Ivy Zelman:
Good morning, everyone, and a pleasure to be here. I'm Ivy Zelman and run Research and Investment Banking at Walker & Dunlop. And I'm excited to have such a prestigious panel with myself. Steven DeFrancis, with Cortland, is going to be our multifamily expert. Ryan Marshall, with Pulte Homes, CEO, will talk about single-family. And Dallas Tanner, who runs Invitation Homes, will talk about single-family rental.
Willy talked about a lot of things today. I'm going to hit on some of them, but I want to kick it off with a discussion about demographics. We're just about to publish an updated version of a report we did back in 2021 that was pretty unpopular, called Cradle to Grave. And really, probably the reason it was unpopular, it was pretty troubling to look at the demographics of this country's future. And I want to revisit that, because right now, with immigration being predominantly shut off, we do have a very troubling outlook. We have an aging population. I politely say many of those people are aging out. And currently, our fertility rate is below replacement level. When we look at future population growth, which drives household growth, it doesn't look very good, and it's going to only get worse unless something changes around immigration. Because I don't think young adults today, predominantly women, are that interested in having children. I can tell you my 25-year-old tells me she doesn't want children, which breaks my heart. But a lot of them are saying they're one-and-done, or frankly, don't want them at all. For many reasons, political ideology too can't afford it.
But with that said, I'd like to kick it to, first, each of the gentlemen to talk. I should have done this. I apologize. Why don't you just walk through your footprint and give people some perspective on your operations? Dallas, do you want to start?
Dallas Tanner:
Yeah, sure. Great to be with everybody. Ivy, thanks for hosting us. Dallas Tanner, CEO of Invitation Homes. We're a publicly traded, single-family rental business. We basically cover the West Coast, Southwest, and Southeast.
We have about 110,000 homes that we own and operate. The average customer is 38, 39 years old. They have a combined household income of, call it, $150,000. And they stay with us for about five years. So we have a lot of, obviously, interesting information on what that sort of consumer is up to.
Ivy Zelman:
Thanks, Dallas.
Ryan Marshall:
Good morning, Ivy. Thanks for having us. The view this way is spectacular. Hopefully, it's probably not nearly as good looking this way. But it's really nice to be here in Sun Valley. So, Willy, thanks to you and Ivy and the W&D team for hosting us.
I'm Ryan Marshall. I'm the CEO of Pulte Homes. We're headquartered in Atlanta, Georgia. We're a national home builder. Most of what we do is all for sale. We do a little bit of single-family rental with partners like Dallas. We're in almost every single made top 50 housing market and many of the top 75 housing markets. Last year, we built about 30,000 single-family for-sale homes, most of those being single-family. We do a little bit of condo, a little bit of townhome in a few markets.
The majority of our business is in the Southeast, Florida, Texas, Southwest. We've got a fairly decent Midwest business, including Ivy's hometown of Cleveland, which we love building in. And we don't want anybody else to go there because it's quite lucrative for us right now. We do a little bit of a business in the Northeast as well: Boston, DC, New Jersey, New York. The average price point for us is $560,000. And we serve everything from the entry level to the move-up luxury. And we have a big active adult business as well.
Ivy Zelman:
Great. Steven?
Steven DeFrancis:
Good morning. Steven DeFrancis. I'm the CEO of Cortland. We're based in Atlanta. We're a vertically integrated multifamily investment manager, meaning we buy, build, develop, renovate, and operate multifamily communities. We have about 80,000 units today. And the markets we focus on are the, we consider the growth markets of the US. So naturally think of the Sunbelt, Mountain West, Mid-Atlantic, and in the middle of the country, the breadbasket of the country. We're most places that aren't at the Northeast or the West Coast.
Ivy Zelman:
Great. Well, thank you. Let's get back to my demographic discussion. Ryan, I'll start with you. As it relates to discussions in the boardroom, recognizing after COVID or during COVID, we had massive migration to the Sunbelt. And yet home prices surged. And we all are now dealing with a lot of affordability issues and overbuilding. Do you discuss re-contemplating where to go strategically? And do you still want to be in the Sunbelt, given that we're seeing migration reverse outside of the Sunbelt?
Ryan Marshall:
To your question, Ivy, about the boardroom, we talk about it a lot. And the report you mentioned, Cradle to Grave, was not one of my favorite reports. I read it multiple times and tried to find all the reasons I didn't agree with it.
But there's a lot I did agree with. And there are a lot of things in there that could potentially be problematic for both for-sale and multifamily developers, because we need population growth, ultimately, to continue to grow our businesses. We pay attention to it a lot.
We really focus on where population growth is going. And we also talk, maybe more importantly, where are the jobs going? Because ultimately, the population follows the jobs. The post-COVID environment was certainly a very beneficial one for us, because all the land that we had bought pre-COVID, we got a real nice lift in gross margins as prices went crazy. I think we're dealing with some of the fallout of the post-COVID environment in markets like Austin and Denver, a little bit in Phoenix, where things maybe went too high too fast. There was too much population growth, followed by rapid price increases.
And you're seeing some of that reset. And then you mix in all the things that we've seen with interest rates. And I'm sure we'll touch on that at some point in time.
But to get back to the question they asked, do we focus on it in the boardroom? 100%. And one of the things that we've tried to do as a company is to own less land and have more optionality, more flexibility, so that we're not stuck in a own-land position forever.
There was a point in time when we were, and we learned some of those hard lessons in the great financial crisis.
Ivy Zelman:
But you have expanded more than other public builders into the Midwest, and that strategy seems to be really serving you well right now.
Ryan Marshall:
Yeah, rather than expanding there, that's where our company started. We were founded in Detroit, and we expanded into Denver, Chicago, Washington, D.C., and Atlanta. We're the first four cities that our company expanded into 75 years ago. And we've continued to grow a Midwest business. We often, on our investor marketing information, tout that we're the most geographically diverse home builder, and the reason that we can say that is because of our Midwest business. And it's Indianapolis, Columbus, Minneapolis, Cleveland, Chicago, those are all markets that aren't the sexiest, highest-growth markets, but there's a lot of people that want to be there. They're more affordable, they've got good jobs, they're very stable, and because there's arguably less competition there, they've been great markets for us.
