Builders and Commercial Real Estate Trends 2020 with John Burns DDRE#4

Builders and Commercial Real Estate Trends 2020 with John Burns DDRE#4

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Welcome to the data driven real estate podcast, the podcast for real estate professionals, dedicated, to driving business success, using data, i'm aaron norris vice president of market insights for property radar and with us today we've got sean o'toole, ceo of property radar and john burns with john burns real estate consulting, hey john. Hey guys. I've got to do the embarrassing, bio it'll be quick and snappy i promise but. Uh. John burns of course is with the john burns real estate consulting, which helps business executives, make informed, housing, uh, industry, investment decisions. He is co-author, of big shifts ahead demographic, clarity for businesses. One of my favorite demographic, books. A book written to help, make demographic, trends easier to understand, quantify, and anticipate. And john has a ba in economics from stanford university, and an mba from ucla. And works out of southern california, right here in sunny irvine california, so, thank you for joining us today our fourth, show. All right, how did um. How did you decide to get into the real estate game. Completely, accidentally. Uh. I, after getting my, graduate degree i went to go work for a consulting, firm i'm there three months they reorganized, by industry my boss picks real estate so in 1989. I became a real estate consultant. And i went and i went to a school with a really, well-known, real estate program and took no real estate. Classes. How long were you there and, when did when did john burns real estate consulting, start. Uh. You're gonna date me here man so uh. So i was there from 89, to 97. And i went out on my own in 2001.. Okay. It's, 31. Years. Wow, well who was your first client what did that look like why did you go out on your own, uh, first client was the irvine company i should have saved the check it was for all of one thousand dollars. That's a heck of a first client though wow. I know. A joke. I started big but very small. Yeah no i just i had done a lot of consulting, all over real estate commercial, and residential. And i i really saw the commercial, guys were very very sophisticated. About managing, themselves through the cycle, and, you know it's a little easier you can build a big. Company, with buildings, that don't move. When you're a home builder and investing a residential, the buildings are changing all the time, and. It was a little bit more of a cowboy, industry it was all about buying the land right it wasn't really about, managing, the the cycle, so i saw an opportunity, to take what the commercial real estate guys were doing and bring it to rezzy. Will you make autism. Yeah and your client roster has really changed then over the last several, decades, then so who does your clientele look like now. Uh it started, with home builders and developers, now we have a lot of building products, companies, we have a lot of hedge funds, we have a lot of private equity. Uh this whole single family rental trend we've been at the forefront, of that so. I sleep a little better at night knowing that my, eggs are a little uh diversified. Into multiple baskets. Very good. Well, and i know you know a lot of what we're trying to focus on is a lot more of the data and i i always like to hand this to sean because this is his baby. Yeah so before we start diving in to uh you know i know everybody's, going to be anxious to hear what you think's coming, but. We thought we'd cover some other stuff first, um. You know this is the data driven real estate podcast, so. What, what data. You know yeah i think you guys have a variety of stuff including surveys, and other things what what data is important for you and your business. Um. As you help uh builders, and these other folks. You know make good decisions. So there's been a huge shift over the 19 years i've been doing this. At first it was can you go find some data there was like none. And now there's too much. So it's more can you filter it down for me so. Uh, i learned back from one of my mentors, al gobar, way back when that it was all about jobs. Uh, i think it's about more than that now but i i you still have to, monitor, the job growth really, well because that's an adult with an income that can buy your house or rent your property, and, that data actually is very very good data. With the exception, of the whole covid, period, here where all these government, programs, have made things really messy. But usually. That data, is is excellent, comes out every month. You know you can't get population, and other data, very reliably. Yeah is it mostly government or private industry like folks like adp, and that kind of stuff or both or a mix. Uh the no actually the bureau of labor statistics. Gathers, it from the state employment, department, california's. Employment development, department. They have two surveys, one is a huge sample, size, of all the major companies, out there. That's what you normally hear quoted, they will miss trends, like uh small, startups, and things so um.

There's Another survey that won the unemployment, one where they call people at their house. That that picks up those trends, but it's a smaller, sample size so i usually find the right i look at them both and the right answer is usually somewhere between the two. Yeah, i mean it's one of the things i find really interesting every time i look at your reports right it's like i'm, totally immersed in public records right county assessor, county recorder. But you pull in all these other things you know population. Unemployment. Inflation. Economics. Uh and all of those of course play, a really. Uh. Important, role. What what percentage, of that stuff do you think you know you mentioned. Um. Like some of the the labor stuff is survey-based. Um. You know how much of it is survey-based. Versus, real hard data i mean like. We have employment, data, getting. Reported, in our payroll reports. Regularly, why isn't that data like available, why are we looking at surveys. So adp, reports, their numbers, but i think they only do 20 million workers, or, something like that so you know. You know who's got all the data. Is the post office. The post office and the utility, companies, and so i've been trying to get it out of them forever, and, you know somebody, sued, the utility, companies a long time ago for some, privacy, issue so. That was the answer to your question, lawyers, are the reasons, is that, we can't get 100. Sample sizes we don't even need to take the census, if they would just. Ask the mailman. Is there anybody, in the house or not and how many people are in there, maybe. He or she knows. Yeah that's that's pretty funny and very true. Um. So you know with a lot of, that data being. Survey, data right the survey that most people, are familiar, with is. Is polls. And obviously, the polls, got the last election, a little bit wrong and there's, already you know people questioning, polls. For this election. How do you feel. You know. When you're asked about survey data and your reliance, on survey data about its. You know, accuracy. And i mean you can get a statistical. Margin of error. But. You know do you feel. That relying, on survey data, puts you at a disadvantage. And. Is there what are the issues there, i try to, again i say we filter data, so i try to get as much, data, as i can, and if there's. 10 different ways of looking at something, and nine of them are all coming to the same conclusion. I get some pretty, good confidence, in the conclusion. You're, you're right you need to be very careful about making a conclusion, off of one data point. You know i'll pick on the census bureau new home sales number which, moves the stock prices, every day. And, every time they publish. It's got something like a 16. Margin of error so they might say. Home sales were up 10, this month when they were actually down six. And people are trading on this kind of data it's just it's just crazy. But if you've got seven other data points that are triangulating. Around that 10, you you have some confidence, it's probably right this time. And that's probably. Why your clients, are are paying you is to do that triangulation. And look at those, other data points rather than just rely on one thing that has a, 16. Yeah. That's how we spend it for less than the cost of a person you've got 60 of us trying to figure this out for you so that that's how that works. Yeah. Um. Do public records play, much of a role for you guys at all i mean, we'll look at everything, sean, yeah. Yeah we will get all the public records, we can we're very frustrated, they're not very, available, in texas for example. Yeah. My, chief information, officer steve dutra, people called the data god. Um and you're not allowed to hire him i know you guys are data geeks. He's, he's, just amazing. And he knows what's right and wrong, by metro, area, of everybody's, data and he's cobbled the whole thing he's been with me almost since the beginning. Yeah, no i definitely know his name and and you know there, there really, aren't, very many, people. And you know. You know that i hang my hat as one of them so, you know i'm a little biased here, but there aren't very many people that understand. Both data science. And all the nuances. That are in the real estate, data set. And um. You know i think that's a real shame i think we made huge mistakes. In, the crisis, coming up to 2008. Because. You know even the fed didn't understand what they were looking at. Yeah i look back on that as there was some data we just did flat out didn't have. I mean we didn't have, our data on option arms. We didn't have data on what percentage, of loans were actually documenting. People's income. Um. You know now we have some of that data so, that's one of the reasons we have a lot more data now than we did 20 years ago is when problems, emerge, and you can. Solve it with data. I, think, that gives everyone a lot more confidence, of whatever investment, they're making.

