New Home Insights Podcast Episode 62 Transcript | John Burns Real Estate Consulting

Episode 62: How Berkadia Stacks Up in the BTR World

 

Transcript

Dean Wehrli:

Hey, welcome to the New Home Insights Podcast by John Burns Real Estate Consulting. I’m Dean Wehrli, your host. Each episode we’re going to bring you some of the best minds in the housing business talking about some fascinating topics or trend or innovation or issue, just like the one you’re about to listen to. Enjoy. Welcome to New Home Insights, the John Burns Podcast about the US housing market. I’m your host Dean Wehrli. Today we are going to again explore the world of Build for Rent or BFR with Joel Kirstein. He’s the Managing Director at Berkadia. Berkadia is a commercial real estate firm, does a lot of things though. They’re a loan servicer, a mortgage banker, but they’re also a market watcher by the way, we look at their data, but today we’re going to be talking about their role as a conduit for investment and capital into the BFR space. They’re part of the Berkshire Hathaway and Jefferies Financial family by the way, but I’m going to let Joel talk a little bit more about the at now. Joel, how are you doing this morning?

Joel Kirstein:

Doing great. Thank you for having me really, really appreciate the opportunity, Dean.

Dean Wehrli:

Absolutely. Let’s start there before we get into the topics and the meat. Just give us a little brief intro about you and about what Berkadia does.

Joel Kirstein:

Absolutely. I’ll start with Berkadia. As you mentioned, we are a privately held fully integrated real estate investment banking firm, owned through a joint venture between Berkshire Hathaway and Jefferies Financial Group. And when I say fully integrated, I mean, everything from mortgage banking, equity sourcing, investment sales, all the way through loan servicing in which we have north of $300 billion of commercial loans we service and the official number will come out. I’m sure you’ll see it through LinkedIn, everyone in Berkadia will blast it out and you’ll know the official servicing number, but it’s over $300 billion. What’s unique about that from my perspective as an employee of the firm is it really allows  our key employee and our C-level executives to take a very long view on how we treat client relationships and markets. And we’re not beholden to quarterly earnings calls.

Joel Kirstein:

We’re not beholden to major fluctuations in markets. We can take a slower, more strategic approach with our clients and it allows also our company to have significant investment in technology, innovation, and data, which all tie into ultimately the best execution for the clients as you know. It’s pretty nice because we have a national reach. So we are in, I mean, every major city I can think of across the country, which gives us a national presence, but we also have local boots on the ground. From my background, very much shorter than Berkadia’s summary I gave you, I started as a land broker, sold farms for farmers. I’ve been in the land development housing side of the business, my entire career. Moved to Berkadia about four and a half years ago and I’m really focusing exclusively on the single family rental, single family build to rent. And then also what we’re calling the single family investment space, which is land development, land banking type structuring and finances there.

Dean Wehrli:

Awesome. Like I said, we look at your stuff. We look at your insights and your data. We definitely love that, especially when I’m doing apartment studies and BFR studies. So, let’s talk about BFR and how BFR has been just on fire. It’s not just that capital loves BFR. I think capital is in love with BFR right now. It’s a kind of romantic. Why is capital so in love, and the biggest picture the 30,000 foot level, why is capital so in love with BFR right now?

Joel Kirstein:

To answer your question, I think there’s two main drivers, a lot of which your firm tracks on a day to day basis. Why do renters move to single family? The decision points behind that and then secondarily, I think the other side of that is just a flood of capital to yield. There’s been a significant ability to get yield on the redacted earnings calls that you folks produce every quarter for the big three publicly traded’s, that’s been proven out, right? And I think lastly, pretty darn resilient going through COVID and previous recessions from an occupancy standpoint that the single family rental asset class, by and large, I don’t think anything is recession proof, but certainly recession resilient significantly.

Dean Wehrli:

Yeah. Is it easier to underwrite BFR than traditional MFR for other reasons than resiliency? That is like, I don’t know, are construction costs less or rising less? Is it maybe a better exit strategy or shorter build time, anything like that makes it more attractive than traditional MFR?