Ivy Zelman:
Steven, your thoughts?
Steven DeFrancis:
Yeah, so we talk about it a lot. It's like Ryan, our focus is on where the jobs are going, and then the population follows the job. A lot of those markets, from a multifamily standpoint, have been struggling over the last few years because of oversupply, but that's still where the population growth is going.
And yes, population growth is down overall, which I think makes it that much more important to be mindful of where there is population growth. Right now, the coastal major markets are doing well, relatively, in the multifamily space. However, in most of those places, if they don't have immigration, they're losing population. They are net negative until people immigrate into those places, which long-term is obviously very tough to run a housing business.
We are focused on where the population is going and where the growth is going? Really, where's the job growth going?
Ivy Zelman:
But at this point, you're not changing the footprint or expanding and exiting. You're kind of staying packed.
Steven DeFrancis:
We're sort of always looking. We were very close to moving into Boston a few years ago. Then, like right before COVID, we had a portfolio we were chasing, then COVID happened, so we blacked off.
And then once we got ready to move back in, because we liked the market, then the regulatory environment up there really started to shift, and so we've held off. There are no red lines on markets. We're just always watching what's going on with the population growth and the—
Ivy Zelman:
Yeah, I want to come back to you on immigration in a moment. Dallas, have you made any decisions to expand your portfolio? To expand into new markets or exit markets, given changing dynamics and population growth?
Dallas Tanner:
Yeah, I mean, sometimes we look at our business just based on where we have dislocation from a concentration perspective. And if you think about the way we grew our company, I mean, 90% of our assets came out of the GFC, where we were buying homes one by one. And we did, we basically did 30,000 homes one by one in 18 months.
So we had to go where the puck was, in terms of where the discounts were the greatest, where we saw an ability to achieve scale. And then over time, we've sort of fine-tuned our portfolio. Like, for example, today in Florida, we have 26,000 homes in Florida. We love the market, it's high growth, a little bit higher property tax, which sort of hurts our margins. Those things we take into consideration. But you might look at that market and say, okay, we have a lot, and on a relative basis, where else could we invest capital and sort of diversify in a way that would give us better risk-adjusted return?
There are markets like Nashville, where we're looking at trying to do more, Salt Lake City, which we're pretty small in, but we see that as high growth. To your point around demographics, people are still having kids in some of these markets. Like, those are the sort of places where we like the opportunity long-term. And then there's, and Ivy was kind of busting my chops on this in the back room, like California. We still own 12,000, 13,000 homes in California, which we bought really cheap in 2012. And that's a 75% margin business for us, with 6% plus revenue growth year over year. The challenge is, it's California. And for all of you that own or operate in California, you're just always dealing with extracurricular noise based on something.
You need to sort of weigh that out. We're not doing a pivot from the Sunbelt to say that we think the growth stopped by any stretch. In fact, I probably have a longer view that I would be more bullish on the Southeast than the Southwest, based on all the different reasons. I think demographics will sort of shift, immigration reform will sort of shift back and forth.
And then I think at the end of the day, people want to be where the sun is shining and where, I hate to say, I hate to make it so partisan, but like red states are easier to do business in than blue states. And there's a lot of red states in the South and the Southwest and the Southeast. So I just think they're going to be a net winner sort of over the long haul. And I think as an operator, warmer weather's a little easier on your assets and everything else as well.
Ryan Marshall:
Ivy, if I can, I'll give you maybe a compare and contrast of two markets that we contemplated going into five or six years ago, Greenville and Boise. We looked at Greenville and saw a big job opportunity, population growth, affordability, good quality of life. You had a lot of attractive things about Boise with a lot of population growth that was coming from California as people were fleeing California for a variety of reasons in the kind of pre-COVID, post-COVID environment.
The thing that we couldn't wrap our heads around with Boise is job growth. And while there are jobs there, it didn't seem to be as robust and sustainable as what we saw in Greenville. We elected to expand into Greenville.
We're very happy about it. We elected not to pursue an opportunity in Boise, and I'm pretty happy about that 2020 being perfect.
Ivy Zelman:
Yeah, and Boise certainly had a lot of reversal of that migration when people were called back from working remotely. Maybe in hindsight, it's a good decision.
One of the things that the demographics also, I think you've capitalized on, Ryan, is the active adult segment. And by the end of 2030, 20% of the population will be 65 or older. It feels like that's still where to be, and you've capitalized on that and gone into active adulthood into a somewhat different strategy. Do you want to elaborate a little bit on that?
Ryan Marshall:
Yeah, about a third of our company is in active adult, which is, we predominantly do with our Del Webb Brand. You may be familiar with that. It was a company that we bought in the early 2000s. It was its own standalone publicly traded company that we acquired in 2001. And we've continued to operate that Del Webb Brand as a standalone business unit. Our Sun City or our Del Webb communities, you've got to be over the age of 55 to live in them. They've been incredibly successful in large part due to some of the slides that Willy showed about net worth and balance sheets. So you've got a population that's over the age of 55. They love owning homes. In some cases, they own multiple homes. They've got a lot of wealth tied up in their existing home. They can liquidate that, and they can come and pay cash and downsize into a community that perfectly fits their lifestyle.
It's a little bit about the piece of real estate that we're selling more than anything. It's creating a lifestyle opportunity for these individuals that are either retired or moving towards retirement to be around people that are like them, that are active, that are wearing their Whoop strap, and they're kind of living their best version of their retired life. It's been a very important part of our company.
One of the things that we've started to identify, and we're moving there now, is that as that boomer population continues to get older and older and older, is that a problem for us because it's no longer a growing demographic. If anything, it's flatlining. So we've launched a new brand called Explore by Del Webb, which will be targeted toward the Gen Xers.