And There's somebody willing to pay for it right so i remember like you know the big. The core logics and the first americans, all went back, because they'd already abstracted, the loans and they went back through all the loans, to abstract. The details, on the pay option arms. And that was like a brand new hot. Data set that they were all competing, with in 2009. But it didn't exist before that you're absolutely right, yeah nobody would have paid him to do it so. You know but you didn't do it. There's a ton of data still in the recorder's, office that i would love to get but it's just not financially, viable, for us to go. Abstract, it and i think a lot of people don't understand, that. The documents, that the recorder, get, recorded, as images. Right it's not. It's pixels, right so, you have to go abstract, the information, off of those documents. And ocr, has largely, failed to do that in any kind of. Regular, repeatable, way, so, um it's it's an interesting it's a tough thing. One of the things you guys come up with from your. Your data. Is. A set of. Of indexes. And, um. Are those. Is that a pretty important, piece of your, your work i know you've got a couple that i find. You know pretty interesting. Um, like your housing cycle, index, for example. Yeah so the housing cycle risk index. Is. Something we came up with, that. It's kind of similar to what aaron's, dad does which just. Sitting back and looking at the entire, cycle. And. When the cycle goes on for a long time either good or bad. Things tend to over correct. So, we we. We did this a long time ago maybe. 2005.. So, we were calling high risk, before it, blew up. But. You know when demand, gets, higher than it usually, does, that's a sign that there's very low risk like job growth is really strong or there's more home buying than usual. But when. Supply, rises, to a very high level to meet that demand and all of a sudden supply, is higher than normal. That's a high risk too. And. Then you look at the affordability. In, in that, market. Uh people used to compare affordability.

Between Each market but that didn't matter i mean la's always more expensive, than phoenix but when phoenix gets more expensive, than phoenix normally, is. That's high risk too so we. We. Built an index going back to 1981. In every market, we noticed that certain markets. That were very supply constrained, like california, were more tied to the affordability. Certain, markets where you could build as much as you want whenever you want like texas were more supplied, to supply, more tied to supply, and, we came up with a weighted average that didn't. Call when the market would turn but it would tell you when the risks, are higher than normal or lower than normal and which way things are trending. Yeah, yeah no super, useful report and does it not only for. As i remember, like. You call out a couple of different things like. You know, supply. Supplies. And and uh, you know, of. Labor, and other, components, there too. Within that so i think there's 25, indicators, we looked at, yeah, a few macro, ones like consumer, confidence, that we you talked about earlier. I wanted to ask a little bit about your intrinsic. Value, index this is something that's always fascinated. Me. You know. Um, in fact, back in 2008. I kind of said one of the big problems was is that we used you know. I mentioned this in i think our last podcast, right the last three morons, to say i'll pay, x. Right is how we. Determine, what every piece of property in an area, is worth and you know especially like in the bay area where you get a company that goes public and you get three people who can just pay whatever. That doesn't then suddenly mean, everybody. In that, area, can pay whatever. Right. Um. And i was just i wanted to. Ask a little bit about that intrinsic, value index are you looking at kind of like. What the people that. Currently, occupy. That area can kind of fundamentally, afford. Yeah. So um. I mean it's the whole buy low sell high, warren buffett, ben graham. Way of looking at things. Uh, so oh okay yeah but we have another, index that feeds into this so it's, just our home value, index which which is basically, an avm. Right right it actually, we cheat we get a whole bunch of people's, avm steve knows which ones are best in which market and we do a weighted average of other people's. Abs. But that that's how we do it, but then um when a market. Gets. Far more expensive, in relation to the local incomes than it usually, does. That's when we say it's above its intrinsic, value or when it over corrects, it's below its intrinsic, value the, the tough thing on that and i'll pick on denver for example, is. I believe denver is a permanently, more expensive, market than it used to be so yeah, there's some subjectivity. Involved, of not just, you know training. Going back to the median. Of trying to figure out what the new normal, is if you will so. I'm not going to say that we've got it all solved mathematically. There is some subjectivity. In it but most of our but when you chart it. You can you you show something to your clients and they go okay i get it and that's more than just a um. One guy's opinion, you know it's got it's got some data behind it and usually it usually ties pretty well to some local guy's gut feeling. Which right, actually that's good data point too i mean smart people that are very objective, when something doesn't look right to them i listen carefully, that's good data. Yeah a good probably reference back to bruce, and, norris aaron's dad. Um. Uh, aaron you wanted to, to talk a little bit about, uh demographics. Obviously, uh. John's. And his team's book the. Big shift to head a few years ago i thought was just, you said it was one of your favorite demographics, books it's my only uh demographic, books, he's only two but he didn't admit that.

