Another Part of Commercial Real Estate Is in For a Reckoning

Joe Weisenthal (0:09)

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

Tracy Alloway (0:14)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, when it comes to real estate troubles, you know, one surprising thing is, I guess, how strong the housing market has remained this year, despite the rate increases. When people talk about troubles in the real estate industry, though, it's mostly the conversation has been on commercial real estate.

Tracy Alloway (0:35)

Yes, and actually a specific segment of commercial real estate. So for obvious reasons, everyone has been very focused on what's happening to office properties.

You know, the whole work from home trend means there's less demand for offices ostensibly. Meanwhile, higher interest rates are increasing expenses. And so that has been the predominant area of attention. But of course, there's also the forgotten, I call it the forgotten commercial real estate, which is actually multifamily residential, which counts as commercial real estate, technically.

Joe Weisenthal (1:10)

Right, totally. And you know, we talk about residential and we often talk about it in terms of just single family homes and what's happening to home prices specifically. And of course, that's a huge part of the real estate industry and where people live. But we talked about this in September, I think it was, with Julia Coronado.

One other big thing that's happened over the last several years is just this incredible boom in apartment buildings, multi-family dwellings, particularly across the Sun Belt.

Tracy Alloway (1:39)

Yes.

So I remember this sort of 2020, 2021 There's just staggering amounts of construction of multi-family properties that were intended, I think primarily to be rented out in super popular areas of the country, like Texas or Arizona, places like that. And of course, since then, my understanding is that we've obviously seen an increase in interest rates. We've also seen or started to see a decline in rents. And so your cost of financing is going up while your income from rentals is actually going down. That seems like a bad combination.

Joe Weisenthal (2:19)

Right, so a big question is like, who are, I guess, the bag holders, or maybe that's a question, or maybe that's when, or how heavy is that bag? Because presumably, you know, no one anticipated this surge in financing costs. No one really anticipated the surge in inflation, construction costs.

And, you know, rent growth had been one of those things that just like went up and up. It went wild during 2020, 2021, 2022, one of the most dominant drivers of inflation overall. But supply and demand seems to be a real thing. And it seems as though with this incredible boom in supply that we actually have seen some softening in rents.

Tracy Alloway (3:02)

Here's hoping, but.

Joe Weisenthal (3:04)

This is where we have to caveat that we never actually see the softening in rents. None of us will ever have rents cut, but in theory on some chart.

Tracy Alloway (3:13)

Like I have heard that rents go down. I have yet to experience it. Actually, you know, I just got my new lease agreement offer.

Joe Weisenthal (3:20)

What's the, how much?

Tracy Alloway (3:22)

I'll just say it's gone up, Joe.

Joe Weisenthal (3:24)

Okay, so let's put it this way.

Charts exist on the internet that show the line going down the other direction. Whether those charts are actually reflective of anyone's reality, that's a separate question, but I have seen charts that at least in some cities, again, probably more Sun Belt boom cities, Austin, Nashville, Atlanta, that rent prices have gone down.

Tracy Alloway (3:48)

Okay.

Joe Weisenthal (3:49)

I've seen the charts.

Tracy Alloway (3:50)

Okay, I too have seen charts, but let's keep going.

Joe Weisenthal (3:55)

Well, so then the question is, what is really happening in reality? And we sort of got to get a temperature check on, okay, if rents are going down unexpectedly, supposedly, if all these things have caught the industry by surprise, how big is that bag? Who's holding it? And how much trouble could it be in?

And I think we have to have this conversation because again, so much of the convo and the discourse has been about office.

Tracy Alloway (4:19)

It's all offices all the time. So now we turn to the, again, the forgotten corner of commercial real estate.

Joe Weisenthal (4:26)

Well, I'm very excited. We have the perfect guest to discuss it. Someone with a lot of experience in the multifamily world. We are going to be speaking to Lee Everett, head of research and strategy at Waterton. It's a multifamily investment manager. It's been around since 1996 So Lee, thank you so much for coming into the studio and coming on Odd Lots.