And I personally right square smack dab in the middle of the Gen X population. I'm not ready to retire. I'm not old enough to be in an over the age of 55 community, but I might want to start moving toward that at some point in time. And we think there's a whole population of folks that are over the age of 40 that are still working that would like the benefits of living in a highly amenitized resort-style community. So that'll be, we think, a big growth opportunity for the company over the next decade.
Ivy Zelman:
Yeah, I was surprised to see the stats for the number of second home owners predominantly in their 40s, which I thought was, I would have thought it would have been older. But as we think about the aging population, maybe Steven, you can start with, is there an opportunity to provide rental communities for active adults or people in that 40 age cohort, 40 plus?
Steven DeFrancis:
Well, first I have to say my perspective has changed recently. As of a couple months ago, I became 55-plus eligible.
Ryan Marshall:
We'll sell you a home, Steve. We'll give you a discount, friends and family discount.
Steven DeFrancis:
No, so we actually, in about 2014 or '15, after looking at the demographics and the demand group, got into that business and started a sub-brand called Ativa, and we did about, I don't know, around a dozen deals. Bought some and did value add and then built some and frankly, we got out of that business several years later because while they were all working, we were frankly, had to be honest with ourselves and recognize that they were working because everything was working in the market at that time, not because the idea at the end of the day, what we learned was the profile that we were serving in our 55 plus communities, A, you could have gone through all of ours and never found a Whoop strap.
It was a much older demographic and what we found was the demographic we were serving was extremely thin, so if you were below that, you couldn't afford to live there and largely, their biggest concern was outliving their money and so they would prefer to go in a traditional multifamily deal, get more value out of that instead of paying a premium to be in a senior specific development. But most of them, frankly, would rather be in your product, or even an invitation home where they could rent a home and still be in a house, and so really what we found was it was largely an older demographic that was being pushed to do it by their adult children, and most of them were actually being subsidized by their adult children. We felt like that was really too thin of a demographic to commit to for projects so we stopped doing it. We got lucky because of the timing. But we are seeing that the population of folks 55 and older in our traditional multifamily is going up. It's in the high teens today as a percentage of the overall population, and so we are serving more and more of those folks in our traditional multifamily.
Ivy Zelman:
Got it. And Dallas, we spoke about it, but with respect to the SFR invitation strategy, any reason to try to capitalize on that aging population and have age-restricted communities?
Dallas Tanner:
The BTR stuff is sort of along the same lines as Ryan talked about. From a segment perspective, you can highly amenitize some things. I've spent a bunch of time recently understanding that Margaritaville concept which I think is really cool. If you haven't been to one, go check it out. It'll totally expand the way you think about highly amenitized sort of senior experiences.
Ivy Zelman:
It's when seniors become teenagers.
Dallas Tanner:
100%, maybe worse than.
Ivy Zelman:
Yeah, it's worse than when they're teenagers.
Dallas Tanner:
Look, there's going to be a lot of opportunities. I do think private capital can play a meaningful role. I like where Ryan went, the mobility, to your point around second homes, this thing in terms of how flexible our lives have become because of the cell phone, there's obviously ways that people want to explore living differently. I think there's going to be many opportunities for private capital to step in, create new experiences.
Some will be gimmicky and won't work. I think some could have a sticky factor, like a Margaritaville. And I certainly think that there's a way to create operating companies around those very specific segments.
I mean, just think about the way we travel. We travel so much differently than we did 30 or 40 years ago. Some people want to river cruise through Europe, and that's all they want to do. And there's segments that are available for that now that didn't exist 40 years ago. I think living can be the same way. I think it'll just, there'll be a lot of ebbs and flows, and some of it will work and some of it won't.
Ivy Zelman:
Got it.
Ryan Marshall:
Ivy, one of the failures that we had trying to do rental in, and I had this idea because we'd had so much success working with companies like Dallas's company doing single-family rental, where we would take part of the community, we would build it, we would sell it to Dallas, they would rent it out. And you'd have owners living next to renters, and you couldn't tell the difference. In some cases, Dallas's homes look better than the ones that we sold to an individual because he actually cuts his grass. It was nice. So we said, well, why can't we do that in a Del Webb community where we build a bunch of homes and we sell them to Dallas, and he rents them out to people that want to live in a Del Webb community, but maybe they don't want to make the commitment of buying. And Dallas and some of his competitors, they said, nah, it won't work, it won't work.
I said, that's ridiculous. They absolutely will work, and we're going to do it. We built about 10 homes in one of our communities in Phoenix. We put them on the rental market and guess what happened? Nobody rented them. And I'm like, how is this possible? We must not be marketing it well enough. So I dove into the marketing strategy. And what we found out was there are owners that we sold homes to, and they're renting their homes at significantly below market rate because they're not living there for that period of time. So a home that should be renting for 4,500 bucks a month, they were putting on the market for 2,500 bucks a month. So, guys like Dallas, they're not successful by accident; they couldn't make money, and they couldn't make a return. We learned it the hard way. We didn't rent any homes. The homes that we built, we sold, and I'm going to chalk that up to a failure.
Ivy Zelman:
Well, back to your bread and butter. I tried it, but it didn't work. Thinking about just the competitive landscape and recognizing whether we're talking about owning or renting, it feels like the housing ecosystem is really intertwined now.
So, Steven, when you think about the overbuilding that happened post-COVID or during COVID, how does the SFR, BFR, for sale impact your multifamily operations?
Steven DeFrancis:
Was multifamily overbuilt? When things are working close to normally, it doesn't impact it a lot because it's definitely a different segment. When the market got really tough last year, maybe the year before, it definitely, it's all one pot. A class, B class, C class for sale, for rent, single family, it all impacted the market. We're growing out, or as Willy said, you saw the demand numbers for this year, and so we've been growing out of that hole. We look at each market individually and evaluate by market where we think each market, or really sub-market, is going to get back to a point of stabilization where you can get normal rent growth.
And if you look across all of our markets where we operate, probably 40% of them or maybe 25% are at that point. You probably got half of the balance popping along the bottom. They're not gaining, but they're not losing ground.
