Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Emerging Multifamily Real Estate Markets

Tyler Stewert
September 2, 2021
Podcast - Emerging Multifamily Real Estate Markets

Learn what multifamily real estate markets are on the rise as Jeff Adler of Yardi Matrix shares data from Yardi's latest research report.

Jeffrey Adler is Vice President, Yardi® Matrix, which offers the industry’s most comprehensive market intelligence service for multifamily, office, self storage and vacant land properties. Adler also is the publisher of industry market intelligence and content providers Multi-Housing News and Commercial Property Executive.'

Yardi Matrix is a U.S. multifamily asset decision support toolset for originating and underwriting investment transactions. Matrix also provides market and institutional research leveraging underlying property-level detail of 131 U.S. markets, 85,916 properties and more than 16.1 million units.

Multifamily Real Estate Report

In this episode, Jeff Adler shared research from Yardi's detailed report:
U.S. Multifamily Outlook
(click to download).

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RealCrowd - All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Tyler Stewart - Hey listeners, Tyler here. Before we start today's episode, I wanted to quickly remind you to head to to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That's, thanks.

Adam Hooper - Hey, Tyler.

Tyler Stewart - Hey Adam, How are you today?

Adam Hooper - Tyler, I feel like a broken record. it's sunny in Portland again, I don't know what's going on.

Tyler Stewart - It's so nice out.

Adam Hooper - Yeah. Loving this weather.

Tyler Stewart - It was a good move.

Adam Hooper - It was a good move. It was also a great day for a podcast, with our guest, who is?

Tyler Stewart - Jeff Adler, vice president at Yardi Matrix.

Adam Hooper - Yeah, so Jeff, about four years ago, went to work with Yardi, he was formerly at AIMCO, super institutional operator, billions of assets under management. Really helped kind of build their data model, and their risk models. He's taking all that knowledge into what he's doing today at Yardi, which we talked about the different legs of what Yardi has and then we got into some, we'll get into some meat today.

Tyler Stewart - We got into a lot of meat, this was a thick cut of meat. I know I was taking notes throughout the episode and I couldn't keep up.

Adam Hooper - Yeah this is definitely a transcript reader for listeners out there and I've got more notes on my two sheets than any other episode we've had so there are just a ton of really good high-level economic indicators that we talked about, digging then into specific markets, this concept of technology hubs. Some really good indicators, just macroeconomic indicators to look at it as we're in this expansion phase, talked about the debt cycles. I'm going to be going back and reading the transcript.

Tyler Stewart - I have so many lists. Jeff went into what to look out for when a recession's coming, what data to look at, and what numbers you're looking for in that data. That's where I really fell behind in my notes. But a great episode.

Adam Hooper - One of the more interesting things to me was again, this concept of the transition to these technology hubs. When the cities go from one industry and change themselves to this more kind of intellectual capital job growth. That's where a lot of the the geographical desire for what markets to identify or to go into as an investment, and then once you get into that market, what does the supply look like for the multifamily side. what is that housing supply for new construction deliverables? There's a lot of really good stuff. That's enough of us talking, so listeners, I hope you got your listening shoes on 'cause this is a good one but as always, if you have any questions or comments please send us a note to, and we always appreciate those ratings, reviews on iTunes. every review and rating you give us help us get in front of more audience so we appreciate that. and with that, let's get to it.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct access to commercial real estate Investments. Don't forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper - Well Jeff, thanks for joining us today. where do you find yourself today?

Jeff Adler - I'm in Denver, where I live.

Adam Hooper - Beautiful, great city. Lot of good stuff going on in that market right now.

Jeff Adler - Yeah, you bet.

Adam Hooper - Why don't you take us a little bit back and tell our listeners a little bit about your history in the real estate space all the way back and kind of what got you into the space and some of the different positions you've held throughout the last 10 or 12 years or so.

Jeff Adler - I actually fell into real estate by accident. My background was in consumer marketing and I was working for Progressive Insurance for about 10 years, based in Colorado, and kind of fell into it by accident. I got into a relationship with the CEO of AIMCO through a mutual, through his college roommate in Boston and I turned down a job to move to Boston for another insurance company, an auto insurance company and we got to talking and he ended up hiring me as the company's first risk manager, believe it or not, and when I got to AIMCO, what I kind of found was hey, the same people who rent apartments are pretty much the same people who drive cars, and the way of thinking about residents and consumers and financial stability and credit scores and all that kind of stuff was very similar so I began building a set of metrics and processes, first on the risk side of things, then on the resident acceptance side, then in the consumer marketing piece, and the operation zone, financial of course for about 10 years with AIMCO, where Terry and I had a great collaboration. He was a wonderful mentor to me. We kind of built, in my mind, a metric-driven consumer-facing organization which I guess is no big deal now for most professionally managed organizations but 10 or 12 years ago was a big change. Now I guess it's about 15 years ago, because I started with them back in 2002 and left in 2009.

Adam Hooper - Now when you were saying building out these risk models, was that more on the real estate side or you mentioned also the tenant acceptance side so were you trying to model risk on both the asset and the potential tenant side of things?

Jeff Adler - I started, given my background, in the, I call it resident acceptance criteria, because I came at it from both the risk side and the consumer marketing side, from the operations side so I spent maybe five, six years knee deep in operations and asset management and only later at the tail end of my career with AIMCO, basically began working on the investment management side of the business, where I've spent now most of my career since 2009 on the investment management side. I kind of come to apartments as a consumer service First and a financial service second. That's what's kind of interesting and unique about apartments is that it really is a combination of both the consumer business and financial capital markets and business, so there's a nice gelling of the two which I find really fun and exciting.

Adam Hooper - You were doing data before data was cool, basically.

