This Is THE Biggest Issue In ALL Of Real Estate In 2024

[00:00:00] Welcome to the Real Estate Strategies Podcast. Let's get right into this episode. So this weekend I was in Dallas with our collective mastermind and, uh, I really had fun with this new video that I just did, but I did, uh,

[00:00:12] nine slides on, you know, kind of where I thought the economy was going, you know, the single family, multifamily. And, and what most people don't realize is that we have a supply problem and it started over 10 years ago. Yeah.

[00:00:24] It's going to really deep dive into why you think that there's a housing supply shortage and, uh, what people should be doing. Well, you guys enjoy. There's obviously a lot more issues here for 2024, but these are the ones that, you know, I'm kind of watching.

[00:00:40] Interest rates, uh, soaring expenses, the supply, uh, there's a short term and a longterm. Most of the news media is they're focused on the short term. They don't know any better, which is fine. And then a population shifts, believe it or not,

[00:00:55] the U S is not really growing that much, but it's moving around, which creates a lot of opportunity cap rates, lending and policy changes, which I think then the last one is something that's going to be really, really interesting that I don't think that we're quite prepared for.

[00:01:09] Let's talk about the first one is if you take a look at the fed reserve increases, you can see that they happen from basically March of 2022 to July of 2023. That's a lot of increases in a short period of time.

[00:01:23] But what I really want you to focus on the percentages, the 50%, the 75%. In fact, there were 4.75 basis point increases during that period of time. Okay. So if you just look at those four, obviously that's 3%, right? Everybody's right now focused and talking so much about these rates and

[00:01:44] everybody's kind of hanging their hat on. Is it, are they going to raise rates at all? Is it gonna be March? Is it gonna be June? It's gonna be three times, four times, five times, you know, and everybody, you know, the media is all over this place,

[00:01:55] but I can assure you if they do anything, it's going to be a quarter point. So I really want you to see this because if you really look at it, we've had 21 increments of a quarter point. That's really what we're battling against for this next year.

[00:02:10] So now we're obviously going into an election year and that's huge because, um, but this is a hot potato right now. And there was an article today, by the way, there's been a few cause the inflation came out.

[00:02:24] They're basically saying since price increases peak this 3.4 as of today, but rent costs have proven so sticky that they continue to drive the overall inflation snapshot month after month accounting for over half of the monthly total increase in December. Okay.

[00:02:39] We're going to circle back on that at the end, but for when we get into the policy, but the real reason for this slide is, um, I don't know, you know, obviously where everything's going.

[00:02:48] I did have Joseph Wang on our podcast and I asked him a few questions. He said four, four times. I said, how many times do you think the fed's going to increase rates next year? He said four. And I said, at what percentages? He said quarter point.

[00:03:00] So if he's right, you know, federal funds rate could go down one point, which is meaningful, but not really that meaningful. And that's kind of the point. Well what I want y'all to understand is if you're thinking that rates are really

[00:03:11] going to go down next year, which is what the media is kind of jumping on, it's not that significant. SOFR, which is the, you know, one of the indexes that we all invest in. It's not really moved that much.

[00:03:23] You know, we're heading into this timeframe for this election in essentially a year, let's call it or less. And they're going to come after landlords. They're going to come after anybody that owns rental housing in the form of property taxes, rent control, rent caps,

[00:03:43] affordability issues. They're going to blame it all on the people that own real estate. So you just need to be prepared for that. So that's the first slide. Um, when it comes to, you know, obviously that's where we have been, you know,

[00:03:55] I do believe we will see some rate relief next year. I think it's probably going to be in June, but it's going to be a quarter point and then that's going to sail us through the summer. Um, and things are not going to be that much different.

[00:04:07] So that's the first thing. There's a lot of focus on office. These are B's right? 34.5 billion office industrial retail apartments. Look at apartments. I think that you've got outstanding distress. So obviously that's today. So offices jumped way ahead. And that's what everybody's focused on.

