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The following video is the multi-family panel at rent TVs Orange County state of the market Conference held on July 26th, 2022. It is comprised of Barry sewitz from the sewitz company Jerry Fink from the Bascom group Paul Julien from Advanced real estate and Dan Blackwell from cbr.e. So we've saved the apartment multifamily piece until the end because those are the special people and we have the most exciting stuff to talk about so we'll try and go to a Quick Clip and and try and keep it for information that is useful something that you can take away. I want to start by having our panel introduce themselves. I did not get the BIOS although I did homework on these guys and it's a top notch group of guys. But Jerry if you want to start and just talk about your background and your company and what you guys do. I think that be helpful sure Jerry Fink, I'm one of the co-founders and managing Partners the Bascom group. We started back in 96 focusing on Orange County multi-family and since kind of grown Nationwide, we've bought over 90,000 units mostly West Coast but east coast as well and typically by renovate reposition so and partner with institutional ambassadors privacy funds But mostly value add other than about six seven years ago. We got into development with a developers or joint venture partners. And now we've got about 15 development projects going on in Southern California ranging from entitling land to actually building the project and Leasing and selling it so historically evaluated group, but I've gotten into development because the cap rates are so low in the You know that model is much more lucrative today than ever was in the past. Paul you want to take it from there sure. Hi, I'm Paul Julian Advanced real estate The Firm was founded by my father about 40 years ago, and we've been doing the same thing which is by and hold real estate here in Southern California. So we're in Orange County LA and Inland Empire with about a little over 10,000 units here and we're a vertically integrated company. So we have in-house property management and we have an in-house construction company. That's pretty robust where we we actually have all the trades in-house whether it's plumbing and electrical and Framing and we even have our own cabinet shop in house. We build our own cabinets. Because we hold for the long term. So to to Brokers dismay like Dan here. We've never sell We Buy and Hold and in all of our money is private. It's friends and family, which is now grown to about Six or seven hundred investors of friends and family will buy all so in tick structures. So, you know, there's some people that might have a piece of real estate. They don't want to own anymore. They can sell 1031 exchange him with us and then ultimately become a partner with us. That's probably the long and short of it. But like I said just long-term holders here in Southern, California. great and Daniel Hey everyone, Dan Blackwell. I co-head the multifamily investment sales division for CBRE here in Orange County. We've got a team of 15 investors Brokers and we cover the entire Market. We also focus on the bordering markets Inland Empire 605 Corridor north San Diego County, but our Hub is Orange County. We specialize in 10 to 100 unit transactions within the marketplace. And we've been doing it now since 2008. Hey, Dan, I got a couple slides you want to mention these two listings? Sure, these are two new listings that we just brought to Market both happened to be in Costa Mesa. The first ones a 48 unit offering in West Side Costa Mesa. You got 1.7 acres of land 48 units that has not been upgraded. You got a tremendous amount of value add upside in the asset. Good Frontage on the street. You got 250 feet of Frontage on avocado and a lot upside 80 potential. You can both 480 use converting some of the garages and this is just a great diet asset. This is Probably I wish it was a good size for Paul over here, but it's maybe it's a little small, but this just is a great medium-sized asset in coastal, Orange County. And then another one a little smaller. This is 20 units also on the West Side. What's interesting about this is interest rates have become more volatile and Rising we've seen more willingness for people to assume existing loans. This has got a great assumable financing on it about three and a half percent interest eight years left on the term full term IO and to get into the coast of Mesa Market if you've got an appetite to get in the market even 20 units is a good size asset for the the marketplace. So if anyone has any interest in these feel free to let us know Jerry said he brought a check so you guys can talk after and then for those of you don't know me, I'm very say what's President of the city what's company and managing partner of say what's properties. We have commercial real estate brokerage company here in Newport Beach and we represent tenants users and buyers of commercial real estate office industrial multi-family here and around the country. And then we also own a portfolio of multi-family properties and Office Buildings as well throughout, Southern, California. So I'm excited. We got a good group of guys and real players in the market. I want to start by backing up for second because I thought what we do is we talk a little past a little present and a little future so that at least we can have some chronology and then give you folks a little takeaway in terms of where things are headed. So we've all been massaging our crystal balls over the night trying to come up with a game plan for the future. But if we look back and maybe Jerry you start with it, what are some of the challenges that you had if we just rewind even just a year ago with covid with not only on the acquisition side, but then also just on the tenant side with them paying rent and then how does that compare to today? A great question? I think Orange County is a little better than LA County, you know city of LA County. The delinquency rates are Stunningly High because you can't evict anybody in La until this emergency orders over which they've not put