Jason Hartman hosts guest Andrew Rybczynski, Senior Consultant at CoStar Portfolio Strategy. The two have a discussion on new construction in signle family and multifamily properties. They look at the labor market and its slowdown. They end the show with how the millennial demographic is impacting housing.

Investor 0:00
I’ve been following Jason’s company ever since 2007. I went through a seminar in his Newport Beach office by fashion Island. And I’ve been listening to his all his podcasts since then. Always wanted to buy some more. But a couple years ago, we went on the property tour in sis Danny. And it was great. We actually sold our Texas property and did a 1031 exchange with two other properties in Hamilton, Ohio notes and they’ve been working out great for us ever since. And this just in 2017. Yeah, last year, we sold our home in Chino Hills that we lived in for 25 years, raised our family and all that. And we’re taking all our proceeds and we’re going all in and rental properties. And the funny thing is we’re kind of following Jason’s lesson to the tee. And it’s working out great for us. We’re not gonna buy again in California. we’re renting actually in Newport Beach, California. I got into real estate investing because I’ve been a student of the stock market for years and years. And it just doesn’t seem to make sense to me anymore. Besides what Jason says it just, it just seems like the guys at the top, make sure that they win and you don’t win, which, you know, it’s just I feel the same way even before Jason said that. And the fundamentals don’t seem to make sense to me. But there are fundamentals in real estate and income property investing that aren’t going to be able to be changed by high frequency investors or anything like that. It’s the fundamentals are there and they’re going to stay there. I’m fine with income properties, you know, the slow and steady approach.

Announcer 1:42
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 2:33
Welcome to Episode 1223 1223. Thanks for joining us today. It’s my pleasure to welcome Andrew schinsky to the show. He is a senior consultant at costar portfolio strategy. And we’re going to talk about housing today. Andrew, welcome. How are you?

Andrew Rybczynski 2:49
Not that Jason? Thanks for having me.

Jason Hartman 2:51
Good. Good to have you. So a lot of stuff has been going on in the crazy, possibly very frothy real estate market. Coming out of the Great Recession, institutional investors, they’re just a lot of money sloshing around looking for yield. We’ve seen a lot of construction in brand new a class, multifamily housing all around the country. It feels like every city I go to, there’s cranes everywhere. Right? Is that subsiding? Or how’s the supply demand outlook?

Andrew Rybczynski 3:22
So we certainly have seen a lot of construction of top end apartment buildings, the cycle and your feeling on a lot of cranes in the sky is well placed. Right now we actually have the largest number of units under construction, the cycle, topping out about 650,000 units under construction right now. Now, that’s actually kind of an interesting subset of the market in that while we do have a ton of units under construction right now, units completing has actually not really been reflecting that. So the number of units that completed in 2018 was actually down a little Bit from the number that completed in 2017. And 2019 is an off to a great start either that says effective vacancy top line vacancy, and we’re talking in early April. So our q1, preliminary numbers for 2019 are just out. And top line vacancy in apartment is actually down a little bit from last quarter. And compared to where it was last year, it’s actually down quite a bit. A lot of that is due to slower completions of apartment units, especially in that luxury market. So why are those completions and deliveries slower? I know that developers in any part of the marketplace, you know, no matter what they’re building, there’s definitely a labor shortage. construction materials are always an issue what what’s slowing the delivery or maybe, you know, maybe even talking about the financing into so as best we can tell the labor market is the key driver of the slowdown in delivery. Now that’s not true everywhere. I’ve heard anecdotal evidence that one Major slowdowns in Boston is actually materials related. It can’t get enough glass or curtain walls on on high rise apartment buildings. But even that plays into a labor shortage. We’re at three, eight, unemployment right now. And the participation rate continues to rise in 25 to 54 year olds. So we’re really tapping the bottom of the employment barrel right now wage rises have started to reflect that. But the end effect is that there’s not it doesn’t seem that there’s enough workers to go around to build all these buildings that developers continue to start. And that has had an effect in the length of time that it takes to complete a building, we have noticed an increase in the number of buildings that are taking three years or longer to to complete. So speaking to the the financing aspect of your question, that does mean that typically with a construction loan, lasting about three years, you do have to go back and find some new financing.