And the other half of the remainder are close to turning, and we think by next spring, all of it will have turned. We don't think next year is going to go running off the page with performance, but we think you'll get back to a more normal rent growth type of year. And starts continue to thankfully, developers continue to struggle to be able to make deals pencil. And hopefully that'll continue for a few more years to give the market time to cycle.
Ivy Zelman:
That is a subject I wanted to talk about whether we think of it for the shortage or we're oversupplied right now. And I think one of the interesting things has been that rhetoric hasn't really been discussed lately. I haven't heard a lot of people talking that we have this major housing shortage when we have empty apartments, empty houses, and you guys are sitting with competitive forces that are impacting multi because the friction with SFR, BFR is close enough, it impacts you.
Thinking about the dynamics of the oversupply, Ryan, we'll talk about the new legislation from the government, but as it relates to the competitive landscape, Willy showed a slide that showed the monthly payment for an apartment is substantially less than an owner would have to pay to buy the first-time buyer 410,000. But you're buying mortgage rates down. That actually is not really in effect what's happening. That segment of the market, it feels like that segment of the market doesn't have a chance to really drive for affordability. Why even be in that market? Why are you continuing to build starter homes when frankly, people can't afford them, and you're being forced to crush your margin doing so?
Ryan Marshall:
Yeah, it's a fair question. I mean, if you went back to 2013, 2014, the question that we were being asked, and in fact, I think you were the one asking the question, if I'm not mistaken, was why aren't you building more single-family entry-level? Because that's where all the growth opportunities were.
And at that point in time, it was probably 25 or 30% of our business. Today it's 37% or 38% of our business. Like all things, first-time move-ups, active adults, they go through cycles. We're in a cycle right now that's maybe not as ideal for that first-time buyer. We've adopted the philosophy and strategically said, we're going to be a significant player in every single consumer group, entry level included. It's not the most attractive, but it's also, it's not bad. And we also tend to play at the higher price point of the entry-level buyer. If we look at our entry-level product, it's in the high 300s, low 400s. We're not building very many homes in the high 200s. I'm not sure anybody is in the high 200s, but if I had a do-over or I could do something today to tweak it slightly, I'd bring our entry-level business down to kind of 32%, 33% of our business. And I would take those four or five points that I'd be giving up, and I'd move it into the active adult. I think there's more opportunity there right now, but—
Ivy Zelman:
Well, your point, ebbing and flowing, definitely. But as we know, we have a K-shaped economy. And for those that are not familiar with the term, we have directionally the wealthy are getting wealthier, and the poor are getting poorer.
So when you think about what the administration has been focused on is really more the likelihood that we need more rental products because people can't afford to buy because they have difficulty solving for affordability. And the recent legislation really, Dallas, what do you think? I mean, you got away with still being allowed to do BFR, but you can't buy an MLS. And does this really help affordability?
Dallas Tanner:
This is where I roll the grenade in the room. It's been a very interesting six months. I just want to piggyback on something Ryan said.
I do think there is a misnomer in terms of who the average home buyer is today. And I think it's an unfortunate piece, and it's not all wrong. I want to be fair to like all sides of the argument, but like it's not a 23 or 24 year old trying to buy a house today. I bought my first home when I was young. My dad lent me a little bit for the down payment when I was 24, 25. I just got married. That is not, by the way, just to kind of compare and contrast to what you said about your daughter, like probably a very different thought process 20-some-odd years later, 20 years later.
I would say, if you go back to LBJ, the home ownership rate in this country has been about 67% continuously, okay? For the last 50, 60 years, about two-thirds of the country owns something and about a third of the country leases something. Willy talked about it earlier in terms of the lock-in effect, like mortgage rate volatility has tons to do with what happens in the housing market. We all know that, but you have to actually believe it.
When you think about Ryan's business, these guys have done a wonderful job booing up housing prices over the last three to five years by buying down mortgage rates. The percentage of new home sales, as in total aggregate of all home sales, is abnormally high right now and has been for the last two to three years. You sit there and you say, well, what's going on? It's like looking at a pool of water, like it's really stagnant. You have about 4 million sales a year right now happening, 4.1, 4.2, that's a million units light. Is that the pool that got painted blue? It's got reflection pool challenges. But what I would say is like Steve's business benefits, my business benefits, Ryan's business benefits from more transaction volume. If we have 4 million sales a year in the US, it's probably 20, 25% light. You have people staying put, you have more disposable income availability, as Willy talked about also earlier. People just aren't as much focused about things like, let me burn my awesome three and a half percent mortgage rate and let me go buy a five and three quarter rate and see my payment go up 60% for what at this point in time. So it's just a little bit of a tricky balance.
To Washington's credit, I think both sides of the aisle are trying to say like, well, how do we stimulate sort of both the politics of a good story around housing growth and everybody deserves the American dream, but also the real practical application, which is we need people, the economy is sort of built on housing to some degree. I think we got caught up as sort of the, when I say we, like our industry. If you look at that housing bill, it's like 300-some-odd pages; the final version came through. The piece about SFR, which got sort of the most attention when the tweet was in January it's about 20 pages.
And where I came encouraged from the process, we obviously spent a lot of time in DC. I came very encouraged that both sides of the aisle were open to healthy discussion. Now it was really clear to me very quickly, both sides of the aisle and I'd say the administration, treasury as well, is that the politics that are interplaying in all this totally dilute the messaging we all hope would be really pure, makes sense. It's like that around pharmaceuticals, it's around oil and gas, housing's no different.
Our industry got sort of painted as a boogeyman, but I think the one helpful thing through the process for the industry was that for 10 years we couldn't get a fair media article written on our industry. We had hundreds between January and June where everyone was like, guys, these aren't the companies that are really creating the issues. By the way, we don't even buy any homes on the MLS; we haven't since about 2017. The reality is we're all out building; we're trying to create new supply. I think the government, from a federal perspective, wants to create a narrative where supply can be more easily induced into the market. I do think there are some good things in the bill that sort of incentivize local municipalities to deregulate, to do some things that are smart.