Okay Totally a true story but uh. I i had to end up buying it again last night because i keep on giving away my copies, and oh, the price and people are like. Have you not read this. Especially, markets like california, that are so cyclical, and it's uh. When ups are ups they're great when they're down man you want to get out of dodge. Um, and i'm very visual as well so, um what was the genesis, of big shifts ahead it it's 2016. So for you know, almost. Yeah. It needs a refresh. Although some of the framework, in there is. Helping me a lot right now. So the genesis, of that was here we come out of the great recession. And housing, ain't booming. And, everyone's got one millennial, excuse, after another. And i'm like well i think we can figure this out data wise, so it started as a small research, project that turned into a 9 000 hour research, project. With three really smart interns, all of whom work for me full-time, now so that's that, that worked out really well for that reason. Um. But uh, i i just said we can make sense of this. And, when we got into it we said let's break everything, down to decade, born because then you're comparing, 10-year periods to 10-year periods, everybody knows what year they were born, and, it just made it all more. Understandable. Just. That's putting it lightly so, you know baby boomers into the, baby boomers gen x gen y and then breaking it into 10-year cycles it just seems a lot more sensical, when it comes to trying to, identify, trends in a segment. One of my favorite words out of the book is serbian, can you uh, describe what that means. Yeah we made that up, uh, it's, it's, when and i i think the world is trending away from that right now too so. It was uh. Bringing the best of urban to the suburbs. So, urban. Actually due to a lot of local government, investment. Really, got cleaned up a lot in the 90s, and 2000s. And all everyone knows how great new york and. San francisco, and other places, have been recently. Um. They were not that way 30 years ago. And. Then they became really cool and hip, and the suburbs, said we want some of that in our city. And so, they started zoning higher density, you know not high rises. But uh 20 to the acre detached, housing, or. Or, even attached but you can do detached, at that. Right next to retail. And so we called it, serbian and that that was really the hot, thing. Until coveted. So you. I you know what i guess i thought serbian would be. Survive well so you think that's a trend that the, serbian is just too dense. No i well, i think. I shouldn't say any. Questions, against aspects. Well i still think it will continue. Uh. One thing. That surprised, me and was very different, in this last cycle, was that. It used to be, people would go to the suburbs. And then the jobs would migrate to the suburbs because that's where the people were and you kind of get sprawled, that way. And in this cycle, it was like. Everybody, went downtown, including, the jobs. And so. I can't afford, a house. In this great location. Unless, i get a really dense one. And so, uh. What has now shifted, i believe, is this whole. Proof, that work from home, works. For a lot of people. We're seeing it it's. People are, fleeing, it's not an urban flight as much as it is. I can now live. 60 minutes away. Frankly i can now live in another, state i've been given permission, by my boss to do so. Uh we can go back to where i grew up. Um, it's a flight to more affordable, housing. Which wasn't, which wasn't there because the affordable housing was so far away you couldn't, physically, commute. From there to work. What portion that do you think is more affordable, versus, more desirable. Do you think that they're just going for cheaper. And they don't like it as much or do you think they're going also to something that they prefer. I think there's some of both. But i think the big i think the big difference, is um. Affordability. Even even if it's an expensive, home. I can get so much more, than i could. Somewhere, close to la, or san francisco. Or close to even scottsdale, now i can go out to west phoenix, and. I guess i guess that would be a, preference. The quality of life changed too when, i had a friend that moved from the inland empire up to the bay area. Uh worked in uh union square, and bought a home two hours, outside. And was making the drive back and forth every day to work so four hours out of his life, it's just really hard to imagine. The quality of life shift when all of a sudden you get four hours of your day back. So his, neighborhood, right now the housing market is on fire, right because everybody, is joining him. Did the big shifts ahead book really change, what you were offering, clients or was the demographic, conversation.

Always An overlay, on what you were covering. No it was it was super, clarity. Behind, all the discussions. That were going on on my clients about making, big investments. And. Demographic. Trends. Uh. You know it's usually based on somebody's gut feel in fact usually it was based on something, going on with their, son or young son or daughter, you know and their friends. I'm like that you know that's, that's cool but you guys do realize that you're skewed because you make a lot of money that's not the whole, world. Um. And so we went and figured out what was going on with everybody, and it, it. It's become a big part of our reporting. It's a i also am a big fan of your podcast. Uh. You guys do a great job and i love the term the jewel box. So as you're sort of, dissecting. The trends, in the different age groups. Um. I. My father bruce norris is moving to florida, it's now been made public, and uh he's moving to a jewel box he's downsizing, outside of california, moving to florida and that's specifically what he's looking at so, a jewel box can you describe what that is. Uh. It's just a really, cute. Small. Place, that makes me really happy, and it's very low maintenance. And well appointed, is that fair, oh yeah no yeah i mean. The price per square foot on these things can be really high but the, absolute, price, can be relatively, reasonable because there's not that much square footage. You know, your dad doesn't have five people he has to live with he just. Is by, himself, i guess so that has not stopped him from buying really big houses, for two people so i'm excited to see him downsize, a little bit yeah there you go. See how that goes. Yeah he's going to 3 500 square. Feet. That's a joe box. I don't know that counts. The, i was gonna ask something about the california, association, of realtors, um they were releasing information, about new builds and it escaped me maybe i'll come back to it, um. Is there going to be an update on big shifts ahead is there is it bigger shifts ahead is it coming soon, uh, we talked about it but it hasn't hit the top of the priority, list. Is there anything that. Hasn't worked out like you thought it would i mean kovid being, maybe serbian, we'll see if that sticks or goes away but is there anything else. Uh. I'm pretty proud of everything we forecast, in that book except the one, massive, miss. Which everybody, told me i was wrong. And they were right was that we were calling for falling home ownership. They, were right for the wrong reasons. And i was wrong, for a different reason. I really did not think we would continue, to see falling.

