Gregmal

CLI $12.50 calls

Do you have any thoughts on the CLIs and CLPR or any other names in the more restrictive markets when it comes to building? CLPR trades like such a piece of shit but its got a strong base ahead of it. I dont think the coastal stuff has nearly the same momo as the better located stuff but if the cycle dynamics you described take effect, I would imagine those(coastal names) experience far less of it. You could make the case NYC area already had its building boom in recent years.

To each their own. I know folks who are levered 3-4x and sleep like a baby and I know folks who have 20%+ cash and stay up at night sweating because they have too much exposure. Whatever you gotta do to have a clear head is what you need to do and everyones different. Personally, I almost NEVER incorporate macro risk into individual company analysis or decision making. Why? Because 1) every friggin stock shares the same broader macro risks and 2) the larger macro stuff is super easy to hedge both at the portfolio level with larger index products/derivatives and then also at the company level. I only really focus on company specific risks on a single stock/company investment. IE AIV has development risk and although now largely gone, the mezzanine loan risk. I mean think about it...how silly is it to spend 95% of your time worrying about things that only happen <10% of the time? Or less. Or are still largely unlikely? Its like going around your house 24/7 fretting about a fire starting and the whole thing burning down. Whereas, me? Just buy some homeowners insurance and stop wasting time thinking about it. In the market its even easier...whereas my home can be totally destroyed, Berkshire for instance, cant. So through that lens, what am I hedging Berkshire for? What? Maybe to avoid a temporary drawdown? Totally not worth it. Of course I can then naturally go down the rabbit hole of "well in this scenario Berkshire doesnt come back" but if thats the concern you're worrying about things that are wayyyy too far out the probability curve and will just inevitably spend most of your time finding excuses not to take likely money because something unlikely can occur, which to me doesnt make sense.

Ya. Probability wise, I see low 20s as a reasonable and highly likely target and I see mid teens as a safe place to back into a bigger position if you get that downside. Not really much impairment risk, IMO. Either way, its fun playing the discount to NAV games when a company is actually selling assets. One of the easier event driven type trades out there, especially since covid shook everything up.

Not a whole lot that you probably dont already know. They're done for the most part with office...I hate office, so thats mainly what I was waiting for. Whats left there will move. Beautiful waterfront buildings. Otherwise you just have some really good assets on the MF side. I actually like it quite a bit more than CLPR here for the simple reason that governance seems in check, the properties are better, and again, where's your downside now? One of the better ways historically to play any sort of bullishness on NYC has been to buy certain types of NJ assets. Jersey City is the new Hoboken. Lease ups have been strong as well. Lotta different things could go right and not too much from what I can see that can go wrong at this stage of the game. Whats your realistic risks on this? Mine were total disdain for office and especially suburban office. Those are no more.

CLI

If we were playing Jeopardy I would smash the button and declare, What is, Why The Opportunity Exists! This isnt quite "COVID killed retail, malls are dead" on SPG in the 50s/60s but "inflation kills real estate" is up there. In a way, as Ive been saying for over a year now, covid blew spreads out of whack. With MF, even of the ESS ilk, but especially the smaller cap with some hair, if rates stay low..you have massive upside. If rates rip theyre gonna crush it. So yes, in this instance, higher rates, lower rates...doesnt matter. Personally, I'd prefer higher rates so tons of other stuff gets crushed and I could pick up some of the bodies.

IDK but to me, the exercise of low rates = good for housing, high rates = bad for housing is a little too academic. Sure, low rates are better for housing. Sure higher rates mean less affordability. In the real world people still need homes and adversity on the macro level is ALWAYS met with flexibility and subsidy. Rates go higher to the point its severely impacts the ability of people to buy homes, 1) you'll see either subsidies or lending standards relaxed, or probably both. 2) you have a ton more folks in the renting pool. Its the same stuff over, and over, and over with the "what if the market crashes" stuff. And people spend all this time doing all this worrying and the playbook is the same every time. There is ALWAYS a rabbit hole you can go down to come up with a risk you cant assess but in the real world I really haven't seen a situation that warrants making these assumptions a base case. "What if the Fed loses control" is the new one. If the Fed really loses control Ill still be on the right end of the curve and do better than most. Bring it.

You currently have the UBI/child tax credit. Thats $300 per child and an average of 2.5x that per American family. Rates go to 6%, SFH/mortgages get more expensive, more folks get priced out of homes. Guess what happens to rentals? BG is on the money. Everyone talks about theoretical "what if rates go to x?" situations. They never contemplate what gets them there. The universal accord is wage inflation is here to stay. Thats another notch on the MF bull case.

