The State of Build-to-Rent and Multifamily Real Estate with John Burns | Ep. 103

 - Hello everybody, this is Darren Powderly, welcome to StreetBeats. I'm here today with John Burns of John Burns Real Estate Consulting in Southern California. John, welcome to the show. It's great to see you, I was on your conference just a month ago and I learned so much about residential real estate overall, the build to rent and single-family rental trends that are just really impressive growth is occurring within that segment of the residential industry. I'm really happy to have you on the show today. Please introduce yourself and tell us a little bit about your firm.

- Well, I feel like I learned more from you last week, so that was good. Thank you. I know my staff did. We've got a company of 90 people who we just a big research and consulting firm. We try to figure out what's going on in the real estate market for our clients, which are generally very big companies and big time investors and we do all the research we can, and we charge them less than the cost of a person to subscribe to it.

- And one of the things that I've, you know, I got exposed to John's work is his product, his research years ago, I've been in real estate for about 15 years, sorry, 18 years now and I've always watched your stuff and said, wow, this is a smaller firm, but really high quality and specialized research product. What was it that sort of turns you on a resident, studying residential real estate in the beginning? And I just love, I always love to hear the origin story about an entrepreneur.

- Well, actually this is gonna tie in pretty nicely with your clients. So, I was at KPMG Peat Marwick way back when, when they had a real estate consulting practice and the commercial real estate guys were really sophisticated about doing good research and the residential guys were doing deals on the back of a napkin. And so, and I learned that, you know, I'm not really dissing them too much. It's harder to do residential deals 'cause you know, the buildings aren't the same all the time. It's a little bit easier to do good research on commercial. So I just saw an opportunity to do good research for the residential industry and sell subscriptions to our research and do consulting work. So that's what I did. I started this in 2001, and I've grown slow, steady Eddie, no conflicts. We don't do any investing ourselves, which I know most of your clients will not understand, but it, the way we build our credibility and I grow my business is by trying to get it right and if I've got any conflicts on getting it right, nobody trusts me. So that's what makes us different is we, hopefully we have no conflicts other than to help our clients make good decisions.

- Kudos to you for seeing an opportunity, right in the beginning, and 2001, take you back, it's that's dot com crisis time. I remember for me, 2001 was a tough year. I was in San Francisco and I was in technology sales. Actually, it was the next year that I got into commercial real estate because it was so brutal. And the real estate market was actually quite, I guess, relatively affordable compared to like what brought us out of the dot com crisis. Well, the real estate boom, right? Real estate kind of led us out of it and so that must've been a pretty brave time to start this business and see that opportunity. So that's really interesting. If you fast forward to more recent times, in addition to studying where to build residential communities, which is what you help your home builder clients do and institutional and clients do through a lot of data. You've, we've also seen a surge of rental housing, and I thought we would sort of jump right into that since we are in the investment real estate space, what has caused this surge of interest and activity in what you call or what the industry calls build to rent communities, purpose-built communities for rental purposes and also single family rental? Can you explain that a little bit?