Jeff Adler - Pretty much. We did a lot of big data executions, we did a lot of metric-driven, we did a lot of systems stuff. The systems that are now in place 10 or 15 years later, we actually had to build those, it was very expensive, very difficult to tie together. Now what you can get commercially available as an apartment investor, it cost millions of dollars when I was doing it in 2001, 2002. It just didn't exist. Again, I've been a little bit blessed by a lot of the folks that I work with that are now sort of infused both in the industry and in the software side of the industry, doing the things that we did 17, 18 years ago.

Adam Hooper - Tell us a little bit about that transition from the principal management side at AIMCO into now your position with Yardi.

Jeff Adler - After 2009, Lehman kind of went busted. I left AIMCO, I put out my own shingle for a while and in the course of doing that I was working with a couple, several organizations. One of the organizations had a Yardi accounting platform and I was doing basically an evaluation of a management suite, and got to know the Yardi organization really well. That's when I decided, we were in New York at the time. We didn't want to stay in New York, we wanted to move back to Denver where we had been and I just began having a conversation with Yardi and said "I'm moving back to Denver. If you've got something for me, that would be pretty cool." We began a conversation about the things that he wanted to do in terms of services to investors, data services to investors, data as a critical component of a software organization going forward, and that kind of excited me and I thought I could make a difference, make a contribution and we ended up joined, I joined about a little over four years ago, to basically build out the data triad component of Yardi. It's been a heck of a lot of fun, I've had a really good time.

Adam Hooper - Most of our listeners are on the investor side, there are a handful of managers that listen to the podcast as well, so for investors out there that aren't familiar with Yardi, maybe a quick 30,000-footer of the different avenues that Yardi covers.

Jeff Adler - Yardi is best known as an accounting platform, accounting, both entry level and property level accounting software that was very much back of the house, founded by a single guy named Anant Yardi in 1984, when he was out of work. He was an engineer at Intel, he lost his job. He was an investor and he said hey, I see this need for accounting software so over the course of the next 30 years, Yardi's built a number of platforms. One is the accounting platform. Over the last 20 years they've built, we've built as an organization a set of operating modules that help properties run better and more efficiently, from anywhere from marketing to procurement, to resident acceptance to pricing. That becomes sort of the operating stack and that is in multi-family and in office and industrial and in retail globally, not just in the United States but all over the world. If you think about those two first parts, one was an accounting platform. The second one was a set of operating modules and the third that we are in the middle of building right now is data as a platform to help make investment decisions better. That's a huge part of what we're doing right now is building out tools for investors to improve their processes and to leverage data, both internally to Yardi and externally out in the open marketplace to provide better tools and that's for me, having set up AIMCO's investment committee, I'm in the process of building the stuff I wish I had. I come at it from the perspective of

Jeff Adler - a real estate investor, and looking for this that I wish I had and didn't have, and that's what we're kind of focused on doing. And again, it's been a heck of a fun ride. We're having a great time and we're doing a lot of good stuff.

Adam Hooper - So you said it's been about four years that you've been at that, what was the state of data within Yardi when you came there and how has that progressed to its current state?

Jeff Adler - Well, Yardi purchased a company called Pierce-Eislen, which was a competitor to Axiometrics, which was the leader at the time and MPF and then CoStar has kind of come along and become a competitor over that period of time and what we've done is we've taken the essence of what Pierce-Eislen was, which is great property-level data and enhanced it, expanded the markets, expanded the asset classes, and expanded the range of information associated with it, including a sleeve of data which is aggregated, anonymized out of the Yardi operating stack in a massive big data project which provides for the first time ever, expense comps down at the comps set level, which just wasn't actually possible. We could never get that level of specificity. It's filling a hole that everyone in the market needs and has expressed a need for while covering all the other bases of baseline information that most people need to have and we've met with a lot of success in the marketplace. We're quite happy with where we're at.

Adam Hooper - Data in our industry has always been opaque at best and to to have a platform like Yardi that is, you know, in the weeds and all of these different bits of data, like you said, to be able to anonymize and aggregate that data across the stack. That's a pretty powerful dataset to work from, that not many others would have access to.

Jeff Adler - That's right, we view it as, we kind of focused on the stuff that we could deliver immediately, and I view this as a journey. There's lots of other data elements we've already identified that we'll be adding and aggregating, anonymizing in the future but we focused first on expenses. That was kind of a clear opportunity. There's tons more information that has not yet been made available In a usable form and that's what we're going to focus on over the next five to seven years.

Tyler Stewart - Good. We'll have a lot to talk to you after the cast here for our own data needs.

Jeff Adler - Oh yeah. There's a lot to talk about.

Adam Hooper - Yeah. Getting to your insights and what you guys do with that data, let's take a step back and kind of look at macro right now where we're at, just economy-wise. Where are we at in your mind with the overall economy and what are some of the indicators you might be looking at to really come to those opinions?

Jeff Adler - Yeah sure, and the reason that I do this level of analysis kind of at the macro level is, the data services we provide are really, once you've decided on an investment strategy, how are you going to execute that strategy? If you're at the point of like, "Well, what should my investment strategy be in the first place," That's where I might spend a lot of time and my team spends time thinking about and communicating what's driving your investment strategy and how you should be doing it, so that's the context I'm going to talk about here a little bit. Firstly, the economy. The economy's doing, if you look at the general economy, this is a amazingly positive development. We have right now in the United States, more jobs than people who are officially unemployed. That hasn't happened like, ever. The lowest unemployment rate since 1969. Wages are up, inflation's up but not too much, it's kind of like the Goldilocks moment. Again, forget about real estate for the moment. This is about the economy, okay. We've never had this level of robust kind of growth in the labor markets and the employment markets. We have the deregulatory kind of push from a fiscal standpoint as well as the tax reform, this is growing another push. It was a coordinated global expansion. Yes, there are a couple of drags and I would kind of put a drag on the immigration policy and the trade spats are kind of a drag on economic growth, but if you look at the package, it's incredibly positive. Anyone who's read the Wall Street Journal recently,