Interest Rates. In. For year after year after year. And. I thought the the documentation. Did get horrendous, on the mortgage, but i thought things would tighten up more than they did and actually fha, went we'll take all that subprime, market share i'm i'm exaggerating, a little bit because they are documenting, everything. But, the bottom line is the government, played a very, aggressive. Role. Growing, home ownership. And so we missed. And the falling rate so we. We got that one wrong and now it's going to look really wrong because i think homeownership, is taking off right now. Because, we covered that last week didn't we sean about the different kinds of demand, people getting divorced. And. Forced health, creation. So our divorce is on the rise. Uh you know don't know that yet it's just it's pure, speculation. We kind of walk through like, what are some of the things we see, you know coming out of this and we're going to dive into cove in a bit but you know just the. The idea that people have spent a lot of time in a house. That. They haven't, spent time in before. And are probably realizing, it's not the right house and they spend a lot of time with a person. That they probably haven't spent quite that much time with before even if they've been married for a while, uh, so. Actually, i actually have some data related to this so we we had the same question. So, my guys have figured out how to use google. Analytics. Um. To. Check all sorts of trends. And the uh trends on our divorce attorneys, are up. But they're they're not, up substantially. So. We also checked uh pregnancy. And uh some of the indicators, were up and some of them were down so we said with the jury is out on that one. Uh but it looks like divorces, are trending, up, and china apparently, they spiked, the day they opened so that's what made me, think. Wow, okay. That's awesome, that's uh that's good stuff and yeah google analytics, and and the. You know they're. Yeah, them telling you how much things are searched on is super useful for that that's that was smart, um on your part. Like the last i remember what the data point was the california, association, of realtors, does their, i think they've, the last time they did it was 2015, but it was the impact report where they look at buyers sellers and investors, and, they broke down this time by demographic. Uh buying trends in the new. I don't know if it was resale or news space but what was surprising, to me is that millennials, because they had waited. The homes that they were going into were higher priced. Uh in some points up to the boomer levels, so it's like they skip the whole affordable housing they're like nope, we're just going to bury ourselves for 20 years and something. Uh, more expensive. Yeah so as as you know we, broke it into decade born so we the night the group born in the 1980s. We call them the shares, because they develop the sharing economy. Have the highest, college education. Ever, by far. So they've got more dual income, than ever before, and they're waiting to 32, to make their first purchase, so if you just think about those two things. You're going to see. Particularly, here in california. People can afford, very expensive, homes, because there's two college educated, people that have 10 years of experience. Chipping in to purchase the house. That's never happened before. Okay. That would make sense. Yeah. Right. Builders. Builders, yeah. So i mean obviously they're your your primary, client, and. It still feels to me like part of what drive, is driving this market. At least in california. And i don't know we're, we're. Expanding, nationally, so we're starting to get data on the rest of the nation but i'm you know i still know california, best and. Arizona, and the places we cover. Today. Um. So, what what's. You know. What's builders, sentiment, like, why haven't we seen a bigger ramp, in supply. Over the last handful, of years. Maybe start there. Um. Have you been to a city council meeting lately. It's it's, pretty, hard to get, your. Land entitled. In fact i would say during this cycle, the land developers. Who, got in at the bottom of the market. And have sold recently. Have done, fine. But are now saying. Boy i completely. Timed the market, perfectly, and i just did, fine. Am i going to go out and buy some more land and try this all over again no.

No, Frankie that that's been the conversation. Probably for the last four years. So really everybody's, been, i'm not going to make the big long-term. Bet, uh, put a ton of capital, in. Get messed around by the city and the army corps of engineers. And the nimbys, and everybody, else and i i had a. Client of the city one day decided that he wanted they wanted a bridge built to highway standards, instead of just normal standards so that cost them several million dollars. That's the type of stuff. That makes developers, pull their hair out, so. The, capital, doesn't, think the uh risk reward, is really, there in a big way. And so the, builders. Um. You know development, is different than building some of them will, go out and do some of that for their own, account. But what, they will try to do is they will try up the land tie up the land under an option agreement, until, they get all the entitlements, through and they understand, the costs. Before they'll go ahead and purchase the land. Still significant, risk in that right because they've got to do all the studies and all the rest i mean it's. Hundreds of thousands or millions of dollars to get to the point where you know, whether you've got a deal or not, right and if the market turns on you you're going to own that thing for a decade, so it's very illiquid. Yeah, yeah for sure. Um. So builder, sentiment, though. Today. Is, hey we feel really good, if we can get the math to work is that kind of where it stands and just getting the math to work super hard right now, uh. I, i use the term cautiously. Jubilant. So, june was actually. The, highest, sales rate per community, since, probably. 2005.. Live yeah yeah so, um. They just killed it. Uh but they you know they're they're not running around saying i think this is going to go on for years i think it's going to go on, for the rest of the summer and maybe the rest of the year so. I'm jubilant, about what's going on i've got my balance sheet in great shape i'm making a lot of money and doing really well. But once again i'm not going to go make a five-year, bet on the housing market right now. That's being driven by sub three percent. Mortgage, rates. During a during. The greatest job loss in my, lifetime. Yeah it's a very. Very, strange. Mix of uh. Of, numbers, for sure. Um. How much so we talked about you know one of the, big problems. Is. How difficult, it is to get something entitled. Right, um, i guess really more on the development, side. Um. And. What about. What about like, materials, we've got all these you know trade war, things going on and the rest, and. Um. What about just you know. Cost of lumber. And, and uh granite, and all those things that go into building a house is that. Causing your builders, much, consternation. The trade wars really hit them at all. Uh. Surprisingly. So, i have two guys that pay attention to that steve bastian, and todd tom like they do our bill earlier building products, consulting, which has become a big part of our business. And it varies a lot by product. The builders, are very. Wise. And. They, figured out pretty early that this particular, countertop.