- Yeah, sure, so when the, a little bit of history here but I think it's very relevant. So when the housing market blew up, when Lehman Brothers blew up, which really two years after the housing market turn, but then it got really bad. I could tell DC policymakers were making policies $10,000 tax credits, all this kind of stuff with absolutely no information. So a guy I knew who had just left Treasury and was a lobbyist said, "well, why don't you come to DC with a deck and educate everybody on what's going on in the housing market?" This is February 09 and out of that came the idea to build single family rental portfolios, because, well, I won't go into the history on that, so that, but then somebody from HUD said, well, you know, we're not gonna own these homes. Can you find some private capital to do it? A couple of my clients who got famous shorting the subprime market had plenty of capital and were ready to come in and build up this business. It took the government three years to get their act together. And then Blackstone came in and Wayne Hughes from American, from public storage, did American Homes for Rent, Blackstone did Invitation Homes and proved that this mom and pop industry at the time, there were 12 million households renting from those landlords, no institutional involvement at all. Wayne Hughes who I don't know super well but they are a client of ours had seen the same thing in public storage decades before where there was no national public storage company it was all mom and pops. Blackstone, you know, probably through their founder Schwartzman saw what had happened to the apartment industry over the prior decades where there were no big apartment companies in the 70s either and saw an opportunity to build up big businesses of single family rental homes. And frankly, with 2020 hindsight, they now tell me that the new technologies that are available, that allowed you to communicate with people at auctions. And I can give you an address now and in five minutes you can tell me what it's worth and what it'll rent at wasn't available before, but now it was available. So then they went public and now prove to the world that, hey, somebody can make a lot of money owning 50,000, 80,000 homes that are scattered all over America. Imagine if you put brand new homes with the same refrigerators, no capital expense issues, because by the way, new homes usually come with a 10 year warranty, wait a minute, this could be a new apartment like product. And so that started really taking off three years ago and we were at the forefront of that because we'd been playing on the single family side and the for sale side. And, you know, interest rates got so low your clients remember like trying to find yield was next to impossible. And here was a yield backed by an asset that somebody was buying below replacement costs are now built for rent building at replacement cost. Then COVID hits. Everybody becomes worried about inflation, so what's an inflation hedge? Something where the cost of the structure is likely to be going up, which by the way, we just surveyed our builders. The cost of building a home is up 22% in the last year.

- Ouch.

- For the guys who knew how to do it efficiently, the public, the production builders and rents are up 10% and they believe well, if we're gonna have inflation that's wage increases, which means we can raise the rent because the people can afford it. And so it's like a perfect storm. So, I mean, in my 30-year career I've never seen this much money flow into a business so fast. And I was there during the SNL crisis when everybody got rich then, this is much better.

- Yeah, incredible. It is the perfect storm, you know, and rental properties for kind of three main, like historically strong risk adjusted return with rental properties, definitely an inflation hedge which we're seeing those forces come into play right now. And then people just love income and appreciation, right? Any real property or any asset that can produce cash is in big favor right now and especially if it produces cash and appreciates in value which is exactly what we're experiencing in residential real estate. As you were speaking, I was thinking about something I learned at your conference a couple of weeks ago, which is the single family rental market is almost the same size as the apartment market or multi-family market, right? They're both about like three and a half trillion dollars of overall value. But I learned that institutional investors only make up 2% of the single family rental market whereas institutional investors make up 55% of the apartment multi-family ownership market, right? And so there's a lot of, you know, as much as they've moved in the last 10 years or so, there's a lot more that they can consolidate the mom and pop and become a stronger force.

- That's absolutely right. And you know, institutions were probably 2% of the apartment market in 1970. So that's the analogy that I had. And you know, a lot, I find a lot of investors don't understand this market because why wouldn't these people own homes? But there's 15 million households that live like this, we've surveyed a lot of them, people forget there's well, you got to live somewhere if you've got a dog and you got to live somewhere while you save for a down payment, or you just went through a divorce or you relocated to Atlanta, and you're not sure how you wanna stay there, you wanna rent for a year or two, your prior options where to go to the Penny Saver online rent from somebody that you don't know if it's a decent landlord. Now you can go and vet the company, see the online reviews, they've got a call center. There's actually a social element to build for rent because if you're the renter in a neighborhood of homeowners, you're the deadbeat on the street. And now if you're in a neighborhood with everybody else who is a renter, it's a better social environment too, and the risk, the thing I didn't mention earlier, the risk in housing, in construction and real estate is usually when the market, when the economy tanks while there's a lot of supply going on, there's not a lot of supply of single-family construction right now. So that's actually what I think makes it more interesting than apartments 'cause apartments are coming off a 30 year high of construction. Single family is not.

- Right, under supplied for the longest time, never quite made it back from the great financial crisis for a variety of reasons, from government regulations to a lot of builders being wiped out and lower, sort of more conservative loan devalues, or less aggressive lending practices to the home builders. A lot of different reasons for that. So under supplied, and another thing I learned is that a recent study from Freddie Mac says that the US economy is 2.5 million housing units under supplied right now. And I think that's a correct statistic. So we've got amass this demand that, you know, that exists today and will only increase over time. So it seems like residential real estate is on a strong footing whether you own, or you or in a rental investment environment. Is that, any thoughts on that?