Jeff Adler - even today, there are labor shortages and what this is doing, what it means is that if you go back 20, 30 years there's been an increasing bifurcation in the economy between the high end and the low end, where the benefits of economic growth and globalization are really tending to be those who have been exclusively the beneficiary of who could have an education, a higher education, and they're attached to the global economy. For the first time, in maybe 30 years, the shortage of labor at the lower end, of manufacturing, of services, of unskilled labor, is forcing businesses to work harder to pull people off the sidelines and to work with people and just begin to pay them in a level we haven't seen in, again, 30, 40, 50 years. Now the question, how long can this go on? We'll chat about that in a second. But I would say for social peace, I've been doing this talk for years and this is the first time I'm actually constructive and positive on an increasing level of social peace. Forget for a moment the craziness and the media cycle. If you look literally at ground level, at the causes of the discontent in 2016 were primarily that folks who did not have a college education were locked out of economic growth. Because the economic growth was slow and technology-driven, it basically had excluded all these other people. What we're seeing over the past year, year-and-a-half is basically those populations now benefiting from economic growth for the first time. It's a very positive perspective. Technology is not slowing down so again,

Jeff Adler - I still tend to focus on where innovation occurs and where intellectual capital is generated but this is very positive as well. What needs to happen, and I always kind of think about this as what has to happen for these good times to go on, and my take on that is that we have to have growth but not too hot. That's the issue, what will slam this thing down is if there's such a shortage of materials and labor that inflation kicks up very fast that causes the feds to slam on interest rates. That's the main thing that it looks like, I don't see it now and I don't see it for the next two to three years. That doesn't mean we won't get there at some point but I'm very positive for the economy. Again, let's leave real estate out of this for the moment. For at least the next two to three years.

Adam Hooper - Obviously, the good, you're mentioning there job growth, wages, economic growth across the spectrum. For that to continue, needing again, not growing too fast. One of our first episodes this this year was talking about the new tax regime, the tax changes. That was one of the concerns, was it going to be enough to kind of push it too much too fast that would cause it to kind of break down, so what are some of those indicators that you might be watching that would give us some suggestions that that might be coming down the line?

Jeff Adler - I look at five major things that have presaged every recession and I do believe what we are experiencing now is is equivalent of the 1940s, and in 2009--

Adam Hooper - Let me just... Tyler and I just pulled out our pens, so I'm ready to write these down.

Jeff Adler - If you think about this, I'm going to go back to something that I've learned that we talked about in college but people kind of forgot is, and Ray Dalio, by the way, at Bridgewater communicates this superbly and eloquently on a YouTube video. There are major debt cycles that run in capitalist society that run about every 80 years. And between those, there's minor debt cycles that run every five to seven years, roughly speaking. It doesn't mean you can't break it, Australia has had a 25-year expansion, but that's roughly where it is. We went through an 80-year event in 2008/2009. We're now coming out of it. Now the last time we went through it was in 1929, 1930 and the only way we got out of it was a calamitous world war that killed 50 million people. Thank god, I don't think we have that problem or that issue, but the same tensions what were in the economy in the 30s where in the economy from 2009 to present. We're at the point now coming out of that in a very meaningful way and I'll call it returning to the normal expansion, inflationary interest rate driven minor debt cycles. That's the longer view I take. So I'll go back to looking at what were the precursors of every other minor debt blowout over the last 50 years, which I think are analogous to what the next recession will probably look like. Because I don't think we're going to experience another 2009 for another 80 years, when everyone in loving memory is dead. That's why they tend to recur at that timeframe. The five things that I looked at, average hourly earnings, when it goes from

Jeff Adler - two and a half to four, first red flag. we're now at, call it 2.6. The cyclical share of GDP moves from 24 to 28, that's autos, housing and such, that's now at 24. When it gets to 28, things tend to get blown up. The GDP deflator, when it goes from-- We've been at 1.7, 1.8 and now we're running just around 2, when it breaks two and a half, that's a red flag. Operating capacity, manufacturing capacity, when it goes from 76 to 80. We're not at 76, 77. But the biggest one, the super one, is the inversion of the yield curve. That is the thing that I look at all the time, and right now--

Adam Hooper - Kind of break down a yield curve for listeners out there.

Jeff Adler - A yield curve is the spread between the two-year treasury and the ten-year treasury. That's the biggest, you want to look at that spread between the ten-year and the two-year. If that drops to negative, and if you go to Wall Street Journal, the yield curve is every day published, you can go to the Federal Reserve Bank and they'll actually print out the yield, you can go on it and they'll show you a graph of the yield curve. Every day, and comparing it to a year ago, this is no secret. It's totally visible. When the spread goes negative, when short-term rates rise above long term rates, 9 to 12 months later you get a recession, every single time. Now currently, we're something like, the yield curve is still positive by about, oh, 100, 110 basis points, something like that so we're okay, but again, go and look at the yield curve and you will see that it is a lot flatter than it has been and to a certain extent, the move in the ten-year, okay, which has been flirting with three percent, has allowed short-term rates to come up, remember the feds said they're going to be moving short term rates up because now the economy's completely normalized. That's the thing to watch is as long as economic growth continues on a modest level and inflation is modest, the ten-year which is set by the market, if it moves up gradually, then the short-term rates can move up gradually without inducing a recession. If short-term rates keep moving and the long doesn't move, you're going to get a recession. That's the thing I look at absolutely the most

Adam Hooper - hands-down, it's the most predictive. But I don't see, it bears review and caution but it's not a red flag right now.

Tyler Stewart - That was a lot of information for our listeners out there. We will post a transcript of this podcast on our blog. I know I try to take notes, I couldn't keep up. Jeff, that was incredible.