I think unfortunately a lot of the energy and the momentum around that bill was caught up in sort of the false narrative around supply being taken or this, that and the other, which isn't true. The challenge for the federal government is that they can't have the impact that the local and the states have. We all know that in this room.
So the waterfall effect is, hopefully, local and states sort of gravitate to the good things in that bill, which will help obviously, open up better pathways for developers and operators and institutional or private capital to play more of a meaningful role. Now that being said, and I know all three of us would answer this the same, if we can't see the demand, we're certainly probably not going to take the risk. So you have to be incentivized in some of these parts of the country where maybe a Midwest market, take for example, wants more housing units. There's got to be sort of a risk-reward trade-off if we're not sure what those absorption statistics are going to say or do. And I think that's the tricky part because when you get down to the brass tacks, even with the politicians, and I would say, look, to be fair, I was very impressed with a few people on both sides of the aisle that are truly trying to tackle this. And I'd give fair credit to the administration as well.
The legislative affairs office, the back office that was really trying to kind of strike the right balance. Everyone was collaborative. I think the challenge is the noise around housing. And it's a very easy piñata to put out there to say, do you want something cheaper? I do. I don't know about anybody else in the room. But the reality is like the markets, what moves that? To Willy's last point around standing up for capitalism, you also have to stand up for free markets. Because when markets dislocate, that's when usually the opportunity either comes or the wiping of the bad decision-making occurs, and then the market can kind of course correct.
So I think the challenge is, as a consumer, and I'm speaking about myself now, we've all been so stuck on hot money and housing for so long that sort of the overhang effect isn't that fun. Steve, like we talked about the last couple of years. But we have to pay the piper at some point.
Ivy Zelman:
And with respect to the oversupply that we're now dealing with, in reality, Ryan, really the way that the market will adjust is if we have capitulation by land sellers, and that's not happening.
Dallas Tanner:
That hasn't happened yet.
Ivy Zelman:
Really, how does the government get involved in creating affordability? I don't think they really can, unless they start using a big stick to governors and saying, you need to figure out at the local level how to bring more housing. But I guess, Steven, on our prep call, we talked about, do we even need more housing?
I mean, you mentioned the multifamily starts. They're still running at 400,000 roughly annually. And arguably, if you go back historically, that's still slightly above a trend line. Tell me what you think as it relates to supply. Do we need more supply?
Steven DeFrancis:
I would say no to all of you developers in the room.
Ryan Marshall:
Well, we'll just be going for a hike this afternoon, Steven.
Steven DeFrancis:
Exactly. We need more single-family homes for sale. Ivy, to your point, stars have not gone down nearly as much as everybody would have assumed they would have given the fact that we're in probably the fourth year of softer declining fundamentals in areas which cover probably more than half of the population of the country. I think it's become a political narrative that we don't have enough housing in the U.S., and we truly do not have it. You talked about the K-shaped recovery. At the bottom leg of the K, we truly do not have enough affordable housing. I don't know if we can solve that.
Telling developers to develop more at numbers where that housing is needed by and large, you could build that deal for free and still not cover the operating expenses. I don't know the solution, but it's not to get the developers to just build more housing. I don't know of any industry that is as efficient at overbuilding the market. It serves as definitely the apartment market, if not the whole housing market.
Ivy Zelman:
I think you're all good at it, overbuilding.
Steven DeFrancis:
Yeah, we're all really good at it and all pro. And you've seen that in the last few years where in most, all the markets where we operate, wages have continued to grow and rents have been soft.
I do want to give one plug since we're here in Sun Valley to Boise, because we did go and it's been interesting to watch. It's been a proxy for us because it's the smallest market we're in.
Ryan Marshall:
You're happy with it.
Steven DeFrancis:
Well, to your point, it went down. It was the first one to struggle, but it was also the first one to come out. And it's not a plug for everybody to go there, but I think our rents today or probably our trade-outs are over 10% year over year.
So we're hopeful if we can get all of them there, but it's been a good market. It's small, so it's a lot of volatility, as you can imagine. But we don't need more housing today in most of the markets in the U.S.
Ivy Zelman:
And one of the things about the multifamily industry that I find fascinating, back in '09, I started researching multifamily, and having only done single-family, the turnover was 55% to 60% per annum. And now it's like 35% to 40%. People just don't want to move because there's too much friction in moving. As a result, bringing so much more supply, you just don't have that competitive pressure that you would have hoped that people would want to move up from a class B, let's go to class A. The dynamics of the food chain don't seem to be working as fluently as they have.
Steven DeFrancis:
Yeah, I think there's a couple things driving that. Well, one is the most obvious and hopefully short-term one is that because people can't buy houses, they're just not moving. We don't have nearly the numbers of folks moving to buy houses that we would have.
Ivy Zelman:
Do you have any stats on that? Because it used to be like in the teens and now it's in the single digits.
Steven DeFrancis:
Yes, I mean, so if you compound that over several years, it's a big impact to that renewal number. And the other thing is multifamily rentals are serving a much higher demographic than we have historically. So our average residents probably make $95,000 a household and pay around $2,000 a month for rent.
And these are people who have invested in that as their home. They've decorated it.
Ivy Zelman:
And you guys have made the amenities and everything you offer so much better. Whether it's gyms and, you know.
Steven DeFrancis:
They're not going to go spend—20 years ago almost every resident we had could move with one pickup truck. Today these are higher demographics.
They hire movers, and they've decorated their apartment. So they go spend, I don't know, $5,000 or $10,000 to move to save $300 a month on the rent. It's a big savings on a relative basis to the rent they're paying, but it's a big cost to move.
And by the way, they're paying less of their income for rent than they ever have in our case. So our average renter is probably paying 18%, 19% of their income for rent. It's just not as material a benefit for them. It's a big cost and not a material benefit. I just think that's causing a lot more people to stay put.
Ivy Zelman:
Yeah. Interestingly, the national numbers show that renters are really burdened. Your footprint shows something different, but more than 50% of renters are spending more than 30% of their income on their rent. And that isn't just the coastal markets, because I looked it up and it's like nationally 52, and then it's like 40, but it's inclusive of all the other incremental costs that are inflation and things that are impacting them.