Joel Kirstein:

When you say underwrite, I just want to make sure I understand the question. Are you talking about on the front end or the exit?

Dean Wehrli:

The front end, does the deal sort of pencil better or more easily able to get your head around it or both actually? Is there a potentially easier exit strategy as well?

Joel Kirstein:

Well, I think there’s a uniqueness to the exit strategy in single family that we have not seen exist by and large in the traditional multi-family. Right now, for example, if I’m a middle market to larger middle market operator, I have positions in key markets where the single family rental aggregators either own assets or want to be. I have the ability to put shovel in the ground and the minute that shovel goes in, I’m going to have [5:40] offers to take me out at C of O. And in many cases, it’s based on projected underwriting.

Joel Kirstein:

And as a builder developer, I’ve completely de-risked my position because I’m going to be taken out at C of O and not take the lease up risk. What I think is unique about this asset class, to answer the question a different way, it’s not necessarily easier to underwrite, but there’s way more interest in taking you out as an operator at any point in the value chain, everywhere from certificate of occupancy to backend stabilization, that hasn’t existed in this traditional multifamily space, to the extent that it is in single family. Every deal in a market that the big operators are in, has that ability to be taken out at Cof O.

Dean Wehrli:

But that is something that could go away, right? That’s not something that’s sort of intrinsic to a BFR deal versus a traditional MFR deal. If the market cools down or the sense of the attractiveness to folks who might take you out cools down, does that kind of calculus go away?

Joel Kirstein:

Absolutely could. You got to burn through a lot of money for that to happen? As you know, there’s been a significant amount of money raised in this space and there’s way more money than there are deals available in the marketplace. And I think that’s why it is it’s a land rush in a way to some of these assets. I don’t think it’s predicated on pure fundamentals, although these are some pretty smart people that are underwriting these assets with certain assumptions that, hey, my cost basis today most likely is going up in the future, land cost is going up for the foreseeable future. Entitlements are getting harder and harder each and every year. It’s a de-risk calculation of taking out at C of O and handling the lease up and in a organization that generally has, they’re fully integrated from the leasing and management side anyways. So they’re plugging it into their platform. They have better data than some of the market purveyors like ourselves have right now, just given the size of their portfolios.

Dean Wehrli:

Yeah. Now I’m going to ask you two questions that seem like they’re kind of the same, but they’re not. I’m going to ask you what kind of actual market runway do you think BFR has going ahead? And then I’m going to ask you, how long do you think this capital love affair with BFR will occur and you see they’re not really the same thing. One if is kind of built on actual fundamentals and actualities on the ground and the other is built on a little bit psychology. Let’s start with just in terms of purely the market, do you think BFR as this resilient class just in terms of its market attractiveness, its market power to actual renters is that years, years we’re going to be seeing BFR be a strong sector for years and years?

Joel Kirstein:

Can we phone a friend on that one? Can we put John on the phone? I mean the market fundamentals. I’d be lying if I wasn’t say I’d paraphrase 85% of what I’ve learned from the Burns team, right? As it stands today and we have to look in shorter term snippets and a lot of that is I think also driven by allocations of capital and the institutional investment class. Within the next 12 months, I don’t really foresee any change and frankly, in the next 24 months, I don’t think so either. The fundamentals are there, the money’s been set aside, it will be deployed in those spaces unless there’s another black swan event that I’m not aware of and that’s well above my pay grade or knowledge. I would really encourage those listening that if they’re not reading the stuff you guys put out consistently on this, on the market fundamentals, they should. I would suggest one thing that we really pay attention to are similar to the traditional multifamily, the key drivers of employment, population growth, where are jobs going?

Joel Kirstein:

What types of jobs are they? What kind of income are those individuals earning as they move to and from locations like Chicago, for example, is hemorrhaging people to certain parts of the market, but it’s bifurcated based on the types of jobs and where they’re going. We really drill down into those local areas and try to figure out what’s my wallet share, can that individual pay my rent? Period. And based on data. Those fundamentals, as we see them from a high level are going to be here for a little while. I’d like to focus a little bit more on the psychology side of it, because it’s incredibly interesting to me from that perspective. Number one, we’ve never seen the types of deals being structured as we’re seeing now on the single family side. It’s kind of 100% financing in a way.