Jeff Adler - By the way, we have, if you go to and you check on our website, we have a ridiculous number of resources both in the market level and overall economic level, and so you can download all this stuff and it's free and you can read it at your leisure.

Tyler Stewart - Great, we'll post links to that on our blog as well. Jeff, with your five, your list of five things that lead to a recession, how many of those have to hit in order for you to be concerned or is it when you start to see one number hit, is that when your warning bells start to go off?

Jeff Adler - Well the yield curve is, the other four you might get in some combination. The yield curve is the thing. If it hits, it doesn't matter what else is going on, you're going through a recession. But you could get earnings going up or the deflator moving, and those are what I would call yellow flags and if they come in concert with inversion of the yield curve, boom, you got a problem. You want to look at always, the inversion of the yield curve is the sort of third rail.

Tyler Stewart - Got it. Now, the market moving too hot, moving up too quickly, would that lead to a recession or would that be more of a correction?

Jeff Adler - What I mean by growth hot, growth too hot is inflation. Economic growth, right, as long as it's pulling in resources and there's deflationary pressure in the economy, you can continue to have an expansion because what is going to shut down an expansion is when inflation moves up rapidly, sharply, and interest rates have to be slammed. That's what causes a recession. If you don't have to do that, you can have expansions for an extended period of time. My caution past three years is that we haven't proven as a republic to be able to put together more than seven to eight years of expansion before shooting ourselves in the foot. Doesn't mean it can't be done, it's just we haven't proven ourselves be able to do it. I have a level of caution beyond three years because that's, you're sort of expecting a lot.

Tyler Stewart - Got it.

Jeff Adler - I just can't, I can't get my head around how we're going to get everything perfect.

Adam Hooper - Now, to boil that down into more actionable information and insights, what does that mean for listeners out there who are looking at real estate as an asset class?

Jeff Adler - The first thing you want to look at is at real estate as an asset class and multi-family in particular, is the demand side of the equation really, really good? It's more about, given the fact that the economy's in an upswing, where is the economy growing? Where's the geography of jobs moving? But it's mostly about where the supply is coming. What we see at the stage in the real estate cycle is where you see a consistent or concentrated level of supply, you've got rent pressures, occupancy declines, and rent stagnation or actual declines. Where you don't have that, you've got meaningful growth. If you're an investor, your two big issues is, how does the geography jobs affect where I should probably go, and then what is the supply picture even among those group of potential candidates? That's it, pretty much, that's it. Then a lot of what we do is try to sort through these geography of jobs and then where the supply is and where it's coming and then the rest of it tends to fall out.

Adam Hooper - Now with supply, you're talking about new construction versus existing market supply?

Jeff Adler - That's correct, the new supply being added to the market.

Adam Hooper - Now, we talked in a couple of prior episodes of and I think you mentioned earlier, there's a shortage of labor and also products. The construction costs have just skyrocketed for new supply.

Jeff Adler - That's true, but remember, that's new supply entering into the pipeline. The supply that's hitting the market at the moment is stuff that has been in the pipeline for 24 to 36 months, and actually, a lot of it should have delivered last year but because of a shortage of construction labor, it kind of got stretched out into this year. We expected to have a peak of deliveries last year, it didn't happen. And my developer friends, last March and February were telling me they can't deliver what they were working on and that deliveries were going to get stretched and we saw deliveries stretched out six to nine months over what they had been in the past, and we're seeing that kind of come into fruition this year. This is probably the peak year, I think you could continue to see nationally about 300,000 units delivered a year which is not out of whack overall. However, as it's being delivered in concentrated cities and within those cities, concentrated submarkets, it is creating localized pain if you're a landlord, relative to overall other economics.

Adam Hooper - The two sides you're focusing on, you've got the geography of jobs which will dictate the attractive markets at a at a high level, macro level and then once you dig down a little bit more, look at what supply is delivering soon and then in the pipeline and we're not seeing a lot of new construction starts this late in the cycle, there's some but not a ton. How do you differentiate?

Jeff Adler - When we looked, just to add an aside to that, we look at our new supply pipeline in three phases. One phase is between under construction, which is easy, the dirt's getting moved. Planned, where it's submitted full plans, right, formal plans, and prospective, which is hope. Hope, I'm kind of talking to somebody but I'm not funded. If I go back just as recently as 2015, the number of prospective projects, we've had under about 1,500. The number of under construction was about 2,500 and the planned were a little over 3,000. What we saw in the middle of '17 was this mix shift, where the number of properties under construction has been stable at around 3,000 which is why it's kind of delivering, okay, call it 300,000 units a year. The number of planned, actually is stable. The number of prospective has skyrocketed, and what that means to me is developers are warehousing projects that they can't get funded and they're waiting for the next opportunity for the funding cycle to open up, but right now if you're a new developer, you've got rising costs and flat or declining rents and even if capital is available, and it pretty much is available, the economics don't work as a developer, for somebody who's looking at a project today. Everything that was worked on two to three years ago, that's all getting delivered right now so that's not the issue, and the number that's coming is fairly stable. What normally kills expansions is a crescendo of supply and that's not what we're seeing. We're seeing a steady movement of supply but it is still highly concentrated.

Jeff Adler - We are not yet seeing supply fan out, and we do a bunch of maps, market by market, which is also publicly available attached in our materials, and kind of lays out the geography of the new supply. It's still highly concentrated in urbanized nodes or downtowns.

Adam Hooper - Can you contrast or compare that shift of stage of deliveries from 2015 to '17, what did that look like going into the 2008-9 picture? Did you see the planned, the near-off deliveries like you said, skyrocketed over supply, but how'd you see those other two numbers and how that mix of those--

Jeff Adler - Remember, 2008, 2009 was not killed because of supply, it was killed because of demand. Demand crashed. The supply was not out of line. It was actually 250,000 units a year, it was actually less than now. What you saw was just a cratering of demand. We're in a little bit of uncharted territory here.