Jason Hartman 5:58
Yeah. So you mentioned I mean, you’re you’re located in Boston, and you mentioned you know, glass curtain walls on high rise buildings. But, you know, a lot of stuff is just garden style sticks and bricks type thing. I mean, three years to build high rises like that isn’t? No, it’s long, but it’s not crazy, I guess. But the garden style stuff goes up a lot faster. So how is it in that sector?

Andrew Rybczynski 6:23
That’s true. And when I started that rise, I was speaking specifically to garden and mid rise apartment. Well, I shouldn’t say garden because gardens. there’s virtually no garden under construction. But the mid rise sector is really what we look at when we’re looking at those increase in number of buildings taking longer than three years to complete, because that is more likely to have a three year construction loan attached to it. Sure,

Jason Hartman 6:47
sure. Okay, good. So those construction loans come due and you know, they’ve got a complete and they’ve got to deliver or your clients and you know, the research you’re doing, they must be seeing big increases in construction materials costs you mentioned In the glass shortage. Anything else on that?

Andrew Rybczynski 7:02
Well, we know copper and steel have both risen in recent years. Steel maybe coming back in a little bit. But certainly tariffs have bitten on that front. on the

Jason Hartman 7:11
demand side, the renter demand side or tenant supply side, depending on how you want to look at it, I guess, you know, we’ve seen these interesting trends, it doesn’t seem to be that there’s much stigma at all toward renting anymore. It’s not like you’re a loser if you’re a renter, but they used to be a little bit of the way people thought of it. The point is to be a homeowner, right? That’s always the goal. But nowadays, I don’t know if that lives like it used to that American Dream concept and feel free to comment on that. But one of the things that’s particularly interesting about the renter population is this baby boomer renter population. I mean, that’s a new one right that we see baby boomers selling their houses, empty nesting, and then moving into apartments. Then if you segment the market you talked about the high end you know high rise apartments, which are always high end, you know, maybe talk about the different categories of, of renters out there. And then I want to talk about your comment OFF AIR about the, you know, people moving down market,

Andrew Rybczynski 8:16
the buyers so the recession hit everyone hard and homeownership rates peaked in around oh five at since then, as you as you mentioned, baby boomers have started shifting towards renting more so than one would expect for that age group. That’s been an important aspect of demand, especially for the high end apartments that we were talking about. Downtown living appeals to not just the younger renter, but the empty nester as you said, I can’t speak to the mentality of whether a renter prefers renting or homeowning or any stigma that might be attached to it. But I can tell you that for younger cohorts who are owning homes at slightly higher shares than they had in the past couple of years, we’ve seen an uptick there but for you cohorts, there is still a huge problem of affordability and debt, especially in the older, more educated markets, Boston’s and San Francisco’s and New York’s of the world where not only do you have to pay that mortgage but scraped together a tremendous down payment, and in many cases, you’re doing that while you are neck high in student debt. The student debt story does attracted a lot of attention, but it’s a very important aspect of the homeownership market.

Jason Hartman 9:28
Yeah, as I always say, we’ve got an entire generation of millennials who have a mortgage, but they didn’t get a house included with it. It’s called a student loan. That’s an excellent way to burn and that is an unbelievable scam. The price of college is a total scam. But that’s another discussion. So yeah, what else do you want to say about the Renner the supply of renters the tenant population

Andrew Rybczynski 9:55
by and large, we do think that there’s still a pretty good demand pool for renters. There is Still a fairly large share of young people who live at home, and that that’s

Jason Hartman 10:05
sort of the shadow demand, right. And during the Great Recession, we talked a lot about the shadow supply of all these houses that the lenders weren’t foreclosing on because they were just just doing workouts or just postponing foreclosure, or they already had them in their Oreo portfolio. They didn’t want to dump them on the market in fear of hurting the market too much. And the government had a lot to say about that, too. But now, I mean, it’s diminishing a little bit, I guess, as people do move out of their house, but there’s this shadow demand of renters. So, you know, that’s interesting on that side of the equation that, you know, living at home and 40 years old, you know, you know, or 29, you know, that’s unusual, too,