Joel Kirstein:

But if you’ve done the work of getting a good entitled site, which is becoming more and more difficult each and every day, you’ll be rewarded for that. In addition on the psychology I also think we’re going to see, and we know it just hasn’t been announced some very conservative types of capital sources that will be stepping into this space. And you’re talking about allocations of three, four, $500 million on one account times multiple accounts. Beyond the $30 billion of capital that was announced last year being dedicated to this space or within the course of last year, you’re going to see another two, three, four, $5 billion announced over the course of 2022 from very conservative capital sources.

Joel Kirstein:

My assumption is from a psychology standpoint, there’s a lot of money that’s still in love with this space. It’s still a way to get yield. There’s a finite amount of deals and they’re going to be very aggressive to get those. And there’s people a lot smarter than me that are looking at the data side of it going, “Why is that?” Which is, again, if we can phone a friend, let’s get John on the phone. He can give us few minutes snippet.

Dean Wehrli:

We think, and I agree that the fundamentals are pretty darn strong for this space, going from a renter standpoint, from a market standpoint, for a while, at least that 12 to 24 month timeline that you just outlined, probably longer. To parse that last part, though, the psychology of the investment class into BFR, I mean, it sounds like you see that love affair going on for a little while yet.

Joel Kirstein:

Absolutely. And there’s new sources of capital that have fallen in love with this asset class. There’s a whole nother segment within the single family investment asset class, as it pertains to ESG and some groups out there doing some really creative building, like the 3D printing going on in Austin, Texas with Lennar. And ultimately once the department of energy defines what those criteria are to check the ESG box, you’re going to see yet another flood of capital that’s going to spill into this space because now they can check the environmental sustainable governance check box, but they can also get yield right into something that actually makes sense regardless of whether or not we’re funneling it through an ESG investment.

Dean Wehrli:

Lennar’s going to be doing that in California too and they are checking the boxes here. If you can get it done in California, honestly, you can get that done anywhere.

Joel Kirstein:

Right. What’s the over, under on that. We’ve got a seven year runway across the rest of the country if California finally got it through then everybody else will pick it up. And four years from now we’ll be on this podcast again, saying, “Hey, it finally happened in Chicago.”

Dean Wehrli:

For 3D it’ll happen, if California says yes, everywhere is going to say yes in turn. I would think. So, let’s turn to the psychology a little bit of any kind of concerns to do with BFR. What are your biggest worries or concerns about the BFR sector going forward?

Joel Kirstein:

I think there’s three key concerns. It won’t be a surprise to those listening. And then I would just say an area of observation where we’re paying close attention and let’s start with that one for us those are those demand drivers, the same things that you’re talking about. Renter sentiment, can renters pay my rent? What is their perspective wallet share on a per market basis? We track that number down to a street level within our data set. It’s an important number in comparison to what’s the wallet share of that renter versus what’s the wallet share if that demographic can qualify for a mortgage and how beyond market am I. That data is still strong and I wouldn’t call it a concern, but we watch it, we monitor it and we have a lot of staff allocated to data and artificial intelligence just trying to get ahead of the curve and give actionable insights to our clients in that regard. Sorry, go ahead.

Dean Wehrli:

On that real quick, do you bifurcate the BFR renters versus the SFR, whether it be institutional or mom and pop? Because one thing we’ve noticed very clearly is that purpose-built built for rent can definitely get a price premium, a rent premium versus that SFR space.

Joel Kirstein:

Correct and even purpose-built single site versus purpose built scattered site, the single site’s getting a premium. And a lot of that is predicated on the debt markets. You’ve got agency takeout financing and others that treat that in their mind more as a multifamily exit. So you’ve got a more robust debt exit on the backend if you choose not to sell.

Dean Wehrli:

I mean a premium for renters. I mean a rental rate premium.