Adam Hooper - Not too much then you can infer from, at least historical again, with this last cycle.

Jeff Adler - No, I think we're seeing something different.

Adam Hooper - Interesting. Now inflationary pressures, interest rates we've talked about on the podcast before. Folks are looking at either new projects or investing in these projects. Rising interest rates are obviously an impact on value and returns, how did how does an investor start to think about that or maybe protect against some of that downside of a rising interest rate environment?

Jeff Adler - Well we actually did some work just on, if you look at the movement in the ten-year, from election day to now, it moved from 1.83 to 3 on the ten-year. That should have crushed values, crushed them. But a couple things happened. One, NOIs went up, and that kind of covered half the distance. Debt spreads came in and that covered a quarter of the distance, and then equity return expectations have come in another quarter of the distance, and so that value curve's essentially flat in a rising interest rate environment up until now. For the last year and a half or so. The bottom line is, when you look on a go-forward basis, you've got to go to places or situations where the increase in your NOI is going to outrun any expected increase in the interest rates. That's pretty much it, I didn't think that... One thing I thought, I didn't think debt spreads could come in any tighter. However, what's recently happened, and you actually could see spreads tighten another 25 bips maybe, which is a surprise to me. The commercial banks, many of them, small, local commercial banks, have taken advantage of the tax law to change their expected required return which is making them incredibly more competitive compared to other debt sources. That is a sort of cushion on values I had not expected, and plus NOI growth, again. If you're outside of a submarket that has intensive supply pressure, your NOIs are still going up three, four, five percent. You're still in pretty good shape. If you can sort of find the value as it works you can get a bigger pop, but even if it's

Jeff Adler - a factually stable asset, you're not in a bad place. Equity return expectations have not increased, let's put it that way, because there is a global surplus of capital right now and will be for the next 10 to 20 years because of demographics that need to find a home and real estate is a pretty good home. Again, if you look globally around the world. US yields on a ten-year are the highest compared to the Eurozone or the Japanese, so capital, foreign capital, and it's a ridiculous amount of foreign capital that continues to flow in here, then we'll get to when they look at what they can get, they can get a positive spread over treasuries, four and a half, five percent on a capped rate basis, then you'd lever that thing up to 65%. Real estate looks like a really good place to be and inside of real estate, multi-family is one of the favorite asset classes, because of its stability in major hubs. Multi-family is, and if you're an international investor, where can you get an institutional piece of that residential market? There are no multi-family industries In the rest of the world like there is in the United States.

Adam Hooper - Right.

Jeff Adler - There's a tiny one in Germany, a tiny one in the UK, but if you have capital, hundreds of billions of dollars, the United States is the place to deploy that capital to get multi-family exposure. There's a ridiculous amount of capital, both equity and debt, that's being put to work and so that will put a floor under values plus obviously the GCs put a floor on the values so again, it's really a function of where's the geography of jobs and and where's the supply coming?

Adam Hooper - You mentioned the return expectations of equity has tightened, that also kind of bridged that gap with the ten-year. That's something that we've talked about within, I'm assuming your comment is more on the institutional side, that is something that managers that we talk with all the time that are syndicating capital from private investors, individuals is that their return expectations haven't necessarily kept pace with market, and so deals are being underwritten in 2012, '13, '14 are a very different profile from a return perspective as deals that are being underwritten here in 2018 and then going forward. Have you seen that expectation shift at the retail investor level or is most of ehat you guys are tracking at the more institutional scale?

Jeff Adler - I tend to track us at the institutional level and what has been happening and I talked to a lot of people who are institutional players in this industry. They're just saying, I have to go to a different pool of capital. I can't make the returns that I used to make in my previous fund, I can't do it. I'm going to a different pool of capital that is aligned with the returns I can get. Which is what I found very intriguing. They're just saying, look, I can't get high teen IRR, that's just not in the cards. I can get a 9 to a 12, so I'm going places that are okay with a 9 to a 12, and so I would tell you is the under-50 multi-family is still non-institutional grade, and there is probably more room in making returns and deals work under 50 units than over 50 units. Usually 50 to 100 is where the break is, usually over 100 units per building is where the institutional players come in strong and there have been forays, a couple of companies are trying very hard to find ways to institutionalize at under 50 unit multi-family asset base with varying degrees of success. It is very operationaly intensive still tougher to make work, but a couple players I know are trying really hard to make that happen.

Adam Hooper - How much would you say you think you've seen that spread tighten from expected or I guess achievable equity returns from the, you said, high teens down to low teens?

Jeff Adler - Yeah, or sub-teens, is what I'd probably tell you. High teens to sub-teens on an IRR basis assuming 65% leverage.

Adam Hooper - And that's a pretty remarkable shift.

Jeff Adler - Yeah, it is, and the fact of the matter is, for institutions, look at the alternatives. There aren't a lot available.

Adam Hooper - Thus the silence, right, there aren't that many. Where are we at with that? Is that going to continue to tighten or is that a function of where interest rates go?

Jeff Adler - It's a function of where interest rates go and right now interest rates are, again, within a range relatively low, historically. I don't think they're going to break, in my mind, the ten-year, if it breaks past three and a half, in 2018, even half of 2019, that's a big signal that inflation's picked up big time, but we're flirting with three. I wouldn't be surprised if you know, three and a half by the end of the year. As long as it's within that range, I think the party goes on.

Adam Hooper - Would that be the main indicator that you would suggest investors keep an eye on?

