Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is an economist by the name of Ryan Davis. Ryan is Director of Research and Client Services at Witten Advisors. Before that Ryan was Vice President of Royal Bank of Canada’s Capital Markets Division where he was responsible for originating underwriting and closing multifamily and commercial mortgages for inclusion in CMB pools and for the sale to Fannie and Freddie. In other words he is an economist who really understands real estate which is exactly the type of economist that makes sense for us to talk to. Ryan welcome to Wealth Formula Podcast.
Ryan: Thank you for having me. Glad to be here.
Buck: Yeah and so first of all I just want to say Ryan’s gonna be joining us at the Wealth Formula event September 27th and 28th. I think we’re probably, I’m pretty sure we’re sold out but you can go to wealthformulaevents.com and check that out. Ryan let’s talk a little bit about you and what Whitten advisors just it what it does just to get some perspective in terms of what your perspective is.
Ryan: Yeah absolutely. So just a little bit of background of me about me and why I’m an economist now is that I rode the way of the you know real-estate boom in the mid early to mid-2000s and then was that you know RBC Capital Markets who remember when the securitization markets froze up. I remember our satellite offices you know being let go throughout the year and then one day I came into work and sat down my computer and then the black screen went you know it just went dark and they pulled me in and said you know we’re gonna have to you know let you go. And so kind of part of the reason why I became an economist is to try and understand that bigger picture so you know what I experienced during that timeframe you know it doesn’t ever happen again. You know on that widespread basis and. So now I went back to grad school and then linked up with Witten Advisors you know almost 7 years ago now. And what we do is we focus on multifamily fundamentals and what more importantly the drivers of apartment markets in the major markets across the country. So from the west coast, northeast, southeast Texas etc. And how we add value is we approach it from a top-down approach. So how is the economy and demographic trends we go how is that playing out across local markets. And kind of just a little bit of background on our firm. Ron Witten has been in the apartment research business for 40-plus years. He was a pioneer in data for multifamily. And so back when you know it was amazing to have growth for dallas. He was one of great ones today to do that and so yeah he built up MPF research and sold it to real Page back in 2000 plus range and then he took some time off and pulled CEOs and executives of apartment companies around the country and said how could I add value? And one of the options was be a nitty-gritty of data research provider another one is kind of a feasibility study and the third option was to be more of an advisor and not so much a dot producer but a dot connector. And so what we try and do is make sense of all the economic data and what that means for apartments going forward it kind of though roaming response from that survey was do not give us any more data, I mean that was back in 2002 from executives and so that’s how the Witten Advisors started. And so our clients are nationwide developers, private equity groups, local value add players, some debt companies as well so a wide wide spectrum.
Buck: Got it so you know understanding your perspective on that and again it’s you know in terms of what we do is the my investor group does and we’re heavily into multifamily this is really helpful you know a lot of people are worried right now because a lot of the things you hear in the press and you know the oncoming recession if that’s going to happen. First of all I guess the question for me is like you know do you what’s your guy’s perspective as an economist? I mean do you agree that this happens in the next few months and if it does what does that look like broadly for most high paid professionals? And the reason I asked that question is I think that what’s tricky is this has been one of the longest expansions I think it is the longest expansion in US history it’s ten years. And for a number of us even in our 40s I mean we don’t know much in our adult financial lives outside of the downsides of what happened in 2008. But the recession doesn’t necessarily mean zombie apocalypse, right? I’m trying to put this in perspective if you do you guys think there’s a recession, if there’s a recession what does it look like is something that you hear about there’s something that goes off in the hills you know in the industrial manufacturing sectors. Can you give us some color on that?