- Well, I agree with everything you just said, except the one thing you didn't mention is the prices are getting a little frothy right now. And so that's the one, because of exactly what you just said. So you go through a period where demand is greatly exceeding supply, what happens to price? They go up. So, yeah, that's the concern that we're hearing from people.

- All right, so let's get into the stuff that I think people are all thinking about. At least the juicy stuff, the stuff that is probably everyone wants to hear it. It's like, okay, I'm being presented with opportunities to invest in housing. Maybe they're just jumping on the bandwagon 'cause that's like, everyone's talking about housing and now it's a 20% in some markets nationwide. It is really remarkable if you're fortunate to own a home or invest in some of these publicly traded stocks that are in the residential real estate business. You've obviously, you've probably done pretty well, right? But far better than you expected, but then there's the sort of other side of it's like, this is crazy. Yeah, we've got some stimulus checks and the government money supply is extraordinarily high and yet it's stills doesn't equate, especially when you look at like the income relationship to the cost of housing and it does appear to be bubblish and it does appear, you know, risky. And we went through the great financial crisis, it's definitely different, but that's just like that scar tissue those nightmares are fresh in people's minds. So, I know a lot of people who think that, you know, the market is overvalued. I'd love to hear your comments on that.

- So, I mean, there's a lot in there. I mean, we have a housing cycle risk index and it is flashing affordability alarms right now. So I think those concerns are extremely valid. There's no supply alarms at all. The supply is fantastic and there's no demand alarms either other than people are now making the decision like maybe I should wait and I, it's not a one size fits all market. I'll pick on Austin, Texas for a minute 'cause it's gotten, it's so interesting right now. So Austin, Texas is the most expensive time ever to buy an Austin, not just from a price to income ratio, but from a payment income ratio it's gotten that expensive. And actually they're build, it's the one anomaly where they are building more homes now than they were in the prior cycle, 2006. So you would say Austin looks like a complete bubble to me. We look at what's going on though, the incomes have ramped up dramatically because of all the migration from Silicon Valley and we've got some mortgage data that the debt to income ratios on mortgages in Austin right now are among the lowest in the country. So the consumers are not stretching in Austin at all. So the point is, I'm giving you kind of the behind the scenes that all the pain that we go through to look at all these things, it's not a simple answer about what the future of these markets are. It's much more complicated. I'm not chickening out but I will say-

- No, I know.

- It is a concern.

- Yeah, Austin, I was just down there and my company for CrowdStreet relocated, has relocated our headquarters down there. And so I was just down there. I was contemplating a move to move my primary residence, my business partner Torstine he did this. He just moved, sold in Portland for a record high, way higher than his list price, he was pleasantly surprised with that 'cause that, you know, residential market's on fire as well, believe it or not, you know, contrary to the headlines people were thinking about Portland, Oregon, but the good it is, and then move to Austin. I went down and he bought he was lucky to even find a house. I went down there on the same sort of like maybe we'll move and I'm shocked at the housing crisis. I was literally like, I don't know what I'm gonna do to try to afford this. Like any who are all these ultra wealthy people then it can afford 10 or 15 or $20,000 a month in a mortgage payment. I mean, the numbers were pretty, even with low interest rates, you know, the numbers are very high and it had appreciated, I forget the number John but their housing market is appreciated.

- It's about 30% across the market.

- 30%, yeah okay, thank you. Yeah, that's, it's crazy but there's obviously a lot of wealthy people and they're coming from other wealthy places and the income is tracking with that price appreciation. So it'll be very interesting to see how it turns out. And in hindsight, I'm sure we'll say, yeah, I saw that in the data and, but like it sort of turned out to be true, whether that be a sustainability of the trend right now or some dramatic change.