Jeff Adler - I'd keep an eye on the ten-year, three to three and a half, slowly moving up, and the inversion of the yield curve. Those are the key things to watch. Again, if you kind of shift now and we kind of shift to say, I've mentioned a couple times the geography of jobs. Let me dive into it a little more in particular there. In the first front end of this expansion, the economies of the major, I'll call it international gateway cities, were the ones that grew the fastest, grew the most. I'm thinking DC, Boston, New York, San Francisco, Oakland, the Bay area, right? These places where big tech jobs kind of came in and really powered those economies and you saw meaningful employment growth, meaningful rent growth, and meaningful economic growth. That has stopped. The population and the jobs are now growing outside of these major cities. New supply is pressing in on it, LA is called the exception among those international gateway cities. It was late to the recovery, and it's the strongest one of the gateway cities still around but everywhere else, with the exception of LA, you're seeing significant job growth happen in secondary or tertiary cities. Reno, Boise, significant growth. Orlando and Vegas and Tampa and Phoenix, Houston's kind of a bounce-back. These areas are where employment is growing, meaningful and the employment is of folks that are knowledge workers, being a loose term, but some sort of intellectual capital. Intellectual capital could be energy, by the way. Houston has a very big intellectual capital center in the technology of energy extraction.

Jeff Adler - That's a big tech center, it just happens to be focused on energy. In these areas, Raleigh, Portland, Seattle, Phoenix, Denver, Dallas, Austin, Charlotte, Orlando, this is where the economic growth's occurring and it's meaningful, it's significant. Now tempering that is to what extent supply has now caught it or overshot it, even in places where these fundamental economics of job creation are quite good. I am fairly positive and constructive on these cities in general and quite frankly the tax reform only adds fuel to that fire, okay. If you feel that these cities in general were good anyway, the tax reform gives it an extra boost because they tend to be located in low-tax cities, low-tax states. You could kind of boost it, and if you look at the major cities and we take a look at immigration, domestic migration and international immigration, if you look at places like Austin, Vegas. Raleigh, Charlotte, Phoenix, Nashville, Orlando, Dallas, even Atlanta, they have a tremendous amount of domestic immigration and they've had some level of international immigration. Orlando has had both, the international part really being Puerto Rico, because it counters work that way. If you look at the major, I'll call it, international gateway cities, they have domestic migration way in excess, the out-migrating. They afre losing population and the only thing that's been kind of saving them as an economy is international immigration. Well, that's kind of topped out right now, so these cities, I'll call it population-wise,

Jeff Adler - are under pressure, and there's some work that's been done by AG Roman at Buildzoom, some census data and so the only way that that party goes on is because people of very high means are moving into the international gateway cities but anybody at a moderate or mid-level income is moving out, so if you're New York, the story is out-migration to the Carolinas. You just read recently about a whole bunch of hedge fund folks leaving Connecticut, going to Florida. If you're a Californian, Boise, Phoenix, Denver, Salt Lake City, Portland, Seattle. They've all had overflow out of California. That is why I tend to be a little more constructive in my view on these secondary and even tertiary emerging tech hubs because a rising tide is a lot easier to make money with then one where you're swimming upstream. It's not impossible, but you've really got to work hard to make it work.

Adam Hooper - How have you seen the attitude of institutional, or I guess even international capital as it relates to these secondary and tertiary cities? Are they...

Jeff Adler - I would say the international capital and all the folks I know in the international capital side, about two years ago, they suddenly kind of caught it that the international gateway was played out. Yields were too low, the demand-supply balance didn't look good, and they started picking domestic partners to take them to places that are outside of places that were the international gateway cities. They've been moving in this direction and everyone that I know of on the US domestic side has been basically going in tertiary markets. I literally have had two clients talk to me about Huntsville, Alabama. They're seriously putting money into Huntsville, Alabama so that's the kind of scouring that's going on to find opportunities in places, and in our sense, it helps that we're in 130 markets, so we cover everything from Huntsville all the way of course up to the international gateway cities but we get a lot more demand for information on these smaller markets than we did, say, three years ago.

Adam Hooper - Now again, this is really getting to that geography of job growth, right, and now it with these more knowledge economies or again, the the intellectual capital job growth, how has that worked out historically from the cyclical nature, is that is that in step with the overall market, is this a new phenomenon, is this going to buck historical trends or how how do you see that playing out?

Jeff Adler - Well, we looked at this, we took a basket of primary markets and a basket of these sort of, about 24, 25 "loosely recurred" secondary markets, but they're really large cities. We looked at this from 1990 coming forward. What we found was that over long periods of time, secondary markets, this basket of secondary markets, outperformed primary markets, with one caveat. In a downturn, they are more volatile, in terms of values, and a little bit more volatile in rents, but a lot more volatile in values, which means if you're moving into one of these cities, you need to have your capital structure more durable so that you are going to be subject to a higher level of potential volatility in values and you do not want to be caught with a lung maturity where the LTV goes the wrong way.

Adam Hooper - Right.

Jeff Adler - With that caveat, if you've got, if you're set up for a long enough period of time, you're going to do just fine and I would particularly highlight, and what we're focused on is cities where the fundamental nature of that city is changing, from one thing to another, and that the economy's becoming more broadly diversified and more focused on knowledge workers than I'll call it cyclical workers that have lower skill sets and are more subject to economic volatility.

Adam Hooper - Now, what precipitates that change in the fabric of a city? Is it education, is it other industry, what drives that shift?

