The Fed’s Next Move Could Create a Massive Real Estate Opportunity

Let's talk about interest rates a bit here. Cause we got the CPI report for June, which say think shocked some people in how weak it was. I'm not sure the market was all that shocked because you look at treasury inflation protection securities. We've been saying there's no inflation risk yet. The marketplace is pricing higher rates because the market's looking at the fed and Kevin Warsh, who are focused on oil prices and not the rest of the economy. And so you understand where people are thinking, all right, where interest rates really going to go? Are oil prices going to stay high? And is that going to lead to a regime where rates are going to go up? And so from your perspective, Ken in real estate, I imagine this is something that people are just laser focused on. They are, you know, it's interesting. Cause I saw that come out this morning and I saw the CPI drop core inflation. However, it didn't change all that much. As you know, it does matter the 10 year and the two year matter to us a lot, right? And, and we did not see dramatic movements in those yet. Obviously, uh, there were some, but they, uh, you know, those matter like this, this all matters a lot. What's interesting to me is I actually don't know why the energy costs went down that much. I mean, I saw the price. It doesn't look to me like there's anything meaningful that really happened in the last 30 to 60 days, like around any of this, like the straights are still a mess and the reserves are still a mess. And, you know, and so I'm like, well, why, why is all this happening? You know, there's somebody behind the curtain there that's pushing this down and it's very interesting. Well, if you look at what's going, if you look at the seat, you start with the CPI numbers themselves. What they said is that, you know, what the fed keeps focusing on is energy prices go up and because energy, you can't really get away from it is energy prices go higher than say you're a service provider and your energy costs go up, your input costs go up. Then you've got to raise your prices, providing whatever service to the public in order to get that money back. And so the fed, it's an institution staffed with economists. So they're always thinking ceteris paribus. So all else being equal, if energy costs go up, then other prices should go up alongside them because it only makes sense, but we live in a real world where all else is never equal. So what the CPI report reported was essentially the energy costs went up and then they came back down, but other costs didn't go up. Other costs went down. I mean, this is something that Walmart was talking about just recently. Walmart said we would love to raise prices on our customers, but we know what happens when we do, we raise our prices, they disappear. So we're actually going to cut prices. And so what the CPI report really said was the economy is weak and service providers in particular had to cut prices in order to maintain volume, even though they want to raise prices, which leads to all sorts of other consequences that are very relevant for your neck of the woods, because that means that incomes and jobs are only going to be under further pressure, which means rents are going to be under further pressure. And so what emerges from the CPI report as well as the marketplace is more of the traditional recession case that goes along with an energy shock, a higher energy prices, set the, set the federal reserve and mainstream economics aside. Common sense. If you raise energy prices for non-economic reasons, if the economy can't handle it, the response in the economy is to pull back. Everybody ends up pulling back incomes, pull back, unemployment goes up. And so what the CPI report essentially, and I want to say confirmed, but it's certainly feels like it was moving in that direction was the demand destruction that goes along with an energy shock case. And I think that's one reason why people were shocked by it because they keep hearing how the economy is resilient. When you know, from your business that that's not really the case. When we say the economy is not resilient with that, that doesn't mean, you know, it's falling off a cliff. It's not early 2009 all over again. It just means that regular people are struggling. They really can't afford higher gasoline prices. So they're cutting back in other areas. They're not pulling back. They're not, you know, it's not a, an absolute crash or catastrophe, but it's enough at the margins that it shows up in the CPI report and it makes business that much more difficult because you're trying to struggle bringing in revenue when your customers are hurting at the same time you're hurting because your gas bill and your energy bills going up. And so it just adds more and more pain. I think one of the things that the marketplace or not really the marketplace, but one of the things that the commentary keeps looking for is the breaking point. When are we going to get to the breaking point where everything does fall off a cliff and I'm not sure we're going to, I think it's, you know, we've been in this situation for a couple of years where the pressure just keeps building and building and building, it makes people miserable, but it doesn't necessarily lead to something like a massive full on full blown contraction that just wows everybody's, uh, you know, knocks everybody's socks off. To me, the CPI was like, Hey, we've got demand destruction. We've got more pressure on consumers and businesses and it's not going to lead to inflation. It's going to lead to the opposite. Yeah, that's a really excellent point. I, you know, from my standpoint, I'm obviously a multifamily guy and you know, we're pretty, we have 10,000 apartments and we're heavy on the, on the landlord rental side of the equation versus ownership. So back in 08, we lost a lot of people to ownership 06, 07, 08, you know, during when the president was rolling out these, you know, everybody needs to be a home owner policy, which is totally