Steven DeFrancis:
It's the bottom leg of the K everywhere. And it's a good bit of the upper leg in those coastal markets. Where it's more.
Ivy Zelman:
One thing I want to ask you, Dallas, and then I want to talk a little bit about factory-built, because Pulte has gone in and out of that, but Dallas, reluctant landlords. Reluctant landlords or accidental landlords. From a competitive perspective, how much is that impacting you? And how is multi oversupply impacting both BFR and SFR?
Dallas Tanner:
It's interesting. We survey coming in, and we survey going out. 80% of our customers that come in are coming from a single-family rental home prior to choosing our single-family rental.
Ivy Zelman:
80, that's high.
Dallas Tanner:
We don't see as many people saying, hey, I'm done with the Cortland property and I'm coming. It's just, it's a different customer type. We have a couple of kids, dogs, multiple cars, things like that. The accidental landlord—
Ivy Zelman:
Your homes are slightly bigger. You're slightly more expensive?
Dallas Tanner:
Yeah, so our average square footage is probably right around 2000 feet and our average rent's about $2,500. We do see in the numbers on the supply side, on listings, on available listing data. Now, in the single-family rental industry, we have terrible data in terms of what another competitor is actually leasing their homes. We have no clue. What we see is listing data. We get all the access to the Zillow and all the public data. We really don't know where people are closing on leases. There's no information system that includes all that. We certainly saw in 24 and 25 an increase of homes available for lease in multiple listing services in some of those markets. That puts some pressure on rents, for sure.
This year's rents, we talked about this on our earnings call, feel a lot better than they did at this time last year. And I would say the same thing. We peaked out in rents last year earlier in the cycle. For us, we typically peak in June. Last year, it peaked in April or May. And I think that had a lot to do with the amount of supply that was on the market.
Ivy Zelman:
One other thing I wanted to bring up before I go to the factory built, Steven, as it relates to the immigration stat that Willy brought up, suggesting that occupancy or rents are not growing because of the lack of incremental immigrants coming to our markets. Do you agree with that?
Steven DeFrancis:
Yes.
Ivy Zelman:
I know he's the guy hosting the conference, but you know.
Steven DeFrancis:
I always agree with Willy, no matter what he says here.
Ivy Zelman:
Always, there we go. Where is he?
Steven DeFrancis:
We do not serve that clientele for the most part. But when the market moves materially, it's hard to separate it all impacts. Every piece of it impacts the whole market. So I'm sure that the lack of immigration is impacting our portfolio differently in each market. But it definitely created a meaningful lack of new renter demand, which is clearly impacting the overall rental market.
Ivy Zelman:
The bottom, bottom of the food chain, because every operator that we survey, every multifamily public company, REIT, has not had an impact from deportation or the lack of incremental immigration. I think it has to be that households are doubling and tripling up, and they don't really get the benefit of immigration for a few years to come. I disagree with you, Willy, but apparently Steven doesn't, at least based on the data that we have.
As it relates to the competitive pressures out there, and we think about ways to solve for affordability, there's been a lot of discussion about factory-built housing. And we had Katerra for a while that really got the market excited about the factory-built opportunities. And that kind of died pretty dramatically. But Pulte's gone in and out of the factory. ICG recently exited after purchasing what would have been given you backward integration in 21.
Talk about why you went in and why you're not staying and what you think about the future of factory-built for the US.
Ryan Marshall:
Yeah, Ivy, maybe just a quick trip down memory lane. Our company's long had a history of trying to solve the inefficiency that inherently exists in building structures. And we've tried some really stupid ideas like something called pull trim, which was an integrated gutter trim system that was terrible in the freeze-thaw cycle, and it cost us millions and millions of dollars. It was our founder's idea. Fortunately, nobody got fired because it was his idea. And we tried some really dumb things like trying to pour basement walls in a factory.
And then there's probably nothing more inefficient than putting a finished piece of concrete on a truck and trying to drive it down the road. That was a failed experiment.
And then as a CEO, I decided that I probably needed to put my fingerprints on another innovation opportunity. And we bought a company six years ago called Innovative Construction Group. And they were a factory, an offsite modular building component manufacturer. They were building walls, and they were building floor trusses. And the idea was that we were going to take what they were doing. There's nothing really novel about floor trusses and wall panels. But the idea was that we could go in and we could integrate electrical plumbing and do window installation and then sheathe the exterior of the wall and ship essentially a wall unit to the job site.
There's something there and I still believe that it's possible. And it really stems from this idea that you've seen no manufacturing efficiency in housing in 40 years. You can look at every other manufacturing system and process and you've seen real gains, meaningful gains in labor efficiency, not in construction. We've had zero. Maybe our biggest invention is the nail gun. That's it. And I really do think that's got to change. It's got to be part of the affordability kind of problem. The business that we built, we got some benefits out of it. We learned some good things. We learned some bad things. Ultimately we decided we're not the best operator of it.
There are some companies like BFS and Saint-Gobain that are putting millions and millions and millions of dollars into innovation. I think they can do it way better than what we can. You also need real scale in really close geographies to your plant in order to make the transportation efficiencies of those manufactured products work. Us trying to be an owner of it, even as big as we are, we were too geographically dispersed in order to get the efficiencies that you really need to have with the production side.
Ivy Zelman:
And you said the returns just weren't attractive enough.
Ryan Marshall:
I mean, there were positive returns, but they're not the kind of returns that our shareholders want when they give us capital. They've got a different expectation for return on capital that they give to us than on the capital that they give to us like a BFS, for example. We're going to continue to use those products in our building system, in our construction system. I'd just rather be a buyer of it than an owner-operator of it. I think there's just folks that are way better at it than we are.
Ivy Zelman:
Just one segue, because the recent activity, M&A activity has been pretty significant from non-public home builders. We've got the Japanese have been very active, as well as Berkshire Hathaway recently buying Taylor Morrison because the Japanese have come in a big way. They now have like 20% market share. It's pretty significant. Do you think their plan? Maybe you've talked to some of the leaders there that are looking at factory-built ones like they have in Japan, or is it geography in Japan or is it the size of New York?
