisenthal?

  Well, we did an episode in November 2023, and our guest said something really interesting to me that I've repeated probably many times, which is that for a lot of multifamily developers, they might prefer a hard landing in the economy because sure, that might mean demand for rent goes down or some of their tenants can't pay their rent. But if it means that you get a dramatic drop in interest rates because of how levered they are of the cost of money, that might actually work out better for them, which is sort of still blows my mind, but it is what it is. And so one of the other things that we're thinking about is like, well, what's going on with all these multifamily developers carrying big debt and so forth, given the fact that rates have not come down?

• 5:38Tracy Alloway?

  Yeah, let's talk about it.

• 5:39Joe Weisenthal?

  Well, we are going to be speaking with the same guest who commented that in 2023. We're going to be talking about all of these dynamics. Really the perfect guest. Thrilled to welcome back onto the show, Lee Everett, Head of Research and Strategy at Cortland, which is a multifamily owner-operator, roughly 80,000 units nationwide. Lee, thank you so much. For coming back on the podcast.

• 6:00Speaker 05

  Thank you for having me.

• 6:02Joe Weisenthal?

  I've actually just wanted to have you back on to talk about this specific. There's a lot we're going to talk about, but as Tracy mentioned, rates haven't come down. I know people were like, oh, the feds get started, right? This is relief is in sight. How stressed out are a lot of these entities by the fact that after all this time, we haven't seen any rate relief?

• 6:23Speaker 05

  It's interesting. I think stress is hitting sort of all sides of the market. You have your bigger, more well-established shops that have been managing through this, able to handle the higher rate environment, but have obviously taken a very real valuation hit on their existing portfolios, like 20 to 30%, depending upon the portfolio composition. At the same time, you've had record demand hitting the sector because cost to buy housing is exceptionally unattainable today. And then on the other side, you're having a very material impact on the supply side. And I think that's what's really unique. If you think back to September, the 10 year was around a three, six, I think the day chair pal cut us by 50 basis points. Well, we're at almost a four, six today.

• 7:08Speaker 05

  And I remember that night you heard reports about developers out at like local dinners. And they were calling it Fed Day and getting ready to put shovels in the ground.

• 7:17Joe Weisenthal?

  Champagne and stuff like that.

• 7:18Speaker 05

  Exactly. And what you've seen instead is increased stress on both the short end and the long end of the curve. That's given you trouble on the short end to start new housing and trouble on the long end to afford longer term for ownership housing.

• 7:33Tracy Alloway?

  You mentioned that some of the bigger players are better able to deal with higher rates. Can you talk about how people try to offset some of these higher rates? And is it the case that there is still an ability to refinance and term out your debt? Or is that starting to go away now?

• 7:50Speaker 05

  I think extend and pretend what you're referring to and the always popular looming maturity wall discussion is what you're hitting on. And what we're seeing there is the established owners that have strong relationships throughout either Fannie and Freddie, balance sheet lenders, et cetera, they're able to continue to negotiate and work out loans and delays. The people that got out really far over their skis, the syndicators, the new entrance to the place, and a lot of what we talked about last time, those players are sort of hitting the end of their window here. And what we've seen in the financing space, actually, as we delve into this a bit more, is there's so much liquidity on

• 8:35Speaker 05

  the debt side that wants to come back to work. They want to be rid of these sort of balance sheet hindrances that are these unproven players in the market, and they want to get back to work with the sponsors they appreciate. And we've generally seen spreads come in about 100 basis points from their peak. So that has helped limit some of sort of the financing pressures, but it's certainly a far cry from a 1% 10-year to a 4, 5, 10-year. So it depends a lot on who you are in the space and how this has impacted you today.

• 9:07Joe Weisenthal?

  Right, because 2021, probably part of 2022, we were like in that era, we're Instagram influencers, we're posting about get in, you know, rent prices always go up.

• 9:20Tracy Alloway?

  TikTok multifamily landlords.

• 9:21Joe Weisenthal?