[00:04:25] That's what the media is focused on for obvious reasons. Work from home, people are not showing up to offices anymore. Office buildings are not leasing the same amount of space or even if any space, I sold an office building less this year. My,

[00:04:41] I had my last office building. I sold it in July for this exact reason. I just didn't want to be in a situation that, um, you know, we were fighting for people to come back to the office.

[00:04:52] Now I think that you're probably pretty safe in the one to two to three to 4,000 square foot, but some of these big office plates, they're in big trouble. So, you know, when you need 10, 20, 50,000 square feet, which is a lot of people, they're just not showing back up.

[00:05:07] Now you guys probably all know these office leases that have long lags are three, five, seven years. Pandemic was what? Three years ago. If you signed a lease and you're halfway through it, you still are paying. So I had a guy on my podcast and his,

[00:05:22] his name was Gary and he had 650 commercial properties in 23 States. And I said, tell me about shadow inventory, which is occupied, but they're not coming in. It's a huge number, huge. Imagine the, you guys see it everywhere. They're the, the, the company, whoever it is.

[00:05:44] Like I went into a building and the door dash was, you know, one of the tenants, no one in there, door was closed, sign on the door, work from home, still paying rent. Okay. That's all coming. That's all coming. So there's a huge, huge distress in office.

[00:06:03] And there's also a bunch of studies around where people are, whether or not they're even coming back, you know, cause some, some don't want to, some employers say it's okay. Some say you have to come back. So there's all this stuff.

[00:06:18] So that's going to be the first kind of domino to fall. What really is probably the second one is going to be more than likely retail, which is still the Amazon effect. Let's call it. And then what's doing really, really, really well for retail is a grocery,

[00:06:35] a food. If you have a center or you have something where there's, you know, place to go buy food and all the people around that are doing really, really well. But the centers that are consolidating and rolling up and moving out,

[00:06:46] the smaller groceries, let's say those little centers are dying on the buy. So you've probably seen it first, you know, first it's gone and then it's a planet fitness, you know, that it's gone, you know, then it's a, you know, a second hand store or whatever, you know,

[00:07:02] it's a slow deterioration over a long period of time. But the tenants around those shopping centers are in big trouble because they survive based on, you know, everybody's showing up for, you know, buying their groceries every day. But even in my own company, you know,

[00:07:18] when you thought rates were going to be three and a half or four and they're now, you know, in the sixes, maybe even sevens, maybe even eight superior in the construction. It's a significant difference.

[00:07:30] You can literally go from something that was cashflow at a hundred to a hundred thousand a month to negative a hundred a month, just because of interest rates, same property, same management company, same ownership, same investors, same rent growth, same expenses.

[00:07:51] So what we have here is we have a whole bunch of people that are trying to manage their negative cash flows and their rate caps and all those kinds of things. And, um, they be,

[00:08:03] they be either done a good job or they have it based on the amount of money and the reserves that they have. So obviously that's all over the map. Some are doing cash calls, some are doing, um, you know, uh,

[00:08:15] they're bringing in extra partners and squeezing down limited partners and their limited partners don't even know. And so we're selling their GP interests and it's all over the map. What's actually happening with, they're just trying to keep the deal and these,

[00:08:27] these two or three or four or five interest rate cuts, it's not going to move the needle that much. I can tell you right now, unless something really dramatically happens this year, which it couldn't. And obviously we all want that. Obviously we all want this.

[00:08:40] We all want rates to go down to where they were construction debt. It's 9% construction debt is a floating rate debt. They don't, you can't fix debt on construction because there's nothing there. And so you have rising construction costs and then you have the debt for

[00:08:56] new construction significantly higher. Okay. So I really want to show this, cause this is what I think this is population growth here and this is supply and short term. So this, if you guys just look, this is people that have been born. Obviously people that have died.