Ryan: Sure I mean one thing is obvious is that we’re living in a recession obsession world right now I mean all the headlines were just focused on yield curve inversion. The quick takeaway is that we don’t not expect a downturn. It’s a slowdown for sure but know you know in an imminent recession lurking around that corner. You know our favorite metrics to look at are the two in ten-year Treasuries spread and that inverted for several days but now back to the positive but more importantly it’s looking at that over taking out the short-term gyrations looking at the monthly averages they have that spread between those two bonds and that has a very powerful record of you know leading recessions and we are not you know near that right you know right now. And so even if that spread inverted for a full month beginning you know let’s say if this happens to be a best month then it generally takes about on average 16 to 18 months for a recession to come around. And so still even if that spectrum doesn’t burn then we still got some time then in addition there’s the argument that this time really is different I mean you’re always a little bit nervous making that statement but still you know 10-year Treasuries there’s a very good argument that after you know quantitative easing and also negative bond yields across the globe that there’s a demand for US 10-year Treasuries which is weighing down at the same time the deficits being financed by short-term debt which is pushing up short-term rates. And so there’s an argument that yeah that maybe this time really is different you know on top of that you know back in 2008 the Federal Reserve changed how they do know monetary policy and so we have you know over a trillion dollars in excess reserves in the banking system right now and so even if there were to be a recession the capital markets are very healthy and so it would look to us like it’d be more like an early 90s more rolling recession where it’d be some layoffs but not as deep not what we expense during the tech right not the housing bust or you know great financial crisis and so it would be a pretty quick you know V shaped recovery. That said I mean we we don’t expect that but job growth is slowing the economy is slowing and it’s not due to anything fundamentally wrong with the economy it’s just due to demographics. And you don’t we don’t have you know this big pool of unemployed people out there and then further baby boomers are retiring they’re just being replaced by young adults entering the workforce and so for the first time during an economic cycle we don’t have this big wave of young people that are you know being able to generate the big job growth gains et cetera and so just those sheer factors are gonna limit our growth rate going forward.
Buck: Right so say there is you know some sort of recessionary activity if it’s isolated you know I’ve heard you know another group that I follow is ITR economics you know they’ve predicted probably you know slowdown and likely recession but in very specific areas like the industrial manufacturing part of the market. And if that does happen maybe a silly question but is it have to result in a massive stock market correction and does a stock market correction necessitate a residential real estate correction, do you see what I’m saying? Like to me it’s like that’s what I’m trying to figure out is okay to me that what I’m hearing from economists who even think that there is a recession imminent is that it’s not all sectors it’s specific to some very you know manufacturing industrial sectors.
Ryan: Yeah no I mean we’ve already experienced you know oil and gas you know downturn you know prices cratered and there’s a big concern that you know companies were over levered and I was going to spill over in the bond markets that had this cascading effect in capital markets in the economy know we you know weather that storm and so I think that no balance sheets and the banking system is in just a much better place and so there you know we can weather any you know downturn in the industrial manufacturing sectors or any you know slowdown exacerbated by you know trade policy in certain sectors you know etc and so I think we’re in a very you know healthy position and so no I would not think that it must lead to you know the correction in the stock market at all.
Buck: Yeah right. Now as we often hear about like you know the housing market right the housing market. However when you think about what that is it’s like single-family houses it’s apartment buildings its development space. When things happen do these markets tend to correlate with one another because you know to me it’s also when I look at I’m here over in Santa Barbara you know where people are buying six seven million dollar single-family homes you know and that’s not even the expensive ones, how is that correlated to working you know working class apartment buildings in say Dallas or you know what’s the correlation there?
Ryan: Yeah I mean there are some they are somewhat correlated because you know if there are fewer jobs, there are fewer paychecks for people to pay rent or pay the mortgage and so in that case you know if there’s some kind of evaporation of housing you know demand in general then they are correlated. But you know they kind of do as we’ve seen this cycle I mean the single-family construction of apartment construction have gone beyond the opposite way where multifamily was really quick to you know ramp up where single-family has lagged for you know but all throughout you know the cycle we’re just now getting back to you know levels that are you know relatively normal. And then just looking at the demographics of single-family and apartment renters is that they’re completely different and you know I’ll go further than that. Just looking at single family so you can break that into owners and single family rentals which is really rentals if that’s the hot topic you know du jour and you know those demographics are much more aligned. And so any increase in the homeownership rate that’s really due to people you know the going from single-family rentals to single-family home ownership. Now there is some you know apartment you know folks that are you know aging and getting married and moving out and you know buying homes but you know that’s been relatively subdued just if people get married later having kids later and so there is some correlation just because kind of all you know industries are tied to the rural economy but there are some very drastic differences. And then you know also to that point going back to the recession question is that by our estimates we have 1 million fewer housing units just overall then we would normally have at this point in the cycle and so we haven’t over built overseas as we were in prior recessions in terms of housing and so that would kind of indicate that real estate might you know especially residential estate might outperform during a downturn.
Buck: Yeah I guess that goes to my approach with my personal approach is to invest right now you know I focus on good value add assets maybe not development’s really not my thing but specifically in high-growth markets. I like multi real estate because of exactly what you said then you know people got to live somewhere right and so what you’re telling me is the numbers actually back up that you know that instinctual sense of that’s where there are some security.