Jeff Adler - It's something we've actually spent a fair amount of time studying, learning, actually doing backward case studies of Austin and sort of looking for current case studies of other cities who are making a transition to this fundamental change. What it is facilitated by, the longer this economic expansion goes on, the more that labor in these key cities is incredibly expensive, the more that technology companies, established ones, say, it's time for me to broaden my employment base. For example, Salesforce has capped the number of San Francisco employees they will have and is hiring all its new people in Indianapolis. That's a shocker. You're seeing this all over, particularly with the ruckus in Seattle with this labor tax that got put on, a head tax, which is really sort of a punitive tax on technology companies, is spurring people to say, you know what, maybe I'll diversify my labor force. That's happening in Salt Lake, it's happening in Denver, it's happening in Boise and it's finally happening out of Orlando and Raleigh and Charlotte and Phoenix, where established technology companies are saying, I'm going to cap my employment in my major gateway cities and I'm going to spread it around. Now that is the, I'll call it the push. The pull is, cities have to, and there really is now, I'll call it a playbook. It's really interesting, and if I go back and say where did this playbook come from? I really looked at Pittsburgh, believe it or not, as a city that consciously put together a playbook that's now being copied, and it's being copied

Jeff Adler - because the mayor of Pittsburgh, through the urban lands at TULI, basically has put together a blueprint, a playbook that's now available to pretty much any city in the United States. It really is composed of four components, public and private partnerships, a friendly business environment, amenities and a community environment that attracts and retains talent, technology and creative talent, and an educated workforce. You look at each one of these four components. Now, for example, Seattle fell into it. Seattle didn't design to be a tech hub. It fell in, they got lucky. But other cities that aren't as lucky are trying to make their own luck. Yu see this now, consciously, where cities are consciously pulling this together. Now Pittsburgh did out of sheer desperation, and they had a large enough civic business community, civically minded business community, and said okay, we're going to belly up and we're going to make this happen. In some places you see it kind of taking off and in some places, unfortunately, the civic environment or the business climate hasn't gelled to the extent that you can pull this thing off. That's what we look to, very clearly, we have a methodology of going through city by city, and evaluating how does each one of these cities stack up in its ability to emerge, as... Now there are a group of, I'll call it known tech hubs. There's the gateway cities, which are like the known tech hubs in the institution world of Portland, Seattle, Denver, Austin, Dallas, Houston, Nashville, Atlanta, Miami and Raleigh.

Jeff Adler - There is an emerging set of cities which I find kind of really interesting and those emerging set of cities... And I'd probably throw in San Diego, maybe, as a known tech hub, but an emerging set of cities. Phoenix, which was basically a low-cost, low-skill level market that's transitioning, Salt Lake, Indianapolis, Columbus, Ohio, Tampa, Orlando, Pittsburgh, Philly, Minneapolis and Kansas City are examples of these cities going through transitions. I also would highlight, believe it or not, there is an emerging group called Green Shoots coming out of Detroit, downtown Detroit... Dan Gilbert, the amount of money he's put in to try to bring Detroit back from the brink, or beyond the brink, there's something interesting going on down there. It's still early stage, but there's something happening there, and we look for cities that are like this, where the entry points are attractive and understand that even in the case of Austin. We did a case study. It took Austin 30 or 40 years to put together all of the components, where in the last decade Austin suddenly became this boomtown. But it took 30 years of groundwork for that to happen. Where it kind of grew not quite as quickly. The cycle with technology's being compressed. It does mean that for investors, you have a choice of your entry point, how much risk you want to take versus how much return you want to look for in order to achieve your objective, so the places, if you're looking for high teen, twenty IRRs on a non-development deal, you're going to have to go to someplace that traditionally you probably wouldn't have gone to.

Adam Hooper - That's very early in that emerging state of this transition, right?

Tyler Stewart - That's earlier, because the city is going through a change of character. Now that's not to say, if I'm in Los Angeles, I'm going to use Los Angeles as a case study. If you look at LA and the whole LA basin, the best performing from a rental perspective is not West LA, it's East LA, the cheaper parts that are going through a change of character.

Adam Hooper - Have there been any other historical shifts in the nature of these cities that would mirror this or that we could maybe look back historically that would inform what this looks like five or ten years from now?

Jeff Adler - You could easily look at Denver. We did a case study of Dallas, you could look at Raleigh. You can look at Nashville, and these are cities that have made transitions from one type of city to another type of city, over the course of about, I'll call it 15 years. They are fundamentally different cities than they were 15 years prior. That's what we tend to look at is, okay, if I know roughly what's happening, can I look at emerging cities and with some level of confidence, of course things are never perfect or sure, there's no such thing as a sure thing. But give us greater comfort that they have the components? That's what we look for when we highlight cities that should that should make your investment screen.

Adam Hooper - I guess also what I was maybe getting to there is do we know what the life cycle of this tech hub transition looks like? Is there anything historically that you'd say there's a similar pattern where this city changed from one industry to another, it kind of reached its peak, it lasted for x number of years and then, did the tech hub fall apart? We're very early in this new phenomenon of the tech hub but are there any historical patterns that would show or indicate once a city makes a transition to this new identity, how long does that last? What does that...

Jeff Adler - The only historical analogy we have is to industries that were primarily industrial centers.

Adam Hooper - Right, and it's a totally different makeup of this transition, what it looks like.

Jeff Adler - Yeah, but if you look at what happened in the midwest, you have a combination of rising costs, a failure to innovate and embrace change driven by rigidities maybe in the labor force. If we look at Detroit's, the saddest historically have been Cleveland, Cincinnati, Detroit, they've been really sort of sad. Syracuse, Rochester, these were huge industrial centers. Massively, look at Xerox, right? Rochester was the hub, at one time, was a technology hub. The companies which comprised that and the institutions got rigid, and they got blown away. They started fighting internally on the spoils, versus focusing on the external threats. When that happens, over 20 or 30 years, those cities have basket cases. Now remember, Danny Gilbert is trying to bring back Detroit but you go look at Rochester or Syracuse, Buffalo, Cleveland, it's sad. It's sad for our country, it's sad for our economy that that's what happened to these places. Now, weather does not help. Warm weather helps and cold weather is certainly something that you have to fight upstream. But I would say that even in the midwest, cities are embracing. Certainly Pittsburgh was the case study, Columbus is another one. Indianapolis now is trying to become a third. Madison, Wisconsin being another one, Kansas City. Minneapolis is a little more developed. These are cities that are actively saying, we're going to break that cycle and we're going to move forward and if you look at current operating performance, Minneapolis and Kansas City are in the top ten of overall rental performance, which is shocking.