Andrew Rybczynski 10:49
right? It is, but aside from that, we have seen very strong household formation over the past few years, to the point where it’s actually keeping up with supplied to a large Green. And some of that comes back to the fact that we’re just not building, especially single family homes as much as we used to. When you compare the number of single family homes completing this cycle versus last cycle, there’s a tremendous disconnect and population growth hasn’t fallen off as much as homebuilding has. So, we are essentially facing a housing crisis in America. When you say crisis, you mean shortage,

Jason Hartman 11:25
right? shortage. Right, right. Single Family investors, make sure you heard that, because it is definitely true. The inventory coming out of the Great Recession, especially on the low end, these nice bread and butter type rental properties that you know, all investors love. There’s a giant shortage of them. that bodes really well for your future. In single family home investing. I just want to make sure our single family people hear that

Andrew Rybczynski 11:52
Yeah, go ahead. To that point, actually, the governor of California recently to Huntington Beach for not fulfilling its construction. saga. Yeah. So there may be a backlash coming against this extreme zoning rules that that prevent the single family housing as they’re being built. But for the time being, there is something of a housing shortage in America and for an investor in multifamily housing. That’s a good thing.

Jason Hartman 12:18
Yeah. Yeah, no question about it in an investor in single family housing to that means we’ve got a limited supply. We’ve got a population that needs a place to live. And we’ve got this shadow inventory. Do you have any stats or information on that shadow demand? I said shadow inventory, I met shadow demand. In other words, the millennials usually living at home that will move into the housing market and have household formation. You said that the household formations been pretty strong. The only thing I would love to see is, you know something that would answer the question compared to what, and here’s what I mean by that the millennial generation that cohort is so large, about 80 million people that, you know, even if as a percentage, like on a per capita basis, they’re not moving into the housing market and doing household formation too much. And then they’re, you know, living at home type thing. You know, just because their numbers are so large, it’s gonna seem strong, right, compared to my generation Gen X, you know, it’s only 46 million people. I mean, we’re like, half the size. We’re tiny little generation, or cohort. So do you have any thoughts on on the percentage of the millennials or a comparison on that? I haven’t seen Well, I don’t know if you do. Yeah,

Andrew Rybczynski 13:39
I don’t. I can tell you that last year in 20 1818, q4, about 32% of young adults 18 to 34. Were living at home and compare that to let’s, let’s say, your gender. And your generation might have been in that age group, let’s say 1990. That was about 28%. Yeah, a four percentage point jump Doesn’t sound like a lot to the wrong numbers, we’re looking at, let’s say 1990 get about 18.5 million young adults living at home versus over 23 and a half today.

Jason Hartman 14:10
Yeah. And the funny thing is, there’s really very little stigma attached to that anymore. Whereas in my era, and certainly the era before me, the baby boomers, that would have been just not cool thing to be living with Mom and Dad, you know, you want to get out as soon as you can and be independent. And now you know, it’s in the millennials, like their parents, you know that more than we did. That’s no disrespect to parents, but it’s just kind of a different mentality. It really is. It’s very interesting. And society is so much more portable nowadays. And there’s so much more travel going on that even if you do live at home, it doesn’t really feel like you’re as stuck there. So there’s a lot of factors at play. before we let you go and let’s talk about the segments of you. deal with a lot of institutional buyers. They’re not buying as much Class A stuff now as they used to right because it’s it’s become pretty expensive and you mentioned off air before how they were going down market and buying some of the BMC product, how that’s pushing up the prices in that