Thats why my DD on a @BG2008 name, is often quite minimal, assuming I havent done some work on it already myself. The man is thorough! I love seeing the same bear case arguments redundantly. Its often very bullish as it confirms the narratives holding back future buyers hasn't changed. Well if rates go to "x%".....yawn.....its why housing is probably now maybe in the 2nd/3rd innings or so IMO. As @Spekulatiussaid awhile ago in another thread, indeed tons of people over the past 6-9 months have come around....but there's still many, many more to go before things start running their course. Canadas been in a housing bubble for decades. Australia had what? 30 years of growth? But we're ready to burst in 12-18 months? yea.....no!

The NIMBYism is real, for sure. I actually got a flyer a couple weeks ago for a pretty interesting industrial piece in Denville off 46. I'm in those areas, IE the 80/46/206 spaces all the time. Poconos, East Stroudsberg, out to Lehigh Valley. And yea, theres TONS of "say no to the warehouse!" signs on lawns. Indeed, its largely farmland and all that good stuff. But its also not impossible to get things done there. You can go out a few miles and make something happen. The key IMO is the tailwind. With industrial you have two things going for you...construction costs and labor, as well as rising e-commerce based demand. Industrial Ive seen those things go up in much less than a year., MF takes 18 months at best. Several years at worst. Thats before the horrendous supply chain issues which are much more complex for housing then shells for storage space/warehousing.....With MF I dont think its all that different, if you're in the right area. If you're talking DC, yea, maybe over the years it gets flooded, IDK. I haven't followed it long term. Right now DC looks appealing. But comparing Austin, TX or a Raleigh to a DC is going to be a lot of apples to apples and a lot of oranges to apples. But as @thepupilsaid, it gets hot, supply increases, it stalls, catches up...whatever. I mean people talk like buying at a 4 cap you need magic for it to work...Maybe if you're looking to compound at 20%...but then you stop and realize how many institutions and funds are doing 2-3, maybe 5%....parking cash LOL...So you buy a solid new build in DC and for 5 years you clip 4% NOI with no growth...which is greater than 4% if you can slap some financing together. This is a big deal to the negative? So thats kind of what I'm getting at. Relative to the safety of these things, the returns, despite surface level wincing and "oooh thats euphoric" rhetoric, are actually quite good for a large swath of folks who a currently wasting their time in this other near zero crap. Some obviously have mandates, but a lot dont. Theres oodles of foreign money coming in. Theres a strong possibility this can sharply adjust as more folks get shaken out of the 0 interest, no inflation investments/trades. One of the greatest gifts of 2008 was the RE shakeout and narrative buster. But the truth is, while I won't say "home prices never go down"....these seismic shifts in a negative direction really arent common, and take a TON of things going wrong to happen. Thank the GFC for effectively conditioning the majority of people to expect these sort of things to happen every few years. "Yea home prices never go down" is almost even a snarky quip of the cash up, risk paranoid worry wort quant. Buuuut...do they really, generally go down in a way where tons of folks get hurt? Let alone half intelligent ones? People put these odds at many multiples of what they really are. I wouldnt put them at zero, but certainly low single digit. Whereas theres folks who are underwriting 20-30% corrections........Laughing at that has historically been the proper move. So size up the risk/reward right now in MF to the nth degree and to a lesser but still relevant extent, SFH....for a good while Ive thought its massively skewed in favor of the long trade, its been wildly profitable, and the purpose of the thread was really to kind of gauge what people thought because frankly, I still think its got a very long way to go.

https://www.cnbc.com/2021/09/29/fed-chair-powell-calls-inflation-frustrating-and-sees-it-running-into-next-year.html Frustrating? Ha! Only if you believed all the BS and didn't figure out how to profit from it! Keep on going though, Team Biden/Powell! You can do it.