Joel Kirstein:

Sorry. I was speaking exit. Good point. No, for sure. I think the one issue that exists right now and we’re working diligently on it, I know you are, and I know some other groups are, is nobody’s completely aggregated that data in a way that it exists in the multifamily side. Once that happens, we’ll have a much clearer picture, but fundamentally we look at again a little bit higher level in that market if I’ve got a multifamily asset where my chunk rent is $1,850 a month and my single family is $1,950. What’s the percentage wallet share in that submarket as it pertains to the income earning power of that individual. And then the fluctuation of jobs and job creation there. And then the profile, credit profile, tenant profile. I mean, we have a lot of these different matrixes and levers you can flip to run this analysis, unfortunately on the SFR side, that data isn’t bifurcated very cleanly yet. It’s getting there and I know a lot of people are working on it.

Dean Wehrli:

Yeah. How about another concern a lot of folks have is the entitlement risk, is entitlement something that you are thinking about?

Joel Kirstein:

I would say it’s the number one concern only because it’s the major choke point in this process. It’s land and entitlement. And again, unlike ground up multifamily where you can build 300 units on a postage stamp in a core market, built for purpose single family takes more acreage and many municipalities still have a perception of it being one step above a mobile home community across the country.

Dean Wehrli:

Yeah, they do. It’s crazy but they do.

Joel Kirstein:

It’s really crazy. And we’re seeing pockets of the country come around to it and we’re also seeing pockets of the country start to throttle entitlement back and making it more difficult out of concerns of this asset type being overbuilt. Even though the data suggests that’s not the case, the data suggests we’re not even building enough. Period. But that’s number one is the available land for development and then the ability to get it through entitlement, in many markets it’s a two year process. Can I have a two year crystal ball, but what happens in two years when my deal’s finally ready to go, I put a shovel in the ground and now the market’s shifted, right?

Dean Wehrli:

Rising land cost, do things like construction cost and labor shortages worry you as well?

Joel Kirstein:

Yeah, it was the second one I was going to say is labor and shortages and I was on a Housing Alliance panel with John about a month or so ago, and I don’t want to misspeak, but I think the gap in jobs is about 188,000 available construction jobs. And I noticed in a recent poll, 92% of contractors have said, they’re having extreme difficulty in hiring skilled labor. Let’s assume entitlement is at par for the next couple years, let’s assume the demand is still there. Let’s assume that all the drivers fundamentally are there, who’s going to build the stuff?

Dean Wehrli:

Yeah. It’s kind of a little bit of the part of what went sideways for Zillow in the iBuyer space, part of their problem was that they couldn’t get enough people to renovate those homes and to manage and to get those homes ready for the resale that is so important a part of that model and that just – so it’s affecting everywhere, including the BFR space.

Joel Kirstein:

It’s a really good point. I mean, I look at a lot of the National Association of Realtors data, and it’s overwhelming evidence that the consumer wants to move in and turn a key even in the resale market. You read all these articles on renovating your kitchen and what percentage of that dollar you’ll get back and new floors and new paint new carpet but the reality of it is the consumer wants to turn a key. If you can’t renovate, you’re in trouble and if you’re in Arizona doing a fix and flip right now, how are you going to find labor when everybody’s just cranking on these purpose-built sites for–

Dean Wehrli:

You better have a realty TV show because they’ll get the labor for you. But otherwise, if you’re not on HGTV, you’re in big trouble right now.

Joel Kirstein:

Yeah. Flip that House Arizona, whatever it is. If you’re not on that, then you can’t get the folks to swing the hammer.

Dean Wehrli:

You know what they should do, they should hire a camera crew and pretend they’re doing a reality show because there’ll be plenty of people show up to work on that site, they might get their 15 minutes of fame-

Joel Kirstein:

Dean, I’m going to get the LLC set up right now and then you and I will just pump that out through our respective channels of marketing.

Dean Wehrli:

Yourfakeshow.com will get you your labor. How about supply, do you worry with all this talk and all this money pouring into the BFR space, do you worry that there could be too much supply in the not too distant future?