Andrew Rybczynski 15:19
sector, right. That’s definitely been a trend we’ve seen in the last four or five years. So core pricing that is pricing of your A plus product in downtown’s and core metros has been pretty heady for the last few years. And a lot of institutional investors the same as any other investor have yields that they need to that they need to hit. So they have been traveling down market some degree and a good example of that is the Prudential insurance deal they got done a few months ago, they bought about a billion dollars worth of workforce housing that is BNC properties. The yields on the on those BNC properties tend to be much healthier than your class A stuff and Furthermore, one thing that we’ve we’ve noticed specially for investors who are really seeking some additional boost to yield by going to value add properties, that is properties that are a little more poorly occupied, you do some work you, you bring the occupancy up, you get your yields you get your IRR is a little stronger, does poorly occupied buildings have at the spread between a poorly occupied building and a well occupied building, in terms of pricing has come in a tremendous amount over the past four years. So someone looking to do that value add prospect is now going to have to expect a little bit lower additional yields, because you’ve gotten investors moving down the spectrum a good amount.

Jason Hartman 16:39
Yeah, that’s an interesting trend. It certainly is. Any data you want to share on cap rate expectations on the different product segments. I mean, you know, it depends on the city, obviously, but

Andrew Rybczynski 16:50
it does just anything but but in general, our view right now is not terribly negative on cap rates, the spread between cap rates and triple B bonds, which we find to be a pretty good indicator, it’s actually pretty normal and it doesn’t feel normal, right? Because you’re dealing with very low cap rates relative to history. But you have to look at where everything else is price to history, the spread between an apartment cap and a triple B bond is pretty normal. So even though even though you might be looking at as well, if you’re an institutional investor, you might be looking at a four and a half cat. That’s still a pretty decent spread over triple v bond.

Jason Hartman 17:27
Hmm, yeah, interesting. So that that’s a common metric. It is compared like, you know, the institution could just do triple B bonds, or they could buy an apartment complex. And that’s how they think of that. Oh,

Andrew Rybczynski 17:39
yeah, that’s a pretty typical comparison. It’s especially useful in office because in office, if you’re buying a top rated office building, you’re often buying a credit tenant. Doing the comparison between a credit tenant and a credit bond is pretty indicative.

Jason Hartman 17:54
Yeah. Then that makes sense. And, you know, with a bunch of individual tenants in apartment buildings, it’s different but kind of curious, though, why why do they compare it with triple B rated bonds? Where did that come from? like is that is there some, there must be some comparison on the, you know, the way the investments going to go and the risk associated with it is there, they’re sort of taking, hey, look, we can buy this 200 unit apartment complex. And it’s about the same risk level as triple B bonds. What’s the thinking there?

Andrew Rybczynski 18:26
It has to do with the with the risk spectrum, the risk, the view on risk. So during a during a bad cycle, you’ll get a lot of investors rushing into what’s perceived as the risk free rate that is the 10 year bond, but they’ll abandon what is perceived as riskier investments that is triple Bs and real estate. Real Estate can go to empty very quickly, perhaps not multifamily, but if you’re dealing with a with a company that sets office and retail Yeah, you can very quickly go to no cash flow. So that’s where that comparison comes from, it doesn’t hold up exactly the same with multifamily, but certainly multifamily also suffers in a downturn. More so than a more so than the so called risk free. Right? Yeah,

Jason Hartman 19:12
very interesting. You know, I’ve been saying for a while, and I keep sort of moving my prediction forward. In you know, here’s, here’s what I’ve been saying. The next 10 years, the demographics coming at the rental housing market are phenomenal. And, you know, for all these reasons, student loan debt and the portable I no one talks about the portable society like I do, it seems like but, but I think that is a factor that people don’t, they don’t consider themselves you know, they just need a kind of a place to sleep, right. You know, they, they consider themselves much more portable, they can live in smaller units, because all of our products have become so much smaller. You know, in the old days, if you had a stereo system, you had these big huge speakers I add this actually matters. I mean, I don’t know it may seem like a dumb little thing, but I I think it does matter, this portable society concept. I think people just view it differently. And so we’ve got all these different factors. We’ve got Gen Y coming up. And you know, it’ll be sort of interesting to see what they’re like. None of us really completely know yet what how they will act in the marketplace. But you know, is it still true? Do you think that the next 10 years of demographics coming at the rental housing market are really, really bullish?