Was Probably. Not going to be coming from. Italy so we're going to have to go get one somewhere else and, this, and, one of them i heard like tied up six months worth of cabinets. Just to make sure he had the cabinet, so, uh. The, big home builders have done okay, but you you go into home depot in fact i went into home depot two weeks ago and there was a sign right at the doors, like we have some supply, shortages. I'd never seen that before. So it varies by company. And. Initially, i think it was international. Now i'm hearing it's more domestic, because somebody had to shut down because a worker got sick. So. Yeah. Okay, that makes uh. That makes sense, um. Are you seeing, are there, i mean. We all know, how bad it is to get something entitled, in california. You know kind of best states worst states what you know as you look around the country. Are there places where hey we can just build whatever we want and, like there's no regulation, just go. You know you used to say that about houston, but, we joke that so many californians. Have left houston some of them are city planners. So. So now. It's worse than it used to be pretty much everywhere, but i would say houston, is much easier to get things done. Right. Among the major, cities clearly rural areas some places you don't need a permit at all. Right. And you know and i guess. With that like speaking of houston right the whole oil market being decimated, right, you guys have to look at those kind of local, economic, factors. As well i mean one of the things that. You know, i was born and raised in california. And everybody wants to bag on california, but it's one of the strongest, economies, and one of the most diverse. Economies, in the world. You know you take some place like houston that's so oil dependent, that always seemed to me to be much higher risk. And all my california, friends going there to invest and i'm like. God isn't it kind of a one-trick, pony, and and i don't know if that's fair i'm asking, you know it was in the 80s, it's less so now it's actually got a huge healthcare, presence not that that's, not doing well, either. But but david jarvis who runs our houston, office is part of the greater houston, economic, partnership, and so he stays on top of a lot of it for us and. Actually. Houston, is doing, great, both on the rents. The rents, rents are pretty soft, but um. They're doing better than i would have thought on rentals, and they're killing it on home sales at all price points. Wow, okay. One of the, one of the trick, the data things we do that you've probably seen me present before, is every quarter we go to u-haul's, website, and, price out renting a truck from one city, to the like from, la to houston, and then back. Should be the same price if you have the same flow of people right same truck same distance. Uh we are still, seeing in migration. Into houston, right now despite, the 20, strong in migration, despite the 20, oil price. And i think that is overcoming. The local distress, right now. Yeah. Um. And demographics. Plays a big role too right like so you know florida, has a, you know. Definitely an aging. Population. And and with the salt tax stuff we saw a lot of people escape, new york and places like that for. For florida. But it kind of felt to me like, boy that's got to be reaching, an end where like the future outlook isn't very positive, there, bruce. And aaron came to a very different conclusion. That, that uh. You know. They see, uh, florida, as a good long-term. Uh location, but. I mean, doesn't that kind of bubble burst at some point as these, as the baby boomers start to die. Let's put it too bluntly, well there's multiple, floridas. So if you go down the southwest, coast in naples, where it's all retirement. Um i mean at some day it'll soften, but. The peak. 1961. So that's only 59, years old so there's there's quite some runway. There. You go up to i know where where. Bruce was investing, between tampa, and, orlando. I mean tampa is like america's back office it's like a little mini atlanta, if you ask me it's not a retirement, area, at all. And, orlando, is all about disney world and tourism. So. There's very, different stories, here in in that state. Right okay, then you go up uh, further north so. So i mean at the end of the day these things get very local, and and that, you know i know you guys one of the. I would imagine one of your biggest products is the feasibility, studies where you. Come in and help. Uh builders, not only understand. What that current market's, like but, what's the best product to build and the rest. Yeah no we we love doing that and. You know. Before we started doing it they really were just guessing, like the price that the house down the street is at this price it's kind of like your appraisal, thing we found three people who bought it so if we build it we'll find three more right. Um. There's actually, tools, now, some of which are actually inside, property radar so you need to roll it out the rest of the country to, really understand, who the buyers, are and what they're looking for and, we've been doing focus, groups, uh, now.