Joel Kirstein:

Oversupply is always a concern. And that was always a concern even in the for sale market earlier in my career, that at some point are we building too many homes to be absorbed? I don’t think we’re there yet. And again, statistically speaking, Southwest market, for example, we’re not building enough units to meet previous demand and demand is increasing. If that’s the case, we’re ways away from oversupplying the market. The other thing I think is, and it would be good to see the data on this and I haven’t been able to put it together in my own mind yet, but given the entitlement timeframes and given the number of projects out there, you’re not talking about tens of thousands of units in markets being built, we see a lot of deal flow, but there are 100 units, 200 units.

Joel Kirstein:

And all it takes is one corporate move to a general location and now you’ve got 1,800 employees coming to a market and you’ve built 4, 6, 800 rental units. You’re not even absorbing that one company moving in. Again, the aggregation of that data and studying that data is important to understand. I just don’t think we’re there yet in terms of where we’re even meeting the current supply and John said that on that National Housing Alliance panel as well that we’re still under supplying the market.

Dean Wehrli:

I completely agree. I mean, other than Phoenix, which has a pretty decent market share or where the market share of the BFR space is higher than anywhere else by far everybody else is at the front of the runway. They’re just starting to take off. It is surprising how few actual BFR truly purpose built BFR units we’re talking about that are even in the pipeline, let alone having been built.

Joel Kirstein:

Absolutely.

Dean Wehrli:

Do you see too much money chasing this sector, does that ever concern you?

Joel Kirstein:

No such thing in our business, Dean, no such thing as too much money. It gives our clients options.

Dean Wehrli:

That’s true.

Joel Kirstein:

Let me rephrase it that. I don’t see how that money’s going to get deployed, that amount of money.

Dean Wehrli:

Because of labor because of land because of long term entitlements, et cetera?

Joel Kirstein:

Correct. There’s just not enough deals to go around at this point in time, which is why I think you’re seeing the structures you’re seeing and what I don’t foresee is parts of the country throttling back entitlement and making it much easier for people to get these projects pushed through. I think ultimately we’ll probably have an oversupply of capital to the marketplace and again, we’re seeing that, we’re in the market right now for three separate projects that effectively where the deal’s going to land is capital’s going to put up the entire cap stack all up front, create a mechanism by which the developer builder is paid out on a cost plus basis and then some kind of mechanism on the back end to true them up if you will, for, I call it the attaboy clause because grew up in a small farm town. But the reality of it is those structures don’t exist if you’re building the garden style three story walkup suburban Chicago multifamily deal. That structure doesn’t exist.

Dean Wehrli:

One more question on the kind of concerns is that, I mean, you’ve just mentioned how the BFR sector is very resilient. It’s been rent resilient, it’s been demand resilient. Do you think it ever turns into a more normal multifamily space that is with the apartment sector, let’s think of where there’s much more fluctuation there in terms of demand, in terms of rental rates, does it ever transform into that kind of a mature market sector?

Joel Kirstein:

That’s the prediction is that the market cap will be equivalent to the traditional multifamily. Again, rather than try to predict, I like to look at what the smart people in the multifamily space are doing and the vast majority of those smart people in the multifamily space are either separately investing in single family and/or are allocating capital that was earmarked for multifamily to invest in the single family side of it. And then they pick their poison in terms of risk profile. Will they do scattered site, will they not? Will they build scattered site, will they not? Will they only do purpose built? Will they only do purpose built single family versus purpose built horizontal apartment, the Christopher Todd type product.

Joel Kirstein:

But smart money is all, I think, betting on this being a sustainable long-term investment asset class, and they’re either bifurcating their portfolio, commingling is the wrong word, but it’s the word that popped into my head, but they’re using the same funds for that strategy and it’s almost kind of like everything is multifamily in some respect except for how am I going to operate it and does it have four walls across 40 units or does it have whatever it is, 40 times four.

Dean Wehrli:

Yeah. Well, I mean, that’s I think the best point is that are these things operated? Do you run a purpose built BFR community like you at an apartment complex and the answer is in almost all cases, of course you do. It makes sense that this does sort of transform into very much a part of the multifamily segment more widely defined.