  Yeah, TikTok multifamily landlords, rent always goes up. We have a new project, it's probably called the Reserve, it's in the suburbs of Houston, and it has a pool table, and there's no kids allowed on the pool table, and you're guaranteed, and a bunch of them got wiped out. What happened to them since we talked? And then how talked about it from like, the more established operators? And how much of a relief has it been that some of this, I don't know, new money, whatever you want, TikTok money has maybe gotten washed out? Tell us how that story ended.

• 9:50Speaker 05

  I would call it a thinning of the herd that we're still going through. I don't want to necessarily call out people by name, Sure. but you can see in the news, there is a certain prominent syndicator that basically doubled their positions and became a top 30 owner in 2021 or so. And banks are personally suing the founders of that company on carry guarantees today. You've seen potential investigations and some of the debt funds being talked about in the space. And that relates specifically to valuations on some of these assets that weren't maintained or taken care of by certain owner operators. So you're seeing a high level of delinquency. A lot of these properties that were these new money and TikTok landlords have a ton of liens

• 10:35Speaker 05

  against them because they weren't paying their contractors, they weren't executing their value add plans. And ultimately, they're going to be in a world of pain would be my sort of outcome at the end of all of this. Cause as I said before, the banks are just getting tired of carrying this on their balance sheets. Same with the debt funds. Like you can't make money with this much bad money hogging your buck.

• 10:57Tracy Alloway?

  I have a really basic question, which I feel kind of bad asking because I used to cover commercial real estate and I should know this since multifamily is the forgotten commercial real estate, as I sometimes call it. But what's the best thing to look at if you want to just get a gauge of multifamily markets health? So, you know, I can look at like permits or something like that, but that number is really volatile. I'm not sure how much it's actually telling me.

• 11:25Speaker 05

  Yeah, I think there's sort of two high level factors. One is going to be your rent growth because that's going to feed your NOI growth. The other factor is going to be your cap rate, which we talked about this a little bit last time. Your cap rate is essentially your yield, your income over your price. As money is entering the space, prices go up. So you get healthier cap spaces and that's on the sort of for sale side. And as NOI goes up, you also can get tightening of cap rates because you get a higher value on the NOI. And that also would be sort of your high level indicator. And what we've seen in cap rates is they've just started to flatten in the last few months, but they're up. Roughly 100 basis points across the board.

• 12:06Speaker 05

  And that's where sort of that 20 to 30% hidden valuations I mentioned has come into play.

• 12:12Joe Weisenthal?

  All right, let's talk about from the perspective of a renter. So I have some familiarity with the Austin, Texas housing market. Supply and demand apparently has worked very beautifully there. A lot of people wanted to move there. And then there's just towers up everywhere, including deep into the suburbs. And then actually rent price, I believe, is actually negative for many years in Austin, which, you know, seems like good news. Overall, that's a rare story, though. But we've had this big fall and anyone can just go on Fred and search new privately owned housing units, started units and buildings with five units or more, and see that we've had this big drop over the last two years, roughly since the peak of all these developments. What's going to happen?

• 12:55Joe Weisenthal?

  Play this out a little bit over the next two years. We're supply meets demand here and, you know, we already have these affordability. Rent is already basically expensive everywhere, even in Austin with the declines. Is it going to get worse?

• 13:08Speaker 05

  Yes, I think frankly, we're about to transition from what has been a very renter friendly market to again, a landlord friendly market over the course of the next two to three years. And that's going to be particularly driven by what we're seeing on the supply side. We're going to have over a million units come to market over a two year period here in 24 and 25.

• 13:29Joe Weisenthal?

  Okay.

• 13:29Speaker 05

  But peak supply is hitting in the next six months. And if you look at relative time from A, peak supply and then B, to getting to a level of lower supply than you saw last cycle, every major market in the country will be there by the end of 2026.

• 13:46Joe Weisenthal?

  Beware.