Which. The trick there with is is turning all that information, into something useful, a lot of times focus groups are just, big huge printouts, of reports, and you don't know what to do with them, yeah but but our clients particularly, our rental clients more than our for sale clients are really. Using, it to put in the amenities. To figure out, the mix of one bedroom two bedroom. I think the one bath stuff is pretty much dead right now everybody wants the one and a half or more. You, you just you gotta learn that stuff if you're gonna compete. And you guys do uh apartments. And the multifamily. As well as the single family. Yeah, as well too right so that that's, a big part of, of that. What do you. With. You know kind of the issues around density, and stuff do you see. A pullback, on the apartment side do you see differences, in what, is happening in single family versus apartment. Huge, huge differences. So, if if, home ownership is rising that's got to come from somewhere, right. Right. It's it's coming from apartments. Okay. We are, right in the middle of finishing, construction, on a 33-year. High of apartment, construction. So you, wipe out the jobs, you don't so you wipe out the demand, you add to the supply, that's a pretty ugly mix. Yeah. We're very, very, bearish on apartments, over the short term here. But i will say, uh. You can look at the demand and supply all you want but in the apartment, world, it it matters how much money is out there and what they're looking to do and there seems to be a lot of capital that's willing to overlook, 2020. In 2021. And just say give me some long-term, yield buy it back by an asset, in the united states and i'll take it. So, it's uh, the vacancy, here may get pretty ugly but i don't think the, prices, are going to get really cheap. Because of the demand from capital. Right. Right. Interesting. Do you see, do you see any of these apartments, like. You know as people want to own their own place do they. Condominiumize. Uh. They're called condo conversion. Has never really worked out, um. Let me say it another way so. It really is about the design of the unit. Yeah, you really take a unit that was designed, as a rental. It's really not designed, to. For homeowners, it's usually, smaller. Maybe doesn't have that extra half bath some of that other stuff. So some of the apartments, this cycle, were, were actually old condos, they were converted, that they built as apartments, i think those, could convert, back to for sale condos. Uh because they're bigger and larger and they were initially, designed that way. I actually uh i met an investor, one time and that's all he did was play the cycles. He would buy apartments, and turn them into condos. And then. Buy them back. As condos, and turn it back into an apartment, kind of play the cycle, that way, that was, pretty interesting older guy and have been kind of yeah gone through it a couple times, so, it was an interesting, uh, interesting, uh take on, on things. Um, what's top of mind for builders right now. Uh. Government, policy. Yeah. So. In big shifts ahead we we, came up with this thing called the four five six rule because we, studied all this demographic, history. And every big shift, was caused by some sort of government policy, like the gi bill would be a significant, example of that. Um, yeah, the economy, obviously which we're talking about. Um, new technologies. Which enabled, certain, things to happen, and, actually this, this whole single family rental business, that has exploded, into institutional. Ownership. Has been enabled by new technologies. That didn't exist, before. And then societal, shifts. And the societal, shift to being able to work from home right now is something, that we know is massive, i don't know how massive, it is. But uh. With the anecdotes, that we're getting from that are just, unbelievable. I mean personal, and and all of our clients. Too. Uh. Builders, like. Switching, mid-stream. And like changing the, bonus room into like his and her offices, and things like that. Yeah i mean you take the bedroom you pull out the closet, and you merchandise, it as a great office. I mean you can do that right now. The biggest shift that they're doing is they're now buying, land a little further, out. Because they see the demand, there and that's why i was saying the servant has got to trend down they were buying the higher density, stuff closer in which was really expensive, and paying a premium for it, and now they're saying oh i can.

Now It's back to where it was 20 years ago i can go out further out and and, do, a. Homes on a 7 000 square foot lot that are less expensive, to build there's generally fewer nimbies, too and there's tons of demand, right now. Yeah. Okay, good. Well i think we probably, uh, i know everybody, is, curious, to talk more about covid, and. Market, uh forecast. Kind of stuff which i know you guys just finished a big report. Um. I'm not sure which report you're, referring, to we do big reports all the time yeah. The one i'm looking at. The page it was like 360. Pages. So, i hate to say that but we produce, that every single month for our clients, so it's, wow. And uh, so that's all the national, data we can get our arms on. Uh i don't print it out like you guys did my clients look at it on the computer, or. Oh i wouldn't print it it was too big. Aaron's got a printout. Oh my gosh. And then we do 73. Pages, on every metro area too so that's. That's what i meant we went from, go find the data to now there's too much of it but we we collect it all because it's all. Something i want to. Learn from. Yeah. So. Um. You know how has. Covid19. Like just big picture netted out for us how has it changed your forecast. For. That you're. You know what how's it changed what you're telling builders. In the last, you know, 90 days here. So uh. We have been saying because of the housing cycle risk index and some of the things in that big huge report about how much leverage was in the system, that we were in a high risk part of the cycle. That was going to feel, more like. 2000. 2001. Most likely. Than 2008. 2009. Because, we're, 10 to 12 years after the great recession, back then we were 10 to 12 years after the snl, debacle, which snl, was all the capital, for housing so there were a lot of and so we weren't overbuilt, the industry was very disciplined, we were adopted documenting, the mortgages. And we figured the next recession, rates would probably fall like what happened in 2001. And we slide through it. So. When this all went down. We said we think that's, what's going to happen we think it'll be a little worse given the job losses, that we're seeing. Uh. We actually suspended, our forecast, for three months from march through the, end of june. And, uh. Got a lot of new data, and then came out with a forecast, for us i call, slight, down. We just revised, it to a slight up. Because. Because the evidence, that we're getting. That uh, mortgage rates are most likely to stay sub, three. For a long time. That. Government. You know democrat, or republican. Is going to continue, to throw more money at this. That the fhfa. Has tools in place to try to foreclose, on as few as people as possible. Uh, you know i never thought that they would pay my payroll for two months but they did that. So i mean they're they're kind of all in to help us out. And and then you lock everybody, in their house, with all their family, and everybody's, focused on the house they can't spend money on a vacation. All of that's making me. Crazy, to think that i'm going to be calling, for. Okay, times, when we have. 11. Unemployment. Yeah, yeah no it's a nutty uh set of factors, and you know definitely, let me give you one data point on that that our chief demographer. Pointed out. Most of that unemployment. People have checked the box that they're temporary, unemployed, the vast majority, of that and i didn't even know that box existed. So i i want to. Say like i think we've we've grown we've added almost 3 million permanently, employed, people. But something like. 20 million temporary, employed. So if you just look at the total number. It's um. It makes you sick. I mean 3 million makes you sick too. But. This doesn't appear, to be. The great recession. All over again at least in terms of unemployment. One of the you know i know this isn't you know there's lots of folks really hurting, you know so i don't want to minimize, that at all but um. The. I have quite a few small business friends. That. Are having a really hard time getting, their, folks. To work, because, of the.