Ryan Marshall:
Yeah, so a couple of things there. One, I think it's a sub-kind of story that nobody's talking about. If there was an understanding of how much US housing is now owned by Japanese-based companies, it would scare and shock a lot of people in the United States.
And they've been doing it very, very quietly over the last 15 years, coming in and buying founder-led, entrepreneur-led home builders to the point where three Japanese companies own somewhere about 20%, 25% of US housing. Now, I think from a geopolitical standpoint, we've got good relationships with Japan, but I don't know that you want a foreign country owning 25% of something so critical as housing in the United States. That somebody else is going to have to figure that out. But I do think we need to pay attention to it. And then your question.
Ivy Zelman:
The reason they do, by the way, is because they have no population growth. So we're respectfully probably doing better than other nations from developed world countries, but not looking good again.
Ryan Marshall:
And these Japanese companies have demonstrated they know how to do offsite manufacturing with housing. I think the difference there, Ivy, is what you talked about, the geographic proximity and the densification, the density in which they build. It works.
And here in the United States, when we're talking about places like Sun Valley, where we have just mass expanses and highway systems and the way that we live as Americans, I'm just not sure that that model is going to have the same level of success that it does in a country like Japan.
Ivy Zelman:
Yeah, I think the Japanese that came over for the World Cup figured that out when they went to Costco and a few other places that it's a little different here.
Ryan Marshall:
Yeah, I mean, when you're trying to take home a gallon jug of ranch, ranch dressing.
Ivy Zelman:
So, Dallas, you made an acquisition, ResiBuilt. Thank you for letting Walker & Dunlop do that, Zelman. In terms of the opportunities for consolidation and thinking about SFR that's become more mature now, where do you see the industry going directionally? Is it kind of staying packed, or do you think there'll be more backward integration through building yourself? Developers, will you continue to work with Pulte or will you focus solely on your ResiBuilt for development?
Dallas Tanner:
It was probably like four or five years ago, Ryan and I had this goal, like building 5000 houses together, and we would still say out loud, I think both of us, we share that same goal. The ResiBuilt acquisition is sort of niche. These guys are in four or five markets.
They do a really good job. Jay, who runs that company, we've known for 10 years. And I think for Invitation Homes, our natural sort of progression has been to stand up and stabilize the operating company, and start to expand into relationships with homebuilders. I don't see us being a homebuilder like Pulte homes. Like we're just not, that's just not our core competency. But I think having a partner or an affiliated partnership with an in-house development platform where they can build us a thousand or 2000 units a year, five years from now, is great. We should still be buying five or 10,000 units a year from Ryan.
Ryan Marshall:
I'm still waiting for him to buy the first 5,000.
Dallas Tanner:
He doesn't offer that same friends and family discount he offered Steve. And I would just say the reality is, it is going to be very helpful.
It gives us unique insight into some of the challenges. We were talking backstage about Denver. The impact fees in Denver are ridiculous right now.
Like we can't build a home in Denver and we want to build a home in Denver that would work for somebody in the for rent space. It's just hard to make the math work. I think our view is sort of continue to lean in with our homebuilder partners, build as many as we can with the companies that want us in their communities. And then I think off to the side, the nice thing that works for ResiBuilt is it's sort of a bespoke opportunity set where we can do a 50-unit development, a 75-unit development, which wouldn't be on the radar for some of the big builders or even some of the bigger regional guys.
It allows us to sort of fit into some of these nooks and crannies that make sense where the demand's there, but it's just not a big enough project. And then all the while, we're continually and we bought last month, probably $25 million worth of homes from homebuilders. So we want to do that every month. We would love to 2X, 3X those numbers if the cost of capital is there. The goal is to just continually be active. And I think, look, the scattered sort of buying from the resale person in the MLS really hasn't been a business model for probably eight years. I would say you'd have to have a real depressed overall housing story going on for those sorts of assets to make sense. You're just much better off building today.
Ivy Zelman:
I remember when Jonathan Gray and I had lunch, and he said, we're an army, we're invading the country, and now we occupy, and we don't need to do it. We'll just start operating. And when you think about SFR back when the GFC allowed for that depressed pricing for you guys to come in and acquire, do you anticipate more of the multifamily industry coming into SFR? Because some of the public REITs were really negative initially, and now they seem to be slightly more positive, or some of them actually getting into BFR, SFR.
Dallas Tanner:
Some of them have done it. I mean, to be totally fair to both businesses, like they've been around for hundreds of years. You've had the mom and pop landlord who leased a home to somebody in the 1800s. That's just starting to professionalize post GFC. So now you have companies and technologies and smart home tech. And we can put a washer and dryer in your house.
Don't worry about it. Like that's on us. There's things that can just make it much more feasible, which, to be fair, we've stolen from multifamily, who made a lot of those amenitized offerings a much more seamless experience.
I think on the contrary, there is still a huge segment of the country, 16 million people, that want a multifamily apartment. They want that experience. They want highly amenitized stuff next to running paths and all that. We can't compete with that. But we also have parents that have two or three kids that want to live in Sandy Springs, Georgia, and they need to check the neighborhood out for three or four years before they buy. So they just exist. And there's enough, there's enough space for all the different types.
Ivy Zelman:
Steven, any thoughts about getting into BFR, SFR?
Steven DeFrancis:
No, as mentioned earlier, about the average, I think invitation serves a resident that makes a little more than our average resident, but they're paying about 25% more for a unit that's about twice the size. So I think our average population tends to be a lot more centrally located and is looking to be more centrally located. I think one mistake a lot of us apartment developers make is that we mistake suburban or ex-urban areas where people are willing to move to, to get into a house, as a place that people want to go rent an apartment. And there's just no reason to, because you can rent that same apartment much closer to town for the same price because it doesn't cost materially more to develop. We think, as Dallas said, it's just a different market. So our population tends to be closer to town, not all urban, but inner suburban areas and urban areas. And I think we're serving that need before they graduate into his population.