• 13:47Speaker 05

  Delivering less housing units than they did on average from 17 to 19 in apartment buildings. So you're going to go below prior cycle supply very quickly. At the same time, we do have exceptionally strong labor markets here and the demand story has been outstanding. So 2024 is going to end the year, depending upon the data provider you use, as the first or third highest year for rental demand ever. 2021. Was the prior record. So we're seeing people form rental households at unprecedented rate in the US. And as that supply comes down, you're going to see that demand struggle to frankly, find high quality, well located assets to move in. And you're likely to see that relationship flip at that point.

• 14:47Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai based virtual assets regulatory authority has this to say.

• 15:03Speaker 06

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service institutional clients.

• 15:12Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reese Merica Ripple says.

• 15:20Speaker 07

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80 year old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 15:39Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 15:49Speaker 01

  This is the Bloomberg Tech Minute brought to you by Chat GPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 16:31Speaker 01

  and hiring practices. But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 17:12Tracy Alloway?

  So the other thing that affects multifamily housing construction, other than interest rates, has to be just general confidence, I guess, in the direction of the economy, the direction of the world. And certainly, there's a lot going on right now. We're recording this on January 28th, and there's news that the Trump administration is freezing a whole bunch of federal spending. I think it's something like 20% of federal spending. That includes presumably stuff like Section 8 and other affordable housing measures. Would that be expected to hit multifamily as well?

• 17:50Speaker 05

  Yeah, and I think it's probably easiest to sort of start at the top, right? When you're building multifamily, you're generally trying to build to an acceptable return on cost. But frankly, what we're doing is putting an investor's money together and generating returns for them. Multifamily isn't built for free, and it can't be in this sort of economic world. And a general rule of thumb is a 6% plus return on cost. So cost to build, you want to yield over 6% of that to get a building to pencil. That tracks up closer to 7%, depending upon the institution. Because you need to build to that yield on cost, you have to have rents that are high enough to generate enough rental revenue to drive that return. So in order to build today,

• 18:34Speaker 05

  you have to build at exceptionally high rent levels because of the cost to build, because of the cost of interest rates. The only way to drop that is to drop the cost. And that cost drop typically comes for affordable housing from the federal government, be it HUD grants that are then deployed. Deployed through the local housing agency, be it Lytech, be it any sort of an ensemblage of ways to cut costs, that's how you can get to affordable rents on the supply side. And then on the demand side, you can cut rents by literally giving people a rent check, which is what Section 8 is. And that again, comes from the federal government via grant given to the local housing agencies to deploy. And if that money dries up,

• 19:18Speaker 05

  you have immense problems in terms of A, feeling the demand for these people because you're cutting rent on the Section 8 side, and B, encouraging future construction of affordable apartment buildings.

• 19:30Joe Weisenthal?

  Just to be clear, though, because there are projects that have their market rate rent, and then they have some allocation to what people call affordable units, right? And different cities or whatever have different rules about how much you need to allocate. Is that Section 8 housing to, or is Section 8 housing, like, how much does it co-mingle? Does this also affect development of buildings that people don't think of as, quote, "affordable housing projects"?

• 19:59Speaker 05

  So, in those sort of mixed buildings, you're going to see more of a price lock. You're going to see a supply-side affordable building, be it tax credit, be it a locked price on X percentage of AMI, which is ultimately what you're going to see.

• 20:11Joe Weisenthal?

  What's AMI?

• 20:13Speaker 05

  Area median income, which is how Fannie, Freddie, all of them essentially set what's affordable through HUD. So that won't be destroyed or eliminated. Frankly, usually when people are building, they understand in Massachusetts, you need X percentage of the building to be affordable, so they need the building to pencil around that. Honestly, typically, it just means higher rents in the rest of the building to fund those units. So I don't expect that to dry up. What I expect are larger-scale, community-investment projects to revive an area within a town, like a Pilsen. We looked at buildings with one of the states prior, at a prior job, and that was looking at doing a massive housing development that would be entirely affordable

• 20:56Speaker 05

  for the community there, and this is in Chicago. So, stuff like that's going to disappear. Purpose-built's going to disappear. Anybody who was planning to build an entirely voucher building through Section 8, that's going to disappear. So, you're going to have real pain in that stuff, at least in the short term. I mean, in theory, this could be a quick turnaround, and it's just a big wave of disruption that goes away in four weeks. But- There is a world where it severely impacts housing construction at the lower level.