Ryan: Yeah that’s right I mean you can’t sleep online, right? Now you know in the apartment space yeah there are some pockets of weakness where certain sub markets where all the equity is one to be young this live or play environment we’ve seen you know four projects go on on the same intersection and so those are all competing against each other. But then you know as you get out into the other suburbs and the older properties that much more out there that fight you develop and so those have been relatively insulated from you know the wave of you know supply that is hitting many areas of certain markets.
Buck: Right so I mean for me personally that would be also you know stay away from potentially like tertiary markets because it seems like there is this desire among investors maybe not the smart money but certainly I think amature syndicators things like that to go into markets like say in Oklahoma City or something like that where there may not be true organic growth but you know people are chasing yield. I’m curious what your take on this is because my inclination is okay I’d still pay a little bit more just to stay in a market like Dallas Fort Worth or Houston where it’s got organic growth got a lot of business activity you you know massive net population. Is that kind of like what what you would say is perhaps a safer approach?
Ryan: Yeah I would agree with that part it depends on your time horizon as an investor in your overall investment strategy that kind, you’re looking at Oklahoma City you know you may be able to get higher going in yield there but you may feel that they degrade you know over time. But then more importantly on the exit you know is the capital going to be there to you know you know so you can sell that investment you know it’s there, it’s gonna be there and the major you know markets even you know in a potential you know downturn and so yeah I would generally agree with that. In terms of some of the high-growth markets you know those are also the ones that are seeing the highest growth and supply and so you think of the other Austins and Charlotte and Raleigh phenomenal demand stories right I mean they kind of you’re humming young adults want to move there etc that’s also attracting a lot of capital. And so in terms of investment horizon there may be some period of period of one to two years where you have to fight through some means pricing power but then you know over the long term those should outperform.
Buck: What are you some of your favorite markets? You just mentioned a few there. They’re markets of people kind of know about. But if you say okay you know you talk about Dallas say like 10, 15 years ago maybe 15 years ago people wouldn’t have really thought of Dallas as being like a huge growth market, now it is. What potential markets do you see out there that maybe people aren’t looking at when you look at the numbers?
Ryan: Yeah it’s interesting Dallas used to be viewed as a tertiary market and the cycle right now everyone wants in. But yeah in terms of you know overall you know health we love the Fort Worth the western side of the DFW Metroplex. Dallas should remain strong but it’s going to just kind of average rate of performance and then Austin I mean we think that Austin should underperform over the next three years within it the story is completely due to supply. Austin was one of the first markets to really get and the number of units being built there eight ten twelve thousand units on a yearly basis and just looking at apartment how much the apartment stock in Austin has expanded, its expanded by about a third since the start of this cycle. And then by the end of twenty twenty two issues expand by almost over fifty percent or so this leads all of our markets. And so again just there’s so much new product coming online and yeah that would mean a third of all the apartment units in Austin have been built in the last fifteen years and so there’s some you know nuances across markets yeah Houston had a pop after Harvey and you know deliveries you know slowed to a crawl but they were really fast to ramp up I mean if I showed you the graph on Austin or Houston you would be just shocked at how quickly developers ramped up and stuffed shovels in the ground. Then looking at the the southeast I mean we like Atlanta and Charlotte a little bit of the Austin story with you know kind of more supply pressure. Raleigh’s a little bit higher just because of you know less supply. Nashville we think we’re past peak supply and there’s capital flocked there. Three, four years ago we saw a bunch of new projects coming online they’ve all got gotten absorbed for sure that means the demand and that’s the story across more all markets right now is that the demand is there for apartments. Now you might have to you know suffer in terms of you know rent growth for a little bit but the demand is there and so Atlanta, we like Atlanta. And then the markets in the in Florida as well and also looking in the inner west we love Vegas we love Riverside we love Phoenix and that just speaks to the affordability migration coming from coastal California needs and spoke to that affordability you know issue that the migration numbers you know the number of people that are moving into the Inland Empire, Las Vegas and Phoenix from California I mean it’s staggering. And those three markets are the leaders in terms of rate growth you know you’re ramping up to eight and both of those markets on a market wide basis I mean that’s nuts though.
Buck: So I’m curious about Vegas in particular. That’s not one that necessarily has been on my radar, I mean certainly Phoenix has. But Vegas is that demographic that’s moving in there different than what it was you know because obviously in 2008 got do you stride right it got absolutely demolished I mean, so did Phoenix but Vegas was you know I was on the news I mean people going in bus rides through through Vegas you know and buying houses for pennies on the dollar. Is that a different demographic I mean certainly in Phoenix it is a completely different market than you know 10 years later but I don’t can you talk about that real quick?