fine, but, uh, that, that took people out of the rental side. Now we're seeing it move the other direction. And to your point, one of the things that we didn't have back then was the cost, not the mortgage, the cost to own a home, just the cost. I'm talking about the maintenance that, you know, the, the insurance and, you know, just ridiculous insurance, just all of those things that just to own the home, let's don't even talk about interest rates for a minute, just like, let's say you have no mortgage. There's a cost there. They don't have that on the rental side of the equation, which is really interesting. And so right now, of course, because there's so much inventory, the renter has the upper hand. You know, there's concessions in the market, occupancies are down. And so there's, you know, I know in part of the CE, uh, CPI is that, Oh, we are the owners of the letter rent, which is kind of a joke, but regardless it is a piece, right? And so for sure, you're not seeing any rent growth in that CPI at the moment. Now that could change in time, but, but when, when, when we start to see a sway of people, you know, great if the mortgage payment goes down, but what about the ownership piece that's also going out, that's just pushing more people to the renter side of the equation, which is going to eventually push again, and it's going to, you know, we're already seeing absorption pretty high, people are not buying like they were, they're not financing like they were, they're not moving around like they were, that's all true. And so people are electing to stay in apartments or rentals longer. That's not necessarily good. Obviously, you know, even I have two kids, you've met them both. I want them to be able to, you know, rent, save some cash, buy an affordable home. Those days are tough right now, extremely tough. That down payment is without out of reach for many, many people. So all that means is that more pressure is going to stay on the rental side of the, of the equation for a while. And, and you know, so that to me is what I look at. That's one more reason why we could head more into, you know, a renter nation if we can't get that, you know, not even talking about interest rates. Yeah. That was one thing I was going to ask you here. Is that one of the reasons why you said, you know, earlier on in the video here, you talked about, you want to be looking for properties. Is that kind of a, a structural tail one that you expect to carry forward that eventually people who are not buying houses or maybe even selling out of the house that they own and you know, I got to live somewhere, they start maybe renting. So you have, you know, a structural shift out of single family housing and into multifamily, which you're right, you know, from a macroeconomic or an over, over, you know, a high level perspective, this is not a good, and we don't want, you want the, you want, we actually want the opposite. We want people owning homes because it makes them better people. They're happier. They, they creating equity for themselves, which is usually the biggest asset. So for an actual healthy economy and society, we want people to go in the other direction. However, recognizing that, you know, from an individual perspective, there's really not much you can do about it, except, you know, hate to say, cause it sounds very cold, but to take advantage of what's taking place from somebody who's got an, you know, investable funds, there's an opportunity here. Um, if, so that's the question is, you know, is this one of the things that you're looking at as a way, as a, as a reason to begin looking in the property sector and say, look, as long as this continues, the pressure continues to build on, especially households, they're not going to have much choice. They're not going to be able to afford a rent. I know the national association of real, this is just like I throw around all the time, the NAR last year in their annual report said the median first time home buyer age was 40, which means people are going to be renting for a long period of time. So is that something you're factoring in as you're looking for properties? So thinking that's a significant tailwind? Yes. So there's a few things. The first thing is price and basis, right? You want to make sure that you have a tremendous amount of room there. So we have seen a repricing cap rates, which we said before is in your favor, right? Because the market is repricing from a high to a low. Yes. So there's, I can see where you're coming from. There's a lot of factors that are, they're not there yet, but they're starting to line up in just the right way. Correct. That's right. Yeah. So first thing is price. Then of course is will, you know, will we have a lot of pressure of our renters moving to a single family, right? That's a big one because like, again, that's just, you know, I'm not going to change history, but you know, that is what people do. They oftentimes rent and then save and then buy a home. And you know, during home building times, they prey on the apartment builders and the renters, and they say, you know, why, why rent when you can buy and that cycle will repeat itself at some point, but the, what we have, it's very different. This cycle that was not in the GFC is we had a four or five, 6 million homes on the MLS and, and, you know, we had a massive repricing of single family. So single family came down in price, which then started to compete with multi again, you know, and then it just cycle repeated itself. And so, yeah, that's one of the things about the current cycle. It looks bad, but prices have been relatively stable. So, I mean, that's again, that's in your. So what you're saying is in order for the cycle or the structural change to shift again, you would need to see either home prices come way down to make it economical for renters to move back to owners, which that wouldn't be a good thing, right? No, that's right. But that's, that's really kind of the only either incomes really do have to rise precipitously and in a sustained fashion or