• 21:25Tracy Alloway?

  What are people in the market saying about it right now? Or is everyone just sort of in wait and see mode?

• 21:31Speaker 05

  I think like most things, it's wait and see mode. I think that's been the general markets approach to this entire administration transition, just because you need so much clarity to start figuring out real world impacts here. And that very much trickles into the cost to build stuff with the tariffs, with the deportation impacts on labor and things along those lines.

• 21:51Joe Weisenthal?

  Let's talk about deportation impacts on labor. What are the estimates for what percentage of the multifamily workforce, whether it's construction or maintenance, whatever else, is undocumented labor?

• 22:05Speaker 05

  It's estimated 20% of construction workers in this country are undocumented labor. I'd venture to guess it's similar for the whole multifamily industry. When you look at staffing and things along those lines. And I think when you look at a combination of deportation of construction workers, as well as the sheer amount of labor it's going to require to rebuild huge swaths of California, I think you could be looking at a massive deficit in labor within the construction space. And when you think about that, that's going to be your strongest lever that's going to hit your cost to build. And that's what's going to drive up those rents that are necessary is all of this immense pressure you're going to see in the labor costs.

• 22:46Joe Weisenthal?

  Tracy, I hadn't even thought about the huge demand for construction labor that's going to come out of California.

• 22:52Tracy Alloway?

  Oh, yeah, because of the wildfires.

• 22:54Joe Weisenthal?

  So we have the fires, we have deportations, we have the end of a lot of affordable housing projects, at least temporarily, and the interest rate shock, all coming together so far. This is what we've covered so far at the same time to sort of like constrain the supply of new housing in the coming years.

• 23:13Tracy Alloway?

  Well, the irony is like everyone's building at the same time after the wildfires, right? So like, everything is just going to go up. Actually, that reminds me, we should talk about insurance rates because I think this is another source of pressure on multifamily, which is that insurance rates for a lot of these operators have also been going up quite a lot, and there aren't that many levers they can pull in order to reduce that particular cost.

• 23:37Speaker 05

  Yeah, I think this is another situation of kind of the haves and have nots. At Cortland, we insure our entire portfolio and when you're able to sort of spread risk over 80,000 apartment units, you can get far more beneficial rates. If you're a small owner in LA, if you're a small owner in California, Florida and Texas, I don't know what you do today. Rates had hit an estimate of 300 per unit at one point in Florida to insure some buildings. Well, there's been some normalization since then and costs have generally stopped with the massive spikes, again, pre wildfires, but it's just a huge, huge cost that hits

• 24:20Speaker 05

  everyone and it's tough at this point in time to enact in certain markets. And that includes also Texas. Tornado alleys had as much of an increase as you've seen in Florida and California to date.

• 24:34Joe Weisenthal?

  So where does the rubber meet the road? We're going to have you back on sometime in 2026, maybe somewhere in 2026 if the pattern goes. What are we talking about?

• 24:43Speaker 05

  I think what you're looking at in 2026 is a very investor friendly rental market again, and we sort of have returned to where we were last cycle. What I think's really interesting and what I see in the housing market today is almost a displacement of people living where they want, rather than people not being able to afford housing. And it starts at the top. The baby boomers have the vast majority of three plus bedroom homes in this country and they aren't giving those up despite plummeting bedroom utilization rates. So the millennials can't really push into the housing they want. So millennials continue to rent or buy first time homes, things along those lines. Gen Z at the same time is the richest earning young generation on record because of frankly,

• 25:27Speaker 05

  the baby boomers exiting the labor force.

• 25:29Joe Weisenthal?

  They don't feel it that way though, from what I understand.