Andrew Rybczynski 20:27
Well, I’ve got a couple things to say there. So So first, in terms of raw numbers, yes, let’s call them Gen Z for now, or sorry, Gen Z. Gen Y is millennial Yes, right. can keep you can keep it straight. But Gen Z in raw terms is just as big as millennials and may in fact become bigger depending on on immigration rules that may or may not come into effect. But that aside, many of things that you were talking about, particularly as it pertains to smaller units and different living styles. I think a lot of the That is driven as much by preference as by the economics of the situation. We talked about millennials being burdened by debt, not necessarily earning as, as highly as boomers did relative to where standard medium wage was 30 or 40 years ago, I think that that matters and has caused some of this, in effect, downgrading and lifestyles. Further, developers are always going to be looking for the best return on their assets, right. So shrinking unit sizes very much age them as well. You get a higher price per square foot on a smaller studio than you do on a certainly compared to a three bedroom unit. And kind of just the last my last thought on on that was that when it comes to that, that whole portable lifestyle, I think that you’re buying large right there, but one important statistic is that millennials have actually been less prone to migration than then boomers were as present of a population, I want to hear what you say about that, but I just want to interject, I would argue that they don’t have the money

Jason Hartman 22:07
to move. Now, you know, I have always said, the best thing you can have on a resume is mobility, you know, to be able to go to where the jobs are. But yes, I think there’s a certain aspect of just the economic ability to move number one, and maybe, you know, another factor is just kind of some laziness. I complain about,

Andrew Rybczynski 22:28
you know, but go ahead. So that does speak to what I was saying that millennials have proved less likely to move, either for jobs or for opportunities and boomers. why that is, I guess I couldn’t fully say,

Jason Hartman 22:41
yeah, comfort level maybe sort of ties in with that kind of laziness, you know, come just being comfortable. I mean, there’s nothing wrong with that, you know, I have this one client that says you got to stop bashing millennials. I’m not really bashing them. You know, I mean, listen, my generations got tons of problems do okay. There’s just not 80 million of them to talk about as they’re moving through the economy. So Millennials are just going to get more press, you know, that’s the way it goes.

Andrew Rybczynski 23:06
Yeah, we’re leaning on Gen Y to pick some of that up. Yeah, they’ll pick it up in a few years. So don’t worry.

Jason Hartman 23:12
You’ll phase out here soon. Okay. So, Andrew, any closing thoughts and give out your website,

Andrew Rybczynski 23:19
again, with this is a co star portfolio strategy. And we’re an affiliate of co star group. So that’s just co star calm. In general, we do think that the multifamily and just the rental sphere in general is in pretty strong shape. The supply pipeline, that is the number of units under construction is somewhat worrisome. There’s certainly a lot underway. But we think that at the current rate that those have been completing, we’ve got a little more time

Jason Hartman 23:44
and when you say the supply pipeline is worrisome, that means

Andrew Rybczynski 23:48
not another supply. Right. I should say that there is quite a lot of luxury product underway. So for that drop in the market, that is certainly a risk and that I would totally agree with. I can’t remember if we talked about that on or off air. But the high end apartment market, lots of supply because that’s what they’ve been constructing that like crazy last several years, right? They have been and the vacancy rates reflect that. However, I will say that the stabilized vacancy rate for that luxury product is still quite good. It’s it’s still very strong.

Jason Hartman 24:16
Good stuff. Andrew, very interesting talking with you, folks. You know, this stuff is complicated. You’ve got to peel back the onion and slice it and dice it every which way to really understand the data and then you’re still left with questions. That’s just the way it is. So thanks for shedding some light on this Andrew. Very interesting discussion. And we’ll look forward to having you back on and future.

Andrew Rybczynski 24:37
No problem, Jason. Thanks again for having me.

Jason Hartman 24:41
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Jason Hartman 24:52
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