[00:09:10] The lower chart is really what I want you to focus on. Take a look at 2005, 2006, 2007. This is in my opinion, what created the housing shortage that we're in today is right here. So if you look at here and if you think about it,

[00:09:25] this is the same place we're heading now. So think of today, lenders have pulled back their 50% L loan of value. They're requiring 50% equity. This is when the banks were taking all that real estate back. It was mostly single family at the time, but regardless,

[00:09:40] their loans that they're taking back banks are supposed to own real estate during this period of time here, which is like 10 years. Not a lot of lending, not a lot of new construction. This is a supply problem and it started here during that period of time.

[00:09:53] We're still at a point where we're not even close to catching up. So there's anywhere from three to 5 million housing units short. So there should be no question that we are heading into an incredible time for us.

[00:10:10] If you're in the real estate game because you haven't quite seen anything yet. In my opinion, the real issue, nobody's really started new construction in about a year. So we had six projects. We took four,

[00:10:24] put them on the shelf because I don't want to keep a cash calling and my rates are eight or 9% home builders are doing that. Cotto builders are doing that. Multi-valley builders are doing that. Clearly there's no office being built. Well, there,

[00:10:37] there might be from here or here you might, and you guys are still seeing these cranes, those cranes and the big stuff you're seeing all over. Those projects started three years ago. They were funded and started three years ago. Like the lag on, on this stuff,

[00:10:50] like even for us to deliver an apartment building, it's over a year. By the time you break ground, it's well over a year before you even open it. And then it's another year or plus to, to, to fill it up. And you know,

[00:11:03] you're still building, you know, for that second year. So it's a two year build at least. And the high rises are even worse. You're going to see the news talking about rents going down. You are, and you probably have, and you're going to see, you know, Zillow and,

[00:11:17] you know, rent cafe and Yardi and all these people. Um, and in some cases it's absolutely true things that started in 2022, 2021 they're, they're hitting the market now. And what's going to happen is in 2026, which is not very far. It goes like this.

[00:11:37] If you're going to hold on to whatever you've got, recapitalize it, figure it out. You know what we really need is supply. So these are the numbers from on the left here. This is the national multi housing council and the national apartment

[00:11:50] association. Now these are just apartments. They say, uh, 4.3 million homes they need by 2035 to meet both future and existing demand, um, of 600,000 units. That's what they're saying right now on the right. It's the national association of home builders. So single family,

[00:12:08] 4.4 million is according to Fannie Mae and 7.3 for the national low income housing coalition. Now this is affordable housing studies. So these are all really good studies. The bottom line is I don't really know what the, you know, what's, what's the true number, but it's a lot.

[00:12:23] So we're very bullish on the market. Uh, this is one year, two years, it's 24 months. The population has in the U S has not grown all that much. I showed you the graph it's growing at a nominal rate,

[00:12:36] but what I really want you to pay attention to is the 1% or more category. Now, 1% is a lot. Uh, as if you measure, let's say Texas or Florida, but you can see the population shifts just in one year.

[00:12:51] So take a look at the top graph. You can, you can see how it's kind of moved. For example, Montana, um, you know, went from green, you know, to light green. So it's obviously moving the other way. Um, you know, so you can see people moving around.

[00:13:05] The only reason I want you to follow this is because this is precisely how you make money. This is it. Like real estate is not that smart. It's like if there's people, your real estate does all right.

[00:13:17] You know what I mean? That's it. If you just focus on where they're moving, where, you know, whether it's for work or for retirement or whatever, you're going to be fine. This is a North Carolina, South Carolina, Florida,

[00:13:29] Texas are kind of the big ones. There's a bunch of studies. You all America, North American badlines. They're all really good studies. If you guys don't get them, you should. Driver's licenses, postal service. These are things that people, these are documented. I've moved here.

[00:13:44] This is my new address. Postal service. I've moved here. I knew address, driver's license, one way trips, U-Haul, one way trips, North American badline. I don't know about you, but most people don't take one way trips. These are one way trips.