Joel Kirstein:

I think it’ll also be driven as to the institutional LP investors and the respective funds of those traditional multifamily or single family investors, ultimately does that pension fund say, “Hey, multifamily, single family, doesn’t matter. It’s a dwelling unit. I’m going to have criteria on markets I want to be in, scale, yield.” But you almost wonder if the asset class morphs into this dwelling unit asset class where the capital doesn’t really care. We’re not there yet but that ultimately will be the drivers. What are the LPs in my fund willing to allow me to do as an operator of that fund and invest in.

Joel Kirstein:

And I think also it’d be interesting to see the single family for sale publicly traded as large regional, how they’re going to treat this as part of their business plan going forward. In other words, are the nationals going to really start saying, every community I do going forward from a planning standpoint is going to have 400 units and of which I’m going to sell 240 and I’m going to rent 160. From a land planning standpoint. It will be interesting to see how that starts playing out and it’s already happening in some cases, but will that be kind of a new norm? The new norm is for every 400 units, you’re always going to have a percentage of those that are rental going forward.

Dean Wehrli:

Yeah. Well, I mean, you’re right. You’re seen that we’re in more master plans and we’ve got eight neighborhoods let’s make one or even two of those, a BFR rather than a traditional for sale. Let’s talk about operators for a minute. Capital has kind of made it easy relatively to break into the BFR space as an operator. You said their financing terms are pretty generous right now. What do you look for? Do you look at the operator when you’re involved in a deal? Is that something you assess as part of that deal and the attractiveness of that deal?

Joel Kirstein:

We look at it two ways. One is which I would say culturally through Berkadia does the operator have the same vision, alignment, core values in respects to what we do, which is a long term vision on the business. Those tend to be really good fits for our platform, good fits for our sources of capital and just good integration points. And again, I think the last number I saw, 88% of our business on a volume basis is repeat business on the debt equity side of the house here. That number speaks to that cultural alignment. We also have to look at it through a lens of the capital. And so if it’s a debt request, there’s certain parameters that client is going to have to be able to qualify for in order to seek the financing they want and the equity or programmatic capital investors look at it the same way.

Joel Kirstein:

Market is also a key component. I live in a small suburb of Chicago. There’s one build for rent deal going on there. And there’s one every other 30 feet in Phoenix. Capital doesn’t want to be in Plainfield, Illinois, apparently, but in Phoenix it does. And so those criteria, which are not unique to our firm, anyone in our line of business is going to be looking at those components. What is the market? What are the rent assumptions? What are the absorption? Are there institutional sponsors that already own, manage, and operate single family in that area? And then just your typical deal level underwritings are all important. But as a firm, we really look for a combination of the metrics we know the lenders are going to want, but also the vision and alignment of that executive team.

Dean Wehrli:

Are you worried about less experienced operators making mistakes? Does that enter into your calculus as well? There’s a lot of new people into this, both in the capital side as you mentioned, and now on the operation side, is that something that’s concerning?

Joel Kirstein:

Yeah. It’s concerning for us. It’s concerning for the lenders and probably more so the lenders, because quite honestly that group could be great people, but aren’t a good for what our platform and firm does. We’re not called venture capitalist to help you move from building your first build rent deal when you’ve done 20 industrial buildings, that doesn’t necessarily translate into the same execution or knowledge base. And again, I go back to the two concerns we always have is number one, entitlement.

Joel Kirstein:

There are many markets where if you show up and you’ve never done one, and you’re going to try to push it through entitlement, it won’t happen. Regardless of all the other metrics, demand drivers, cool looking product, it doesn’t matter. You won’t get it pushed through entitlement. And secondly, it’s a different trade base. If you haven’t been in the game or in the game at scale, and especially now with labor shortages, you can’t get access to the trade base.

Dean Wehrli:

Is that entitlement part a relationship factor that you’re thinking there that they won’t have the relationships to get that entitlement?