600. Bonus. Uh, you know it's 15. An hour on top of, unemployment. And if they're paying that employee, even 20 bucks an hour. Right, they don't want to come back to work because they'll actually. Get less money than they will staying on unemployment. And it puts the small business in this quandary, where they can report. That, employee. And. Um. You know and that employee will lose that unemployment, kind of force them back to work but that employee will then also hate them forever. Which isn't what you want having coming back to work. So they're not reporting, them and, kind of surviving. With less people. And you know and that's anecdotal. And i'm in a in an area that's. Economically. Pretty strong a lot of people are coming here to shelter. And i don't know how true that is what what are you seeing in that kind of larger. Job market, and the, impact of the unemployment. It ends this, friday. What are you seeing there. Yeah so we figured out that 64. Of america, could make more money on today's, unemployment, program than they're currently making. So they i mean they talk about the government going all in but you're right it ends, this week. And so. They're going to come back, i don't think they're going to come back with zero. But they're probably not going to come back with 600, to and i i think they're going to try to solve. That issue. Try to make it where there's still some incentive, to go back to work but. Also not leave people where they can't pay their rent, yeah but part of that is they didn't want somebody to be forced back to work to make money and expose, themselves to getting sick so i mean this is why i'm so glad i don't set policy for a living i can't imagine. Yeah, lives like that. Yeah yeah. No that's uh that's a great point too because, there's definitely especially if you're in a high-risk family or you've got older folks at home that you're coming back home to right, that's where we're seeing locally that's where we're seeing. Most of our spread. Is. Multi-generational. Uh families. And the kids have to go to work and they bring something home and the folks are you know the parents are getting sick. Right. So yeah. Bringing that back to housing so if you're living, multi-generationally. In a house that's a little too small, and pretty old and you have a sub three percent mortgage rate and you're still confident you're going to keep your job your move. And then yeah, and you're looking down. You're maybe even separating, and saying hey let's let's be in separate households, this doesn't make sense, you could do that too that's right, do you have to know how much of the mortgage market is controlled by the federal government. I i'm, going to get the percentage, wrong so i'm not going to quote it, it's, more than half. It's more than half and. What are some of the tools. I i don't know this i know there's a lot of different things that are not new they rolled it out during the downturn. As far as the stuff that's not federally controlled. I know here in the hard money loan space there's not much you know, the government's, not sweeping in to help, private lenders but, uh, for the, non-qualified. Mortgage. Mortgages, out there the private independent, banks who's coming to their rescue. Nobody. May not non-qm. Was two percent of the mortgage market though. Okay. And non-qm. Usually you know probably half of those people have some sort of issues that make them high risk the other half just don't have the documentation. For one reason or another so i, i feel sorry for them but that's not going to move the, overall housing market here. Do you think uh do you see foreclosures, being an issue for either residential, or commercial, in the next couple years. Oh commercial, is going to be a disaster. Uh. But i i do i do think. The government, learned their lesson in the last cycle that if we just foreclose, on everybody, we basically, drive prices, down on our next foreclosure. Yeah so everybody, loses money and so calabria. At least on the residential. Side and even on the apartment side he said like we're going to work with you guys. Uh, because it's in our best interest as the lender your best interest is the owner and in the best interest of the tenant or homeowner. That we try to figure this out. I still think we're going to see foreclosures.

For Those homeowners, who maybe just can't get their act together. But you know they had their act together when they bought the house because the documentation. Was impeccable. Yeah. And i mean yeah. Yeah a hit sip but to some degree you have to have some foreclosures, otherwise people just stop making their payments and won't again right so. A little bit of it at least has to happen, as a. As a. Dissuasion. Tool, i guess. So let's you you mentioned, commercials, going to be a disaster, let's break that up because there's a lot of different sectors of commercial, right retail. Um. Industrial. Distribution. Different things. What what, where do you think where do you think it's going to be worst hit and. Least hit and, that, well, retail was already struggling, going into this, so. Now i hear there's a lot of centers, where they're collecting, 20 to 30, of the rent that does not pay the mortgage, so. And i think we're just. This latest, round of closures. Is going to be the death knell for. Places, that could have survived, a two-month closure, that now, can't. So. Somebody's got a loan on all those that's got to be worked out and the, loan loss reserves, that the big banks just reported this last quarter were massive. And that's a, that that is a big. Big. Huge, problem, that needs to get, solved. And that's retail. Office, is is very interesting, so with this whole work from home. Yeah, we need as much space a lot of companies are saying we don't need, much at all. But in those areas particularly, like the manhattans, of the world where everybody was working elbow to elbow, you can't, do that anymore. But when they come back maybe, they'll be, in back in offices, again so maybe half as many people come back but you'll need as much space. So. I i think we're going to see some pretty significant. Office vacancy, here for a while. But then again does the lender want to own the building, are they just going to work with the owner, to help them through. Lesson learned in the past is you're better off working with the owner if, if the regulator, the fed will let you and i'm i'm going to bet on the fed this time. That they don't want to own buildings. Yeah. Now i think they learned that after snl like i mean we definitely saw a difference, in 2008. Where they just worked through most of it versus you know they didn't want to take back the dirt. They don't want to have the dirty dirt issues either right especially, on the. Office that really isn't so much a problem but certainly. You know. Any of the other places where you have gas stations, or. Industrial. Or paint boosts, and. And all of that so, it seems like distribution. Is probably. Booming. I would love to own some warehouse. Right now. It's the new retail. I mean that's good, that's everything you're ordering online is in an industrial, building somewhere, so. I know, amazon, has been targeting, malls because they're so well located, in cities but i'm i'm hoping that the malls decide to diversify. Into, residential. Senior housing, hotels. Other kinds of, uh. That was going on already, and one of my clients brookfield, has 165. Malls that they got out of the ggp, bankruptcy. And, uh. You know they they shared with us at our conference in, november, that there's a lot of, areas of the parking lot already, that is not being used so you could actually do an apartment, complex, on the uh, already. Those tend to be, primo, locations. That that was always my take everybody's like oh malls are going to get killed and i'm like malls have some of the best locations. In the united, states. And. You know, you could, do so much in those locations. And they're large they're large pieces of dirt that, you know are already zoned for quite a bit of density, and have good traffic egress, and ingress they seem like just, awesome locations. Yeah people keep thinking about the structure, of the facility, it's actually the parking, area. That's, easiest, to develop into residential. Yeah missing those three-story. Jc penneys, and macy's, and, river 21s. Well you know those buildings are fully depreciated, right they've been around for so long, there's no, value, really left in the buildings we just scrape them it doesn't matter. We look at that we look at the. It's interesting, how we look at the value i love your take on this john right like so, in japan. Like. You know so the rules actually say like the building depreciates, over the time, to zero right that's the, tax, tax rules. But yet we. Still pay a lot for buildings that are really old and crappy, rather than tearing them down in japan. My understanding, is that. You know hey after 20 years i tear this one down and build something new that's cool and modern, and like, why the heck aren't we doing that wouldn't that just be awesome for the economy.