• 25:31Speaker 05

  No, they do not, but the Fed strongly disagrees with their feelings. So when you look- The Fed doesn't care about your feeling. Oh, sorry. Anyway, keep going. No, it's, it's fine. When you look at this confluence of factors, what you've seen is really higher earning people living lower down what used to be considered the quality spectrum. So in our portfolio, we've seen incomes jump to almost a hundred thousand dollars per unit on average. Our credit scores have spiked to around 700 and our age is in the low 30s. That's a well-earning, strong, young, American worker, and that's across our portfolio that's primarily in the sunbelt with some mid-Atlantic and western exposure. So you're seeing an exceptionally high-quality, credit-worthy tenant, and you're seeing huge

• 26:15Speaker 05

  demand for that housing. And that's because nobody's building in the well-located areas. You can't build single-family homes in good school districts today. The local builders are entirely out of the market. They've been absorbed by the big boys since the great financial crisis. And you're seeing starts in those high-quality locations plummet at a greater rate than you're seeing them in the further out locations. So you're going to have this tight labor force. Everybody's going to need to work, preventing some kind of crazy AI situation. And you're going to have these high incomes and everyone's going to want to live in the same well-connected, good areas, and you're likely to see rents in those areas begin to pop because that's where this supply wave is winding down the quickest, and that's

• 26:57Speaker 05

  where starts aren't going to backfill the current supply.

• 27:01Tracy Alloway?

  Just to be clear, though, the expected increase in rents, is that enough to offset all of the pressures from higher interest rates?

• 27:11Speaker 05

  I think you're likely to see what's happened in the single-family sector after the GFC happened a little bit in the multifamily sector where there is a thinning of the herd. I don't think it'll get to the point where I think four home builders have 50% of new home listings today or some crazy number like that, but you're likely to see the small developers end up consumed by the bigger developers that can handle it better, and you're likely to see continued pressure in the multifamily space where smaller funds, smaller operators, people that can't afford interest rate caps, that can't ride out long-term higher for longer, are going to have to exit or ultimately be absorbed into a larger player. So- To answer your question, it would be much easier for the industry on the whole to have

• 27:54Speaker 05

  lower rates. I think a three to a three, five, the industry is just fine. Three to three, five on the 10 year, to be clear. I don't know how soon we can get there. And I think in the meantime, we're going to see a calling of the herd, if you will.

• 28:08Joe Weisenthal?

  I'm very bullish on driverless cars, but assuming that they're not in mass production or mass deployment in the next couple of years. Talk to us about like how far people are going to be having to commute. If it sounds like the desirable places, there's no building, people are having to build further and further out. What are we talking about? What are some of the places? What are the hotspots? You know, three hours outside of Charlotte or whatever.

• 28:31Tracy Alloway?

  You're literally describing my house in Connecticut.

• 28:33Joe Weisenthal?

  Yeah, right.

• 28:34Speaker 05

  I mean, that's really what you're seeing. The places right now getting the highest outmigration from Atlanta, where I relocated for Cortland, are Gainesville, which is a separate MSA, an hour and a half outside of the city. You're seeing it in all of these sort of tertiary markets, because that's where people can afford to build. And that's home builders and apartment developers chasing cheaper land basis and cheaper tax.

• 28:59Joe Weisenthal?

  People don't commute from Gainesville to Atlanta.

• 29:02Speaker 05

  If you have a hybrid job, you might commute to North Atlanta once in a while time, or you work remote. But driverless cars, that's a place you could see benefit from that. It's a place trying to grow, because it's exceptionally difficult to get a home in North Buckhead today, or even in some of the closer in suburbs. It's exceptionally expensive. So I think you're going to see people commuting further and further out because that's the accessible product. But also, I don't know if demand for that product is frankly, as high as it is for the better located product. We run independent renter surveys, things along those lines. And it seems location matters more to people today than space to a degree.

• 29:42Joe Weisenthal?

  Yeah.

• 29:42Speaker 05

  And I do think that favors multifamily investment in the longer term.

• 30:03Speaker 01

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• 30:46Speaker 01

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• 31:26Joe Weisenthal?