Or again, I'd focus on the term "glut". Maybe there is and has been a "glut" but there's simply so much cash out there that at a given price you've got renters lined up for the space and buyers lined up for the product? Would that be inconsistent with the overall housing market? In the current market AMC can produce "air" for people at whatever price the market is and can print all day long. Theres buyers. However a MF campus takes 18-24 months or more to build. The "they'll just build til theres an oversupply" theory a lot of people revert to is, IMO, too much of an academic exercise. In the real world, for a stable, safe, hard asset with good cash flow.....if you build it, they will come.

haha yea thats a good question. Best guess would be that "glut" is a subjective term, there is limited supply of buildable space in desirable markets, and sandwiched in there somewhere is the fact that people want to live in decent areas. But thats just a guess. Similar things have been said about warehouses. Which are even more glaring and something that by and large Ive missed as an investment opportunity. But why cant you just build that to wazoo? Relative to building an office tower or even a multi family campus, throwing up a warehouse is easy. Of course theres zoning and permits and all that shit, but same question applies.

I think @maplevalue is getting at the bigger picture. To your point above, NO! The trend is already in place, which is what you want to see! I'll elaborate a little. Take your points above. Theres so much money out there, and theres your spectrum of options. You have cash at the top and IDK, crypto or equity derivatives or some shit at the bottom. Fixed income you have munis and then you have junk bonds. And everything in between. We've had a 40 year bull in rates. We're at 1.5 on the 10 year and negative most elsewhere. Its not a matter of if really, but when this market gets disrupted by the forces of nature and those things that are out of the control of central banks, etc. We've already talked on other threads how if rates stay low, theres good money to be made in a bunch of RE based stuff. But what Im getting at here, is essentially, when that rumble starts to get real and the cash/treasury crowd gets forced out the risk curve...where does the money go? I would think MBS is next on the safety ladder but those too share unfavorable dynamics and lets face it, the spreads arent even that much better. You've got a lot of good evidence out there that the foreign buyer of US MF is just emerging over the past few years. Why? Because MF housing is largely a US thing. Most overseas dont even know what the asset is because they dont have the same type of stuff over there. I have no clue why, but these mini campus type rental complexes just dont exist in lets say, Europe, the same way they do here. But in terms of profile, they are extremely attractive once one does some half assed or better DD. So I think you have a lot of pointers saying that it could be the asset class with the greatest risk/reward over the mid/long duration. I mean look at the MBS...this was a totally fringe product that only started emerging in like the late 70s. Was still off the radar of most till the late 80s. and peaked 20 years after. Today, the trends happen a lot faster, but theres a lot of overlap in terms of the bull case for these assets. If not this, any suggestions on what type of asset and risk profile becomes the next in line? Thats the trade Im looking for.

Probably somewhere in between. While some dont like the loans, this is why I love them...they pay outsized rates and most have purchase options. You'll have to shuffle with it a bit because the developers have buyout options which is were a good chunk of the one off earnings have been coming from....so that question if you want to get real granular is where the trade off is when a developer buys it out, IE theres massive profit bringing it to market, vs when the company takes the property...but no doubt its below market however I wouldnt underwrite the assumption thats its a tick over construction cost either.

So basically if you have the ability to access cash at 0 or negative rates but arent allowed to take risk. Makes sense. The inflation/deflation argument is also interesting. After a 40 year run on the side of lower rates, I know where I sit on this. But thats a good point.

Got it. Its definitely the latter on a raw basis. The land value(especially with entitlements and whatnot) does adjust as its the most supply/demand sensitive component. But it definitely doesnt cost anywhere near where the finished product trades to build one. Similar to industrial where everyone sees a shell off a rural-ish corridor and thinks WTF, how does that, plus a lease trade where it does? But there's value in the aggregate despite not being "that hard" to build.

As I said, I get the "why they buy Treasuries" argument, so while its there, the logic sucks, and instead maybe focus on an MBS...why is an MBS looked at so much different than what a MF unit offers? Side note, re: parking money in Treasuries....why even bother LOL? Like isnt it just a waste a time? Just leave it in cash...whats funny, is theres a bunch of suites out there with corner offices who actually get paid to do this... Imagine that? Just another example of how the financial system is full of waste.

Its not farfetched really, you have seen the same sort of thing play out within the industrial warehouse space over the past few years as well. The market had a certain perception of the risk profile that turned out to be totally off base. Your prime stuff in industrial was trading at like 7/8 cap. 10s weren't uncommon. Now you're at 4. I even laugh because you look at the MF run, and earlier in the year it was like OMG 3s! Then a few months later everyones like "oh fuck, 20% rent bumps! now it makes sense!"....but the force is strong on this, and the larger backdrop I think has to be given consideration. A treasury pays nothing and relies and the full faith in the government. As I said earlier, I won't argue with the "why" behind the boneheads who buy those. But a lot of the reasons even on paper are the same as why you'd buy a MF unit. But then you get to an MBS and MF? There's no comparison. Even safety of asset. In one case? well we've all seen what happens in the "one case" scenario. You've got a piece of paper and a mess and load of legal expenses should you need to enforce the contractual stuff. a MF unit? You have tenant diversification and short term leases and in a good area will always be filled, even during a crisis.