[00:13:59] Top States, Texas, Florida, North Carolina, South Carolina, Tennessee. So same thing as the chart before. When you look at Texas percentage of growth, it's not that spectacular. Eliminate that. You need to look, look how many people moved to Texas.

[00:14:14] Look how people look, look at that. Look at that. That's just an incredible number. Why is this important? Every person that moves, they put pressure on the school system. They put pressure on the grocery stores. They put pressure on the doctor's offices, the hospitals, the rents,

[00:14:30] the multifamily market, the single family market. They put, they put even put pressure on the office market. So if you just focus on where people are going and then you buy in the markets on where they're at,

[00:14:41] there are some cities that are growing like crazy and others that aren't. So that's the next piece is you drill down to find out where they're going. This is important. These are capitalization rates. So if you guys might not know what capitalization rate,

[00:14:54] it's essentially the rate between the net operating income, which is income minus expenses divided in the property price. Cap rates are important, not necessarily to buy off of always, but they're important to watch. Let's pick on multifamily in 2021. The average cap rate was 3.82.

[00:15:13] So let's say I bought a property in 2021. It was a hundred million dollars and the cap rate was 3.8. Now cap rates have gone to five. What that basically means is that that same property with the same NOI is over 20% less in value.

[00:15:30] So now if I'm the buyer of that exact same property and I'm using a 5% cap rate, I'm paying 80 million. So now let's go back to that a hundred million dollar project. Let's say you put 20 million down and 80 million in debt.

[00:15:44] Now the cap rates went up to five, the property's worth 80. So the property is now worth the loan. The investors don't know that they don't have any equity in the property yet. That's where the market is. You can see it by category, retail, office,

[00:15:58] industrial. The reality is here is anybody who bought anything prior to 2023, it's 20 to 40% worth less. This is a obviously being talked a lot about $1 trillion of multifamily linked debt matures by 2028. Here's here it is. Is there government sponsored banks, CM commercial mortgage back life companies,

[00:16:19] government sponsored. It's interesting that banks shed 60,000 jobs in 2023, 60,000. Now let's talk about buy something for a hundred, a hundred million, 20 million equity, 80 million debts now worth 80. My loan matures. My property is worth the debt. My loans do. That's what people are facing. The lenders said, well,

[00:16:38] we have to size this loan back up at 70% 60% loan to value. 60% of 80 is 48. That means I would have to write a check for $32 million to keep the property. That's what's going to happen this year and next. So as loans mature,

[00:17:02] the cap rates are up and interest rates are up. Values are down. Developers, owners, partnerships are going to have to face this. Do we keep it or do we do what we call jingle mail,

[00:17:15] mail the keys back to the bank. And of course there's all kinds of reoccurring, are repercussions as a rule to that. So this is happening. You know, a loan document is a contract has a beginning and an end.

[00:17:30] It's the only thing that can save this is going to be those interest rates and cap rates. This is right off the white houses website, protecting renters from old rental affordability, white house blueprint for renters, bill of rights, targets,

[00:17:46] housing supply shortage with affordable housing plan. That's a good thing. Biden has a 500,000 unit plan over 10 years though, but still, it's still a plan. If this happens here, this would be good. Reduce barriers to build housing like restrictive and costly land use,

[00:18:02] expand financing for affordable and energy efficient. This would be good for our industry. Really, really, really good. So while we have a big supply drop off guys, I'm telling you if you can just get through these next 24 months, we are going to have a massive shortage of housing.

[00:18:19] That's going to hit like no one's ever seen. And, and if rates are low and we have some of these tools here and the, and the government is, um, helping us, it's going to be an incredible run because before things get built again,

[00:18:35] as you guys know, there's a lag too. You're going to see some serious distress to the people that are in the best positions here. They're paying attention to this stuff. They're going to do the best. And, uh, it is a great time, you know,

[00:18:47] and as, as we all have heard Warren Buffett say, you see who's swimming naked when the tide goes out. And I believe, you know, the tide is moving out at 20, 24 is going to expose a lot more in 2025.