  Tracy, I just want to be clear that if you have to commute even part-time from Gainesville to Atlanta, or if you have to live in some small multifamily development, I do not blame Gen Z for thinking things aren't great, even if nominally on paper their incomes are high.

• 31:43Tracy Alloway?

  Well, yeah, that, thank you, Joe. I'm sure they'll appreciate that.

• 31:48Joe Weisenthal?

  I just want to be clear on that.

• 31:48Speaker 05

  One point I do want to put on that, though. Our internal rent-to-income ratios today are actually 30 basis points lower than they were in 2018.

• 31:57Joe Weisenthal?

  Hmm, huh, okay.

• 31:58Speaker 05

  So our apartment buildings today, despite 30% post-COVID rent gains,

• 32:04Joe Weisenthal?

  That's interesting.

• 32:04Speaker 05

  are more affordable because since COVID, we've had a 34% increase in our new renter incomes.

• 32:10Joe Weisenthal?

  But it's a different cohort. Anyway, sorry, Tracy, go.

• 32:13Tracy Alloway?

  So we're talking about the desirability of cities and everyone wants to live there, but you can't really build. One of the other things that Trump promised in addition to, you know, mass deportation and things like that, a reduction in federal spending was permitting reform. And I guess I'm curious, like, have you seen any action on that? Or is there an expectation that maybe the federal government will in some way be able to ease up the bureaucracy around building new construction?

• 32:41Speaker 05

  I don't know how he has any impact there. It's just they're so local driven. He can't touch impact fees on local areas. You can't start touching fire and safety fees. So I don't know how in a federal system, the federal government can control local impact fees. And I just, I can't connect the dots there.

• 33:06Joe Weisenthal?

  Well, setting aside what the federal government can do, do you see, I mean, there's the YMB movement all around. Do you see them having an effect as the dial being turned anywhere in a meaningful way outside of Austin?

• 33:19Speaker 05

  I think it's unfortunate they've gained the most traction and possibly the hardest turn into build environment possible. In theory, you've seen some government elected officials change. You've seen some positions change. I think there's probably some more momentum in San Francisco than there's ever been before. You obviously have the South that's just build, build, build. But it's hard to put pen to paper on if they're actually achieving things when you can't pencil new buildings in high quality locations today.

• 33:50Tracy Alloway?

  So a lot of multifamily loans have found their way into either CMBS, so commercial mortgage-backed securities, or CLOs, collateralized loan obligations. But the defaults on those have, I think the last numbers I saw, they're still pretty low. Like on CLOs, I'm pretty sure it's in the like, low single figures for US CLOs. Why haven't we seen like, greater waves of distress make their way into the end product of multifamily?

• 34:20Speaker 05

  I think people are doing everything they can to protect their warehouse lines in the CLO and CMBS market. You don't want to lose access to capital if you're a debt fund today by having toxic assets. So people are picking them off the CLO book. They're internalizing them. If you're one of the debt funds that has a housing operator wing, you can start operating properties on your own. I mean, it's, I think it's protect credit at all costs. So people are doing everything they can to protect that credit. The distress is there. You see every week on the pipeline report of what's on market, the same syndicators looking for bailouts. You see the same people that hit the overbuilt nodes and overpaid

• 35:05Speaker 05

  in 21, looking for help and you see them not getting the prices that even hit the debt levels they need. So it's working out, but I think ultimately, nobody's willing to sacrifice their credit levels to work it out quicker.

• 35:18Joe Weisenthal?

  Can you just say anything more about the impact of Los Angeles? I hadn't thought about that fires in terms of like estimates for how much resources that's going to suck up, so to speak, for construction and development?