I think the Treasury argument can be made both ways. But if we want to look at an MBS, which is absolutely comparable to a treasury, theres still typically quite the difference, which was largely my point. MBS and even single mortgages are 100% correlated to treasuries and generally the tightest on any asset class in terms of spread. By why is an MBS? Probably liquidity and laziness and nothing else. Risk profile too? One is secured by essentially the same cash flows as the derived logic behind a mortgage, but diversified and marking to market every 12 months. A mortgage or subsequently MBS has fixed coupon typically and prepayment risk. I can see the textbook reasons why one would prefer an MBS, but dont think they make any sense at all in the real world. Same for a treasury. You have nothing but the guarantee the government will give you the money back. Otherwise you have nothing and get nothing for the privilege. I was reading earlier in the year that part of the massive run in MF assets has been just this though. Its fairly new phenomenon but specifically banks, insurance companies, and foreign capital. I recall even a few years back a big JLL reports on like 50% increase in foreign buyers or something like that. Theres so much of that money out there that a shift in thinking can create a massive wave. I pretty much agree. Its totally boneheaded and when you evaluate the real world benefit, liquidity is the only one. I think its far harder to gauge this today because the market dynamics have gotten a bit whacky there past year. That and the costs will obviously change depending on area. Well located Southeastern MF, offhand, pre covid(dont have anything and cant recall anything post covid documenting anything newer) you're probably looking at $80-100k an acre and $75k per unit, plus maybe another 30% for the stuff the developer/contractor handles, loosely speaking. Bringing it to stabilization would also factor in. But its very regionally sensitive. So if the basis of your question presumably relates to the attractiveness/profitability of building these, and the supply/demand effects thereof, this is potentially another argument as to the benefit of the asset class. Inflation gets really hot, and the cost to build soars, making new build much less practical. I have a few friends who do this sort of stuff in FL and even there, Im hearing how these constraints today are holdings folks back.

So I keep hearing about how obviously 3-4 cap rates on MF units is a bubble or is too frothy or how people dont understand how this can be or any of the usual nonsense. Can someone explain to me how a treasury trades where it does, with zero inflation protection, or a mortgage gets sold to investors with a 30 year fixed coupon at 2.5/3/3.5 and liquid as water....but having what is essentially a diversified income stream tied to the same underlying feature(a place to live, in many places with a better, known, and desirable location) with 12 month mark to market inflation protection not an absolutely superior asset? You can have a mortgage or MBS trade treasury + a couple points, no one bats an eye. Either this makes no sense, or the current 3.5/4 cap in multifamily is arguably a bargain...cant have it both ways. Just trying to wrap my head around how folks think these things should be trading at what? 5 caps? 6? Granted they'll never trade on par with Treasuries bc of obvious reasons, but why shouldn't these be on par with, or superior to mortgage tied investment rates?

In the face of a $600-$900 monthly subsidy, $2000 monthly rents for anything in the country near a major market all of a sudden looks quite cheap. Look at the real recovery story in NYC, IE, its NOT happening. Jobs still haven't come back. Offices are empty. But housing/rental prices? Wayyyy up. Its already a free for all and a large part of the country is totally in denial about it. Just wait til they come around.

I think its still very early. You have something like the Child Tax Credit which is putting almost $1000 a month into the pockets of a lot of folks. Some more. With the FHA loan cap something like $700k on a 30 year fixed you basically have the government covering 30-40% of a $500-600k property's monthly carry. Thats just one program and lending standards are fairly tight right now. Long way to go. Theres a reason the average home price is almost $400k now. The rest of the stuff is merely validation that inflation is here. Some might call parts of it a bubble and I wouldnt argue, but as Kuppy said, you're better off buying toasters than holding dollars. Not everyone knows how to invest LOL.

https://www.cnbc.com/2021/09/27/fed-chair-powell-to-warn-congress-that-inflation-pressures-could-last-longer-than-expected.html Guess its just gonna be this game where we say its temporary until it stops. Shits gonna get real whacky when even the dumb dumbs who believe the politicians and media realize the transitory narrative is bullshit.