Joel Kirstein:

Absolutely. There’s certain markets and we don’t call them market here, but there’s certain markets where either A, the relationship or B the relationship of the attorney, the law firm you use for entitlement perspective and the engineering firm. We call it the good old boys network where I grew up, but that persists throughout the country. If you don’t have the experience and track record, it’s going to be really hard to get the project kicked off. And then I think it’s even harder to get the lenders or the equity comfortable with you doing your first or second deal. I think that’s going to have to be a friends and family raise and you’re going to have to go to your local bank that you’ve done all you, in my example, your industrial deals with and let them take the risk.

Joel Kirstein:

And then once you get a few under your belt, this is maybe even more scary to me than the new guy is the guy that’s done three or firm that’s done three and now all of a sudden they want institutional capital to back him on the equity side. That, to me seems to be where the landmine and again, for us, it’s not a perfect alignment of capital to sponsor and so wouldn’t be a great fit for our firm.

Dean Wehrli:

Because they don’t know what they don’t know?

Joel Kirstein:

Correct.

Dean Wehrli:

They think they know, they know just enough to be the dangerous, which is another way of saying I’m dangerous, in my humble opinion, when folks say that.

Joel Kirstein:

And there’s going to be some groups like the home built, sorry to interrupt, like the home building pre the Great Recession. There’s going to be groups that get away with that and it’ll do very well and they’ll learn it and they’ll prove me wrong and more power to them. And then there’s going to be groups that are going to get stuck and their projects will wind up being recapped by somebody who’s done it a number of times. I think history will repeat itself in some way, shape or form similar to the for sale home building market prior to the Great Recession.

Dean Wehrli:

Do you look for skin in the game as a hedge from the operator, or is it a situation, if you really like what that operator does and has the track record, you’re not so worried about that?

Joel Kirstein:

Again, we’ll look through the lens of the capital sources we’re going to go to. Skin in the game is a relative term right now. It can mean as little as pursuit costs and entitlement dollars. And then once permits are ready and shovel can go in the ground, their money’s kind of out. Again, not like what we see on the multifamily side, where that general partnership contribution has to be somewhere in the neighborhood of say 5% of the capital required. It’s not the case in single family. And again, I think that’s why a lot of the capital lenders and folks like myself, we try to figure out track record, history, experience, pipeline of projects, really know the sponsor you’re working with because ultimately we know that many of the structures are going to go by way of these programmatic platforms and in that case, the skin in the game again is a relative term.

Dean Wehrli:

Do you think we’ll see some consolidation ahead among operators? Is that just inevitable?

Joel Kirstein:

I would think so, but I’m not the right person you probably ask Tony or Margaret or someone who’s doing that business every day, but I would think so. I mean, because again, how you get scale. If you’ve got an over abundance of capital in the market, if your only strategy to growth, to aggregate assets, to own, manage, and operate long term, which is where most of the capital is in this space on the backside of this is they want to keep these assets and definitely they’re structured as REITs or long-term holders. If you’re just doing it site by site or MLS only, I don’t see how you get to your targets or get the capital you’ve raised, deployed out. I think M&A is inevitable and it’s probably it’s happened already in some respects, hasn’t it?

Dean Wehrli:

Yeah. I would agree. I mean, that scale is perfect. I mean, when a home builder wants to scale fast, they merge or buy another home builder, a regional home builder, let’s say, so it does make sense that you’ll start to see that eventually happening, but because there’s so much entry still going on, that seems like it’s probably still a little ways away for every minor consolidation there’s going to be some new folks entering and still fragment that space.

Joel Kirstein:

Agreed. I think where you’ll see it first is in the markets where you’ve got institutional capital that can’t get in like Phoenix. If they’ve got no exposure to Phoenix, they want to be in Phoenix, the fundamentals all suggest that Phoenix and the surrounding submarkets, they’ll try to pick off somebody that has both land positions and I think land positions will play into it, land positions and then assets. I think that will be the waiver your first M&A getting into markets where there’s no way you’re getting in there if you’re going to go in the open market and compete on something that an investment sales team brings to market because then you’re one of 300 people that sign a CA and you’re one of 50 people invest in final. That’s just such a low probability win.