• 35:32Speaker 05

  Yeah, it's interesting. I think our CEO made an off the cuff comment last week. We were looking at a building in a location in Atlanta that is, where heavily, heavily populated by construction workers. And his remark was, you're gonna have trouble getting rent growth there for the next year and a half because I expect all those people to end up in California in the short term. And it's another, actually, to sort of wrap, one other question you asked in there is the HUD side of things. HUD is typically vital in these rebuilding efforts. And that's a funding channel that if the government turns off is going to have severe impacts there as well. So A, I think you could see demand move within communities because of LA. I think it's going to have a material

• 36:16Speaker 05

  impact on cost to build in our country. And B, you could see it dampened by some of the recent movements by the administration.

• 36:22Tracy Alloway?

  Well, FEMA is also a really big protection layer for like Fannie Mae and entities like that. So fun times.

• 36:30Joe Weisenthal?

  Lee Everett, looking forward to having you back again in 2026, when we talk about how badly constrained the market is. Really appreciate your coming back on Odd Love.

• 36:41Speaker 05

  Thank you for having me. It's always great.

• 36:55Joe Weisenthal?

  So it's funny, we got like 10 minutes of housing supply relief and then we're just heading right back to constraints and shortages and it sounds like rent growth and investor friendly environments and so forth.

• 37:10Tracy Alloway?

  We got a glimpse of what could be.

• 37:11Joe Weisenthal?

  Yeah.

• 37:12Tracy Alloway?

  The other thing I was thinking-

• 37:13Joe Weisenthal?

  It's also funny Tracy thing is like, oh, this was the renter friendly market? I missed it, right?

• 37:18Tracy Alloway?

  Yeah, seriously. Well, I also thought his characterization of like, people are living in houses. It's just a lot of them are not living in the houses, in the places that they would prefer to be.

• 37:29Joe Weisenthal?

  Yeah.

• 37:29Tracy Alloway?

  I mean, that's certainly part of my experience and one reason why I don't own a house in New York, but I own one elsewhere. The other thing I was thinking about is his characterization of, I guess, the haves and the have nots-

• 37:43Joe Weisenthal?

  Yes.

• 37:44Tracy Alloway?

  -in the market. And I think this is really important because this is like, you could say this about the entire corporate world.

• 37:52Joe Weisenthal?

  Yeah.

• 37:52Tracy Alloway?

  Like, if you are a big company that can access the bond market, the past few years probably have not been that bad for you. If you are a smaller player and you have to take out bank loans, it's been a lot more constrained. So a lot of the financing environment has just led to a situation where the big get bigger. And, you know, Lee was talking about how you might see more consolidation-

• 38:15Joe Weisenthal?

  Totally.

• 38:16Tracy Alloway?

  -in multifamily operators. And that's just an extension of that trend.

• 38:19Joe Weisenthal?

  And of course, we've talked about this in the past, the great financial crisis and what it did to the single family home builders. And there are just a lot fewer single family home builders today than there were several years ago. You know, I always think back to last year when we traveled to Mount Airy, North Carolina, the idea that the community has to put together a road show to pitch the home builder.

• 38:43Tracy Alloway?

  Yeah.

• 38:44Joe Weisenthal?

  Right? Because the power exists in the consolidation of the home builder such that the community is like, please build here. You know, it's the sort of exact opposite in a way of the MB problem. It's like, no, we have plenty of land. We just need to convince you. But this idea that's like, okay, we had the great financial shock that consolidated the single family home builders. Now we have this sort of financial shock in the form of higher interest rates, higher insurance, and that's consolidating the multifamily developers.

• 39:12Tracy Alloway?

  Yeah. All right. Shall we leave it there?

• 39:14Joe Weisenthal?

  Let's leave it there.

• 39:14Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 39:20Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dash O'Bennett at Dashbot, and Kel Brooks at Kel Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots. We have transcripts, a blog, and a newsletter. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 39:41Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk what's next in multifamily, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 40:34Speaker 08

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• 41:10Speaker 09

  This message comes from Edward Jones, where they believe rich is about more than saving and investing. It's also taking care of what gives your life meaning. That's why your dedicated financial advisor meets you where you are with personalized financial strategies that help protect what matters so you can preserve your progress while creating a path forward. The key to being rich is knowing what counts. Edward Jones, member SIPC.