[00:19:03] It's going to be even worse unless there's something that goes on here. You know, and it could, you know, some of these things would be great for us, but I can only see blue sky for, for the industry that we're in. So what is the collective exactly?

[00:19:22] Cause you mentioned it at the beginning and people are probably wondering what the heck is that? And maybe how do I join? Yeah. It's first of all, it's, it's a great community of high net worth people that have their own businesses

[00:19:33] and they're all trying to figure out the same stuff. Like where do I invest? What's going to go on with my money? What's going to go on with the economy? You know, what should I be doing to protect everything? Family, businesses, finances.

[00:19:45] It's a mastermind that George Gammon, Jason Hartman and I, and Russ Gray and Robert Helms all do together. We do it four times a year. This year was in Dallas. You know, front end we did that.

[00:19:56] And then on the back end of course, I took my kids to the goals retreat, the annual goals retreat. So we set our goals for the year. Awesome. And tell me a little bit about the goals retreat. Well, the goals retreat is essentially, it's basically 10 hours a day.

[00:20:10] So it's hard to believe that it can be that long when it is. And it's, they roll you out and kind of unpack everything that you want to do down to about six things. I brought both my kids and there was a number of kids in the

[00:20:21] room, but what was the most impactful to me was, you know, how attentive they were. And these kids were pumped. All kids need is an North star, right? They just, they just want a direction and not always from their parents. So,

[00:20:34] so for next year I sponsored 20 kids. So you guys are interested in that. Just go to createyourfuture.com and you'll find the goals retreat. I sponsored 20 kids. I wrote a check for it. It's already paid. All you gotta do is apply. So now we talked about business.

[00:20:53] Let's talk about what we've done personally this week. So things have changed a little bit in our house. Yeah, just a little bit. You got a new puppy. We have puppy, Joey. Some of you probably saw him on YouTube the other day.

[00:21:04] We have a sick dog and a puppy. The puppy actually made our older dog sick. Yeah, I know. That's so true. I've been so cautious with the puppy so that nothing happens to him. But in reality, Way like, like little Joey got Rosie sick.

[00:21:19] Of course we went to go pick up Joey at the breeder in Klamath Falls, Oregon. There were what? 50 dogs running around? Yeah. Easy. So I'm sure Joey picked up something. It's like, it's like the old daycare thing. Like when you bring your kid to daycare,

[00:21:34] and you're so careful that, you know, they're getting sick. But they get sick because they go to daycare. Right. They bring it home and get the whole house sick. Exactly. And you were in the goals retreat. So I was running around like a crazy person.

[00:21:45] I know blowing up my phone. Yeah. But but in all seriousness, you know, with the goals retreat, you and your boys really connected and you guys made some great goals for the year. And Kate and Kyle are in their 20s.

[00:21:55] So it's perfect time to start doing these kind of things. Yeah, it's you know, it could be confusing for kids. You know, it's it's tough right now. Kids are getting whacked by inflation and, you know. Salaries aren't going up or wages.

[00:22:08] So they have the same issue adults have. It's just it's actually easier for them, even though I don't think so, you know, because they don't have all these big expenses and lifestyle. And they're at the beginning, which is good.

[00:22:19] And so it's kind of cool to be able to be in a room with a lot of them and with them while they're setting their goals. I could tell my kids were just they were there, man. I mean, we started eight o'clock in the morning.

[00:22:29] We go till ten at night. And it's impactful. It's good. It's all written down and it just sets a direction for them. All right, well, we'll see you guys next week. Yeah, we'll see you guys. Thank you for listening to this episode of the Real Estate Strategies podcast.

[00:22:45] If you liked what you heard, please give us a five star review on iTunes and let us know what you thought of today's episode. Thank you. And we'll see you next week.