- I mean, the key thing to prognostic in the future right now, I think is interest rates not just for owner occupant buyers, but also for investors because the build for rent and the apartment communities, as you know, a lot of them are trading at sub 5% cap rates. But the reason you can do that is because you can borrow at a two and a half percent rate so you get great leverage and you're probably gonna be raising rents. So, you know, I think people need to look at it from that lens, not just the, hey what's the Joe Blow typical median worker in a market? What can he afford? There's a lot of other investment opportunities going.

- Yeah, yeah, agreed, agreed. So I'm kind of getting toward, you know, for investors, we do have a lot of our investor community that, you know, have enjoyed the price appreciation. Maybe they have investments cause they're, you know, tend to be experienced investors, right? And whether they own publicly traded stocks or reeds and, or private real estate through CrowdStreet or on their own accounts, right? And so they've enjoyed this and they're like, I wanna invest more. Right, and so we have a huge, we have a large demand for multi-family acquisition and development and we have this new found within the last couple of years, interest in build to rent in single family rentals are your clients who are investors, you know, still expressing interest in this space? And-

- Oh big time, there's far more money than there are opportunities right now, which is why cap rates are falling and it's another reason why I build to rent is growing 'cause people say, well, build me an opportunity 'cause I can't find an existing one. I would look at it as maybe a little entrepreneurial but lower risk than another apartment construction because you don't, you don't need economic growth for this. What you have is you've got 15 million renters and you know, I think every neighborhood in America almost needs a rental community. So there's a lot of pent up demand. And you mentioned the low market share, which I think is going to grow. I think the risks of this investment are more of the operator and the execution on building the home on time and on budget. Because as we mentioned, construction costs are up 22% in the last year. That's the risk rather than the supply side of things.

- Yeah the lumber spike that we experienced within the last 90 days was incredible. Totally unforeseen, I don't know maybe somebody saw it, but most people didn't and it got so out of control and it's nice to see it coming back down the earth, but I know a lot of projects got paused and a lot of, probably a lot of projects got killed that will need to come back because of contracts expiring and so forth and GMPs, you know, expiring. And we were in the middle of some of those. So yeah, there were probably some opportunities there, but I think you're correct. It's one of the reasons why, you know, at CrowdStreet we have very high bar for the type of sponsors that we work with, we wanna work with groups preferably have done like $500 million in track record over a 10 plus year period. And maybe they did multi-family or single family for sale, but now they're in the build to rent or single family rental market. Those are, you know, track record counts when you're, when you have construction risk and development risks 'cause things can change pretty quickly.

- Yeah and then that's been the one challenge on build to rent is that very few people have all of it. Very, very few people have great access to capital, a history building single family homes. They may have built apartments, but single family homes are different. And if you're a single family home builder, you've got no history with doing property management. So and leasing things up. So the trick here is, and where we're seeing is a lot of companies are having to partner with others to get all the expertise they're doing that they need to do it right and that's where you've seen a lot of the huge announcements with some of the publicly traded home builders where some apartment, traditional apartment capital is partnering up with somebody who knows how to build it. So, all they have all the expertise they need.

- That's exactly what CrowdStreet is doing. We have all this capital on demand, in our case, it's from individual Americans, right? Individual investors. They come to CrowdStreet and they're trying to build a diversified portfolio. And it's a form of, you know, old traditional syndication with an online twist. And we might have 250 or 500 individuals pulling their capital together to basically co-invest with a proven operator. Well that or developer and that operator, developer, otherwise known as sponsor, there are other options for the capital is big institutional investors, right? And so, we're sort of an atypical capital provider for them, you know, or conduit to individual investors since the.

- It's like a great opportunity. And I'm glad you're making it available to everybody and not just the big pension funds of the world.

- Yeah, we are too. It's part of the mission and the vision, what we set out to do back in 2012 when we started working on CrowdStreet, the concept at the time. And so we've been fortunate and enjoying that experience with all of our investor members. Well, John, this has been great. Thank you so much for joining us on StreetBeats today. You know a ton about this, this really popular and highly sought after investment niche within the investment real estate space. Greatly appreciate your insight.

- All right, thanks, Darren.

- Yeah, thanks for coming on the show and be well, look forward to seeing you again sometime soon here and thanks everyone for joining today.