Dean Wehrli:

I think that’s true but like you said, the only place that may be true is Phoenix though, just because of volumes right now where other operators, they just aren’t big enough to be that ripe target. I don’t think yet. I don’t know. We’ll see but for Phoenix, for sure, I’d be surprised if that doesn’t occur. Let’s end with a couple of questions that ask you to look into your crystal ball. You know I love to do that. Let’s start with the SFR space, because you’re in that as well as BFR, as you mentioned. Right now institutional SFR, think American Homes 4 Rent, et cetera, depending on how you define it and even relatively smaller operators, but non mom and pops let’s call them. They’re very single digit percent of the market. Do you see that space, that SFR space really consolidating and those institutional players gobbling up a larger and larger share of the market?

Joel Kirstein:

Yes. How long is that going to take them? Who knows because it’s not as easy to your point as other asset types. It’s happening in mobile home communities right now. There’s a significant roll up. It’s happened in traditional multifamily. I think 56 or 58% of that asset class is owned by institutions. It’s going to go that way, but it’s, to your point, very difficult to find these mom and pop owners who own five, six units here, eight units there, 50 units here, and it’s so localized to the individual market that it’s just going to take time. But the flip side is they’ve raised the money to do it and will continue to do so. It’s inevitable, but I think it’s going to take time and then even if they double their market share to your point, we’re at what, 10%, 8%, 12% of the market?

Dean Wehrli:

I mean, it’s amazing how small of a … The really, really big operators say 100 or more units are something like two or 3% of the market nationally. I’ve asked that question before and I had the same answer and I think you’re spot on in that, yes, it’s inevitable. There’s too much money of course there’ll be a larger share of institutional, but it’s going to take decades not years.

Joel Kirstein:

Yeah. And I think it’s a data race. It’s going to be who can get the data to aggregate the 100 unit owners in sub in the core markets you want to be in and get to them when they’re not on the MLS or they’re not listed by a brokerage firm. How can you get to those owners quickly? We might even be working on it. I don’t know. We got a lot of people that are working on some really cool tech stuff. So maybe we’re working on it and we’ll announce it in two weeks and–

Dean Wehrli:

Honestly, it’s going to take some kind of tech solution. Yeah. It’s going to take an app somehow or whatever the next thing after an app is. Let’s end with, I think the most burning question in this space: acronym. BFR is what we’ve been saying. John Burns we say that. A lot of folks say BTR, built to rent. Some people even say BFR, F being a numeral. Joel Kirstein you vote for BFR, BTR or B4R. Who’s going to win?

Joel Kirstein:

Well, I like the number in there. B number 4 R.

Dean Wehrli:

B4R, I love that too. It’s the most creative one.

Joel Kirstein:

If you could get a cooler logo drawn on your hat or golf shirt or whatever, too. If you throw a number in there, somebody really creative with art could come up with something pretty neat with that.

Dean Wehrli:

It’s like Taylor Morrison has been doing a lot of communities with eight in there, Elev8tion with an eight and Ov8tion with an eight. It’s kind of like that and it looks very cool. And you’re right about the hats, I hadn’t thought about that.

Joel Kirstein:

Whatever looks cool on the Richardson style I think it’s a 113 hat then there’s people out there figuring that out. Who knows how it’ll get named, but I vote for B4R.

Dean Wehrli:

B4R. Okay. I’m with you on that one.

Joel Kirstein:

Numeral four.

Dean Wehrli:

Awesome. Joel, thanks so much for coming on. It’s been a pleasure.

Joel Kirstein:

Thanks Dean. Appreciate your time.

Dean Wehrli:

Thanks for listening. This has been Dean Wehrli at the New Home Insights Podcast, and there’s where I get stuck. I have no idea how to end these podcasts. So if you, the listener have any ideas for me, please send your suggestions to us, email us, however you want to get ahold of us and tell Dean how sign off the podcast. It’s kind of a contest. No, one’s going to win anything except my eternal gratitude. That’s it. See you next time. See, I’m terrible. Bye.

 

 


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