Ryan: Yeah I mean it’s gonna be a gaming tourism focused economy but yet it’s changed by being more attractive to young young people that then in addition to you know there’s a strong demand and people wanting to move they’re just magnets for you know migration is that supply I mean like you said it just got crushed along with Phoenix and along the Inland Empire and so investors are gun shy right now and so that has led to just low levels of construction in all three of those markets, well Phoenix you know not not so much anymore in the past two years it’s finally you know beginning to catch up but in Vegas and Riverside this the amount of new projects being built are just minimal and so that’s being you know that’s leading to increased wrinkler within those markets.
Buck: Yeah so let’s talk about just broadly speaking next decade and I’m just gonna ask you to be you know economists profit here. I mean I presume that you probably have a bias towards multifamily real estate to be there, what do you think over the next decade is it really the place to be because of demographics do you think there’s other kinds of real estate that you like that might you know might be better or worse or just give us some color on that and from what your perspective is in the next decade.
Ryan: Sure yeah and so just I’ll preface it with that as an internal company policy we do not invest in any developments. We have lots of public REIT clients and so there’s always a fear of insider information and so we don’t invest and so we support information. So with that said you know going forward we are bullish on multifamily for several factors. I think in the near term if your investment thesis is you know we expect a you know a downturn then you know multifamily is recession resilient. It’s outperforming other property types in the prior downturns and then in addition where multifamily really socked shines is in the early stages of the recovery with the short term leases able to recover you know very quickly and so just yeah in that kind of recession scenario multifamily outperforms. Going to the for kind of a longer term just in terms of the demographic drivers and we look at that’s where we turn the propensity to rent apartments and basically that’s the share of households that are choosing to live and five plus rentals. And if you look back that that share has been increasing for four decades. And there’s the ups and downs with the housing boom and bust yeah et cetera the baby boomers becoming young adults you know etc, but that share has been rising and we do not think it can ebb or even flatline even we think it’s still going to you know increase going forward. And that just speaks to lifestyle changes of people staying single for longer periods of time waiting in order to have kids etc that just pushes people into rentals for longer and many of which choose you know apartments. And just in terms of the economy, we expect continued growth, now it’s not going to be the three four percent range that we’ve been accustomed to in Prior cycles, it’s going to be limited by labor force growth, which may be closer to half a percent, one percent going forward. So yeah we’re gonna you’ll slow down but still you know if you look if you break job growth out into you know that you know from that aggregate number into you know the age is just that baby boomer cohort is retiring in droves and being replaced by a big twenty to thirty four-year-old you know crowd we’re past the millennial but still there’s good growth in that you know age group and so that’s just weighing down on the aggregate numbers and so if you look in you kind of break that apart it’s still very good for apartments and then in addition that people are living in apartments for for longer and so you have that you know a millennial group that is getting into their you know early 30s but they’re gonna stay in apartments for you know longer. And so we just think that all of these trends are long-term in nature and are not apt to change absent some you know change in federal policy where you increases homeownership or you know anything like that, still we think that you know going for the demand is there and then as long as supply remains contained, which right now we’ve been about three hundred fifty thousand units on the national basis for the last three years or so and so we don’t we don’t see that trending higher and higher just with we’re laying cost our construction costs the labor and now you know tariffs on materials etc, that’s all just weighing on the economics of a profitable development deal. And so we think supply will be relatively contained.
Buck: Fantastic. So Ryan you are going to join us as I said at the end of this month in September in Dallas and give us a great you know great look at you know what you’re seeing around you a nice presentation we’re excited to have that. How else can we learn about what you guys are up to in the meantime?
Ryan: Sure yeah I mean you can look at our website we have a little blog called The Witten Advisory that we post an excerpt from you know what we provide to our clients on an ongoing basis just you know once a month, here’s a chart and here’s you know some narrative and context around it. So that’s you know one way we do a lot of speaking engagements so I don’t know if you’re lots of in Dallas but also you know across the country so you can look us up if we’re speaking at an event. So that’s one way and then also just you know reaching out good our website or email and contact information is there so happy to answer any questions you have or have conversations about about markets.
Buck: Ryan, thanks again for being on Wealth Formula Podcast.
Ryan: You’re welcome, Buck. Thank you for having me.Buck: We’ll be right back.