home prices really have to come down in neither of those things seem to be, you know, at least imminent or maybe even likely. Right. And then add that, uh, inflationary operating costs, you know, to that as well. So you've got home prices that are relatively stable and they don't look, they're certainly not going to the spot where they were when you and I both went through the GFC. I personally went through that. So the home prices are still somewhere just bumping around 400, I think. And so even if, even if rates come down from seven, six to five to four or whatever, I still think you're going to have these affordability issues. No question because it's, it's not, you're right. It's not just the, it's not even really the interest rate. It's a whole bunch of other factors. Do you have, can, is there any way to, or maybe you've already thought this through how long a cycle it might be before you get to that? Or is that just, you know, Hey, look, this is a structural change that we can take advantage of and just ride it as long as we possibly can and hope that these, you know, these positive factors that are lining up for multifamily continue to line up and, uh, they spit off these bargains every once in a while, you jump on them, make a lot of money there and hope that they kind of proliferate. I put things in baseball terms. And so I think that, uh, I always tell everybody we're in the first few innings right now where, you know, you don't know where, you know, where this is headed. We do think we're hedged on the single family piece, which we already discussed. We don't think we'll have any threat from there. The issue the market currently has is we have an oversupply or a hangover, very low interest rate produced a tremendous amount of supply that hit a lot of it in 25. We had a 50 year high of supply in multifamily in 25 that's still working its way through the, you know, as, as George would say, the pig through the Python, right? So, so, so the, it was a huge fat pig too. Yes, it was. And so that's, that's actually creating great. So, you know, from an operator standpoint, I have concessions, I have high expenses, I have these high rates, my values are down, not great if you own, but if you're trying to buy great time to buy with kind of the headwinds. So I think we're in the first few innings. Now's the time to put together your team, put together your capital, put together what markets you're going to buy in. Cause obviously they're all very, very, very different. And the lenders, you know, they, it's, it's a very different time. This is not like we just went through, you know, the lenders are asking questions like, if I, if I give you a hundred percent vacant asset, can you pull this off? Can you stabilize it? Cause it's that there's a million, million things that can go wrong. And so you can't just raise capital, right. And you can't just assemble a team randomly and say, Oh yeah, yeah, yeah. So there's going to be a lot at stake for this next cycle. And the, I think the experienced people that have been through this before are the ones that are getting to get some of these deals because the lenders, the last thing they want are these things back. Right. So you've got this really interesting time where I think the next four or five innings are going to be certainly 27 and early 28. And then the interesting thing Jeff is that higher interest rates also shunted supply. So when rates went up, like if I have a piece of land and I was going to build it at 4% or 5% and now they're eight or nine, I'm like, Hey, I'm going to pause. It's still a vacant piece of land that I own, but I might not build something on it, right? So there's, if you take a look at the future supply, it went, it dropped off a cliff in 24 and 25. So you've got this, the supply drop off, this absorption happening, and that is going to cross, the line will cross in, in late 27, potentially early 28. And, and then at that point, you're going to see significant rent growth again, because as always, everybody's way behind this. And when you start to see rent growth, then you're going to start to see this irrational exuberance and all this money chasing at it and it'll push prices up again. So that to me would be, you know, innings call it seven, eight, nine would be 28, 29. That would be the time to where you're going to see your value creation. So now's the time to buy the next middle part of the game is going to be, you know, stabilize, you know, get your house in order, make sure all your operations are, are fine. Your renter base is solid. You're in the right markets, get your debt set up correctly, and then position yourself for when you start to see that rent growth and maybe experience it for a year or two, who cares how long it goes, but then start to exit positions. And, and, and that's, that's essentially what our plan is. So there's the setup and it sounds like you got a pretty good window, but like you're saying, it's not as long a window as you think, because there's a lot of homework to be done, a lot of, a lot of stuff to get in order before you get there. So then everything starts to ramp up. You're right. Everybody gets exuberant again. Then prices start to really rise, especially in the early stages of the upturn, which is where you really make your money because everybody's still euphoric. And so you got a lot of things to do before you can even get to that point, which means, so I guess it really brings us back to where we started. That's why you need to, you need to be looking right now, getting your ducks in a row because the time runs out much more quickly than you think. Yeah. And not all markets are identical. So I'll just give you like two things that could not be further from different. Well, one is in downtown Phoenix, which is an area that in my opinion, I would never buy, but a lot of out-of-state builders, I'm talking about multifamily specifically, they built a lot of property down there. Gorgeous, you know, garage parking, elevator, rooftop pools, all that stuff. You know, it's not uncommon