And And all the rest, they're already entitled, and why do we keep living in these. Ship boxes, from the. So fargo, there's so many of them here in in tahoe, because they all got built around the olympics. Yeah. Yeah. Um. There's no repair and remodel business in japan either they basically, don't spend any money on the house either until it's ready to tear down i, understand, there's some cultural, issues about you really don't want to live in somebody else's house. So there's there's not a real active resale, market, there for, cultural, issues everybody would like to live in a new space. Wow, wow that's interesting, and it's interesting to me how they can. You know how they've made that. Work economically. Right because it's, you know, um. Well they they do factory-built. Housing, there uh one of one of my clients sekasui. Uh does that. They'll tear down and they'll buy an old building, tear it down put four new ones on there and uh. Made in a factory, and they've got it i think they do 50 000 of them a year. So it's it's a machine. That. Just does it over and over and over again and there they're like i'd rather have it built in the factory because i know it was built right and the angles are 90 degrees. As opposed to the way we do it here. Why aren't we why aren't we building houses in factories, here. Wow you're going to have to have a whole nother hour long podcast. For. Well, we can have you back. I would say the primary. Reason would be local, zoning, the zoning, is different in every single, city. Uh, we had the benefit, of low-cost, labor coming from south of the border that japan, never had to. And uh the the industry here has also been so cyclical. Factories are big investments. So you, you want to build a, 30 40 million. Factory and then have the housing market turn on you. So i think it's a combination, of all those things. Okay. Do you see the, uh, public builders getting into, the build to rent space, sort of diversifying, their own portfolios. So did you know that we have a conference, on that tomorrow. You're teaming me up here. I i didn't. I didn't know. But actually this won't be tomorrow because this is airing later right. This is putting out thursday so yeah we'll miss it by a day. We could tweet about it or like let people know if you if you're looking for more signups. We're full actually, so, i bet, it's kind of hard to say you're full online, but we actually are trying to break we're trying breakout, rooms as part of this to, to bring back some networking. So cool, our six breakout rooms are full. Uh, yeah that that has become, a third of our consulting, business, is built for rent it is, wow, everybody. Is building it. I should say everybody, is planning on building it there's actually not that much of it under construction, right now and build for rent that's not apartments, like single family, or like town homes or what are they building, for rent, it's um. Yeah so. I'm actually that's the opening part of my presentation, is trying to clarify, that so there. Really is contiguous. Communities. That we really should just start calling them apartments. They're they just. Half of them are detached. And the other half are attached, but more like row towns, more single level, or some, two level row towns.

Uh And then there's another component, of it where, um. You know builders, are just selling six of the homes in my community, to this guy and another five to that guy so that's. That's more to the the scattered, home guys like the. American, homes for rent if you will who would be buying those. Okay. It's uh but none of this was feasible. Before, all this technology. That allowed guys to figure out how to do this, right. Well, we are up about on that hour, mark, um i wanted to bring up the single family, rental intex, uh if people were interested, in finding out how to participate. And who you're looking for. Yeah so, again. I mean where there's a hole in the market we're trying to get data on it so. This single family rental, data. Is, not that great because if i decide to rent my house to you how does anybody know what the rent was and whether or not i gave you some concessions. So. Uh we're we're trying to get better trend data so we're, doing a quarterly survey we partnered with the national rental housing council so we've got the big boys in there too and, anybody, who participates. In that we'll give you back the survey, results plus i think we're given some of our forecast, data too. And that's we definitely have a lot of single-family, rent, landlords. So, we'd love to get them participating, and i'm sure they'd love to have access to the data. Yeah. What we're asking is and we don't say who but you know just tell us some stats about what you've seen going on the market just a few questions and then we'll return, to you everybody, else's results. How many properties, in an msa would you like them to have. Uh you'd have, i think it's five i knew the answer before i asked it. Uh, devin tells me five and what i'll do is i will post links in everywhere where we're producing the show so people can find out how to get involved and to email you, yeah, all of our our landlord, folks listening if you have more than five units. I. I suggest you take advantage, of this because. I do this actually, for a software company i. You know put in my data, into some of these, uh, surveys, and then i get back the results, and i can benchmark, my company against. All the other companies, and it's it's. Super, useful, it's it's something i do, regularly. Yeah we only ask a few questions, and uh, devin's email is d bachmann. B-a-c-h-m-a-n. At real estate It's gonna say for more information. Um, is that where you'd like people to go to, Please, yeah there's great blogs you have links to the the new home insights, podcast, real estate investors, it's one of my favorite place to go to to hear what builders are doing, trends in different demographic, spaces, so as you're rehabbing, homes. Put this stuff out for free it's ridiculous. Anybody i mean even i mean. Yeah just, the podcasts, and the other things i think it's something that realtors, real estate investors. Our mortgage folks and all the rest should be listening to, and, and paying attention to i realize they're not your primary, customer, but they may know some of your customers and they can send them as well so you know more importantly, for me they've got intel on the market i don't have, so, uh, you know we like to swap some free stuff for some intel. Awesome. Good stuff. John awesome this was uh this was really good hour went fast lots of really really good stuff thank you, you bet, thanks you guys. Thank you for listening to the data driven real estate show you can find show notes and links to some of the resources, mentioned in the show at. Click that join the community, and you'll be forwarded to our community where you can even ask questions for upcoming, guests ask questions of current guests, we monitor there and we'd love to engage with you. Please don't forget to like favorite subscribe, and share, on any of your favorite platforms, it helps us out a great deal, thanks for listening and we'll see you next. Week. You.

2020-08-01 07:04

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