Ivy Zelman:
Got it. Can't leave the panel without finally talking about AI and thinking about the implications of AI in your businesses. Maybe we start with you, Steven.
Steven DeFrancis:
Yeah. I think half the population is convinced that all the jobs are going to disappear tomorrow. And the other half is convinced that there's going to be such an increase in economic activity that it's going to create a whole new set of jobs that we're not thinking about.
We're watching what's going on. We have not taken an opinion either way. We think it's still early to make that decision.
Ivy Zelman:
Have you implemented AI into your business?
Steven DeFrancis:
We're implementing AI. Two different questions, I guess. One is, are you using it and how are you using it? And one is, are you making business decisions based upon the long-term impact on the job market? The second one, we're not. We're watching it. We don't know whether it's going to be A or B, but we tend to think B is probably what happens. On the implementation side, we are using it in a number of different ways in prop tech operations, our construction and purchasing execution. None of these are sort of Elon Musk level AI uses, but there are dozens of little ways where our teams have created more efficient ways to operate and to underwrite and find or evaluate opportunities. And that's growing pretty regularly, as you could imagine.
Ivy Zelman:
Has it resulted in incremental net jobs down or up?
Steven DeFrancis:
I would say neither yet for us. I do feel obviously, we can read a lot of the media about a lot of these big tech firms, which are cutting huge numbers of jobs because of AI. There's also a lot of folks that I speak to who are not hiring low-end jobs or staffing their low-end positions because they're depending on those people that are there just to use AI to sort of accomplish that expanded execution need. But if you look at the jobs numbers, you're not seeing it in the jobs numbers. There were some concerns earlier this year about jobs for young people, newly out of college or at that age, but that seems to have corrected itself in the second quarter. I don't know where all those folks are going because they're not becoming households. Obviously, a lot of them and the data are staying with their parents. But the job seems to have been corrected.
Ivy Zelman:
But for you, for Cortland, you're not incrementally hiring, and you're waiting to see how AI develops and benefits the business before incrementally starting to bring in a lot of new bodies. Is that fair?
Steven DeFrancis:
Yeah, I mean, we've always had a pretty big data science team. We're not hiring a significant amount of new people specific to AI because—
Ivy Zelman:
It just seems like everyone I talk to and I'm curious, Ryan, whether I'm talking to Lennar, I'm talking to Home Depot, there's this: we're just going to see how it goes before we incrementally start hiring, and our ecosystem is under pressure. But tell us about what you're doing. We've only got four minutes, so you've got two, and then Dallas, you got two.
Ryan Marshall:
Yeah, we're, we're really trying to experiment with it and use it in a kind of back office to make our employees more efficient. We just gave more than half of our workforce co-work or co-pilot or experiment with a bunch of the other models. And I think we are seeing some efficiency out of it. It's not caused us to reduce staff at all. Maybe it's slowed hiring just a tad, but it has not eliminated it by any stretch. The one that I'm probably most excited about is efficiencies in the, in the loan origination process.
We have our own mortgage company. 80% of the homes that we build and sell, we do the mortgages for. We have a thousand employees in that space, and it costs us $9,000 per loan. $9,000 to manufacture a loan. It's absurd. You think about $9,000 worth of paperwork to create a 30-year fixed-rate mortgage. It's, it's, it's absolutely crazy.
So I think there's a big opportunity in that business where we can potentially reduce, significantly reduce, the cost and the labor hours that go into originating a loan. We'll see if it pans out. We are also, and I've got, my team's got a strategic offsite in a couple of weeks. One of the topics that we're really trying to study is if, if AI plays out the way that some are talking about and there's real changes in the workforce, what does it do to some of the migratory and demographic trends that we started talking about? And what does that ultimately mean for housing?
Ivy Zelman:
Is that the study I participated in?
Ryan Marshall:
It is, it's the study. Yes, it is one that you participated in, Ivy. And I don't think it's a three or a five year question. I actually do think it's a 5, 10, 15-year question. And we're thinking about that and how it impacts our land strategy.
Dallas Tanner:
Lots of low-hanging fruit. Centralized leasing functionality, HOA management.
We manage 45,000 disparate HOAs. So a lot can get sort of, that's a very archaic industry in itself. Just like de-confusing the coordination there.
We've seen some headcount reduction in a few areas, but nothing that I would say is earth-shattering. The fun stuff is I was actually showing a friend this last night, like on my Claude Cowork, it scrapes every night, and it presents a CEO summary every morning of just things it's picking up around macro policy, legislative at the state levels, industry. Now you still have to kind of curate it and fine-tune it. But like every iteration it gets a little bit better. I think having information quicker makes me a little bit more nimble on my feet when I'm talking to my ops team, talking to my finance group, or my head of ledge affairs. I think it's been pretty helpful so far. I think nothing's like reinventing the wheel, but it's definitely making our teams faster.
Ivy Zelman:
Yeah. And what about hiring?
Dallas Tanner:
No, I mean, look, I would say there's definitely going to be some functionality in our company that will get quicker with automation and will, in fact, reduce some overhead, like more back office functionality. It can't change the way one of my 500 guys in a maintenance van shows up and does great customer service. I wouldn't expect anything like that.
It's definitely made our investments team a bit more efficient. Like if Ryan's team sends us a tape of 2000 homes that they're sort of thinking about selling down the road, that would have taken us a couple of days to go through. I can get a pretty good desktop in a couple of hours now, which would sort of give us some leading indicators of how to give feedback. So I feel like our revolutions are getting a lot quicker in terms of how we can sort of work with partners.
Ryan Marshall:
And maybe that just ultimately contributes to what Jamie Dimon said. AI is going to give us all a three day work week.
Ivy Zelman:
Right.
Ryan Marshall:
Or a four day weekend.
Ivy Zelman:
Or Elon Musk says no working and we'll just be in Utopia. We'll see how it goes. Well, everyone, thank you so much for joining us. Thank you, gentlemen.