for you to see two, three, even at one time they had four months free on a 12 month lease, which means that way more supply for the people. So great if you're a renter, right? But not great. If you own it, not great. If you lending on it, not great. If you invested in it, but you can literally go five, six miles away to Tempe, Arizona, which is where Arizona state is. It's a tale of two cities, man. Like, like highly occupied and not a lot, a lot of excess land, you know, wasn't overbuilt. Um, you know, the market's still growing. This is why market selection is so important because you know, we looked at downtown Phoenix and we looked at some areas like West Phoenix or the West Valley, and we're of course in Dallas and we're in Vegas and we're, we're in Salt Lake city. And right now I'm in Idaho and there's, there's other markets that we're looking at, but the point is each one has a very different recovery cycle based on supply and based on the amount of people that are coming. So you gotta be very, very careful. And that is really important as you start to head out in that any seven, eight, nine, because you know, a market like downtown Phoenix that could push out significantly longer. Right. And then of course, there's a whole bunch of economics that don't always add up when you're holding something that long. Ken, let me ask you one more question before we wrap up here. Then are you seeing, since you're saying there's such a, you know, regional or even inter-regional differences, is there places that you look at right now and say this is where things are getting really bad? I mean, you always hear about, you know, the, the South, because the South tends to be high beta and high, uh, high volatility and variability. So there are places that you're looking at right now that suggest, Hey, this is where, this is where things are getting really bad, really quickly. And this is maybe where you want to look for the bargains. And then there are other places that are doing really well that you don't really want to go waste your time on. Sure. Well, I'll just take a, I'll take a shot at the urban core and whatever. Call, call it Seattle, call it Portland, call it San Francisco, call it where people don't want to be right now. Oddly enough, there are pockets, uh, where like even New York had high, high rent growth, uh, oddly enough, you know, cause they're not necessarily moving out of the state, you know, but they're blowing up little areas. So that, that's the first thing I want to take a shot at because that's a real issue, uh, from a safety standpoint, from a, the politics and you know, what's going on with, with, with all that is important, the, the next, the overbuilt ones, certainly Austin, Texas is a poster child for, you know, really, really barely in trouble. The single family home prices dropping multifamily dropping. Then you go over to Nashville, another incredible story. Certainly there's pockets in, in and around some areas of Texas, Florida, very different reasons, but a lot of people move there. A lot of building actually more of an Airbnb bust there. So there's, there's little things going on. Um, the Midwest has actually been really pretty stable, pretty neutral. Um, so yes, market selection is everything. And, uh, again, you know, they're, they're not necessarily like, I personally love Nashville and Austin longterm, but, but you know, you've got so much supply there and like Nashville's not that big of a town when you're looking at a Metro, you know, and, and, uh, you know, so, so you start to look at, you know, what's the in migration, how many people are moving there, is it affordable still? And, and all of the things that affect why somebody would move somewhere. So all that's really important. So for us, we look at where are people going and what's the supply and how long will it take for this to correct? So basically who made the biggest mistakes and how can we help them correct it? Yeah, exactly. Right. I mean, that's, that's what makes a free market, right? Like I said before, if you're on the good side of it, you're part of the correction, uh, the correction mechanism, which means you, you get to pick up tremendous opportunities from other people making mistakes, which is, you think about it, that's one hell of a business to be in, right? Yeah. Right now. And you know, to your point, the banks, they're not set up to own real estate, as you know. No, they tried that, you know, 20 years ago. They don't want to do that again. Yeah. So we're getting into that situation again, where you've got people that don't really understand it. And so they need seasoned, experienced operators that can go in and say, listen, we're not trying to steal anything. We're just trying to buy it for what the market is bearing today. And, and then, you know, what, what's really happening is that they're transferring their risk to us. So we're buying their risk and they've already taken a haircut, but they're still risk. Well, you have the clean balance sheet. That's why you can take the risk. Yeah. Yes. Ken, I really appreciate your time. By the way, again, everybody check out Limitless. I cannot recommend it enough. It's one of the best and if not the best conference that is out there, Arizona. You can, you can't go wrong with that. Um, next month, Ken really appreciate your time. I will see you again pretty soon. Jeff, as always, thanks for being on. I appreciate it. Awesome. Thanks. If you're an investor or a business owner right now, you already know that the market has changed. Rates are different. Debt is different. And capital is different. And the assumptions that worked just a few years ago are not the assumptions that you would use today. That's exactly why I am inviting you to Limitless 2026. This is three days this year in August in Phoenix with investors, business owners, entrepreneurs, high net worth, accredited investors, and more. And they're all asking the very important questions. Where is the opportunity right now? 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