Jeff Adler - Compared with where our mental framework's are, but they're doing quite well.

Adam Hooper - How can we, as investors looking at these trends. At this transition from one identity to these kind of technology hub concepts, how do we know how long that's going to last? What's the next shift? I guess this is asking you to kind of crystal ball.

Jeff Adler - I don't know that I can tell you with certainty when this ends, but I think what you want to look at is, and we examined this before a year ago, there's a number of core technologies that are sort of rippling through the economy, The four biggest ones being autonomous vehicles, solar energy, Internet of Things, those sort of sensors, and robotics, and you look at those, those components, those four major technologies and if your city is playing in one of those four big trends, you're pretty well positioned. If you look at those industries, they are solving real problems, that are to a certain extent all driven by the aging or erosion of the labor force, and that's why to a certain extent there's a lot of folks who are very concerned that while things are good in the short term economically if you don't have an education or some sort of technical skills, long term, a lot of jobs do go away. I find more interesting the autonomous vehicle truck experiments being run in Arizona where you've got autonomous trucks on the road right now being tested for long-haul trucking. That solves a real need, because quite frankly, the labor force for truckers, for long-haul over the road truckers is declining. Who wants to spend their lives in a truck? Very few people. At least very few people might enter that field. They don't mind being a trucker in a metropolitan area, that's basically day trips and they can go home at night. Nobody wants to spend their lives on the road. Autonomous vehicles, autonomous trucks solve that real problem.

Jeff Adler - We can go through it in terms of things that are happening and health care is another big component driven by, I'll call it big data, which is another one of those major shifts where you're using information to make decisions versus a lower level of expertise. When you look at, in terms of AI, I should probably have mentioned AI and machine learning as one of those major megatrends in terms of technologies. That's going to ripple through the software industry.

Adam Hooper - Technology is largely an accelerator, and the tends and the pace at which they're adopted and how fast these dynamics can change. When you talk about the industrial shifting, that was a many decades long process. Is the technology accelerating the ability for these markets to change, how quickly does that change their ability to transition out of this to whatever's next, for better or worse?

Jeff Adler - What you want to position yourself as, real estate investors, we don't create wealth as much as we ride on the wealth that's being created and facilitate space to enable that growth. We perform a role, and if you're doing a big mized-use experience as you create places that bring people together to create that growth. But we don't create the growth in and of itself. Where you want to be is, where is the intellectual capital? Where is their brainpower, where is it aggregated? It doesn't have to be in a downtown, it could be in what we call an urbanized node. Demographically, those are going to be the best places in terms of performance, because they have better schools and with the aging of the demographics, those areas are going to perform better. The fundamental problem of the central business district is that you can't really have kids there unless you're making a ridiculous amount of money to send them to private school. The urban, in the US, we have a problem with our urban school system which is resulting in growth occurring in the suburbs but in now newly-urbanized nodes within the suburbs in better school districts. That's where you go. We've got a bunch of maps. We've been down this road where we identified all the top urbanized nodes in all the top cities, the top 40 cities, and so there's a playbook. You don't have to sort of say, oh my god, I have to do all this original research, there's actually a playbook out there that actually says where are the conditions and where should you go, and if you are say,

Jeff Adler - fixed in a certain city and well wait, how do I replicate, what am I looking for? It's pretty much now, I would say, a pretty well-known playbook.

Adam Hooper - Does that take the fun out of it?

Jeff Adler - Well, do you want to make money or do you want to have fun?

Adam Hooper - This is such a different approach. That's one of the things that has attracted me to what we can do with technology now and some of the stuff that we're doing on the risk analysis side, is you can replace that intuition, you can replace that gut feel. A lot of the art that's always been inherent to real estate decisions is gut feel. To be able to access data now to make better decisions through a proven fact-tested model completely changes it for me.

Jeff Adler - I got to say, I'm all about metrics and data, I've done that for 20, 30 years. I do think it is a complement to and not a replacement of judgment. Wise people who can make important judgements, I think the data can help us focus our attention and focus our ammunition in a more structured way, but I will tell you, there is nothing that replaces, after you've done the work and come down and sorted through it and got to a fewer number of potential candidates, you still need to look at the structure. I can't tell you the quality of the construction, how it's actually put together. I can't tell you, yet anyway, what physical condition problems you're going to walk into. There is still a tremendous amount of judgment at the local, boots on the ground level. What I am trying to do is make people's time more efficient, so instead of doing things that they didn't really have expertise in, they really weren't great at it, that they can acquire data which helps them focus on the things that they weren't good at and had to spend a lot of time and drudgery figuring it out. They can spend more of their time focused on the things where they actually can make a difference which is picking the right customers, tending to customer service, tending to physical quality, tending to the environment of that multi-family property, because it is a service intensive business. It is not just a financial tool. It's not a bar. You got to roll up your sleeves and you got to work and so my mission or my vision here is that we can bring a lot of things to bear

Jeff Adler - to help people make better decisions more quickly with less variance and less drudgery so that they can spend their time focused on the things that only real estate people can do with boots on the ground. That's kind of what drives me.

Adam Hooper - That is a perfect wrapper on our conversation today. I think that's a great outlook.

Jeff Adler - Well thank you so much and it's been a joy speaking with you. Have a good day now.

Adam Hooper - Likewise, Jeff. We really appreciate your time, and listeners out there, as always if you have any questions, send us a note to and we'll catch you on the next one.

Tyler Stewart - Hey listeners, if you enjoyed this episode, be sure to enroll in our free six-week course on the fundamentals of commercial real estate investing. Head to to enroll for free today. In Real Crowd university, real estate experts will teach you the important fundamentals like the start with risk approach how to evaluate real estate sponsors. What to look for in the legal documents, and much more. Head to to enroll for free today. Hope to see you there.

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