into it Orange County is a little more open. But when I talk to our asset managers on can you actually evict someone they give me this long-winded answer of they're not sure we'll try maybe so we're still in this pretty bad ownership zone of not being able to evict people it's getting better. You know, if you look at rent increases since the covid downturn, you know rents are up asking rents 15 to 20 percent so big jump up, but you know, not everyone is paying those increased rents on turnover. So that's more of kind of asking rent, you know. Media hype than reality and then you've got areas like Santa Ana that put on a vicious formal rent control. Where your increase are capped at 3% So a lot of crazy things have happened in the past couple of years and then you know, we were in this little boom time here for about a year two years the past year and then interest rates spiked up and so interest rates. Are you know shooting up right now? So if you buy a deal at a three-cap rate your negative cash flow again, so that's pushed up cap rates from you know, the low threes to kind of high three low four range in the past couple months and then lenders have also gotten way more conservative today where they're going with much lower loan to value fearing that we're going into recession fearing rate increases. So a lot of turbulence has happened the past kind of month or two months here and just as a follow-up to that so my question would be for you. What's the appetite then knowing that that's what's going on with high interest rates struggle with disconnect with cap rates. Are you still buying? Are you still seeing deals? Yeah, we're still looking for deals. But I'd say the sale Market other than maybe the handful of exchange buyers or people have to buy is really taking a big hit so a big reduction and institutional sales because this turbulence and fear of going to recession. If cap rates gone up, you know, the sellers still want the three cap rate the buyers want the four it's using a big kind of, you know, discount between what a seller wants and what a buyer is going to pay today and then the lenders have gotten just a lot more conservative. So do we still want to buy here? Yes, but you know, we want to buy a lower price. You may be five ten percent lower than it was a couple of months ago. Yeah. And so Paul maybe just to follow up on that your thoughts on where you were where you are and are what are you guys doing as a game plan? Yeah, so I think one thing to remember is we are seeing credible rent increases and we have over the last two years here unprecedented. And and you know, we're really running up against AB 1482 on our rent increase that we're putting out, you know, 10% Max. Basically, we could go higher but we're not because of that Max so there's a little bit of a roof there but we have to remember, you know, there was a year in 2020 that we didn't do it at all. So there's a little bit of catching up that's happening too. So when you look at those numbers of these rent increases remember, it's actually spread over three years. Not not really two years. Our vacancies are as low as they've ever been. We are doing some evictions right now we have about 5% of our portfolio is delinquent. And of those I look back and we've got about 75% have applied. You know for Aid of those that haven't been paying the other 25% haven't and of those, you know, we are doing evictions and it's actually happening and it's working and you know, the courts are open again is probably not as fluid and easy as it was prepandemic but it is happening. I Echo what what Jerry says on the investment side, you know, we last year. We raised a pretty big fun last August over 130 million dollars that we're sitting with and our intent was to place it in the first six months as we did our previous fund and prices got so fraught the at the end of 2021 that we kind of sat back and stayed on the sideline a little bit. No knowing rates. We're gonna go up then rates did go up and then there was this long gap which we're kind of still in right now, which is this big ass gap between the buyers and sellers were sellers haven't come to the conclusion that they have to change their cap rate. And so you've seen a few deals go on the market than be pulled back off the market because they're not getting their price. And so there's there's a time change here where we're going to have to all come to reality of where we are because buyers don't want a bunch of negative leverage, you know, they want to go in with a cap rate, you know that that is higher than their interest rate, which is not happening or at least pretty close to it. And so but I think we're also seeing you know, the FED met today, you know rates are gonna go up again here people are waiting to see are the interest rates going to go even higher should I wait even more so there's a ton of capital sitting on the sidelines waiting. So if deals do come to market right now, they're actually getting some good attention. There's a A portfolio that a read is put out right now because REITs are one of the only buyers I mean one of the only sellers right now because they're trying to buy back their stock because their stock prices have dropped so much. So they're actually motivated to sell some of their worst assets take that money and buy back their own stock. But besides that there's just not many sellers out there. So the market is pretty stymied. So Dan, what are you see, because you're in the trenches with you and your team in terms of just sort of echoing with these guys are saying is there really this disconnect and cap rate? And is there really a Slowdown in terms of buyers of people waiting on the sidelines? Absolutely. I mean we're seeing buyers just pulling off to the sidelines like why unless there's an opportunity that is presented to them that's compelling them enough for them to put their Capital to work right now. They're waiting. So we've kind of bifurcated buyers either buyers with needs and buyers with wants so you buyers with a need of it's 1031, you know those buyers if there's any blip in financing if there's any blip in some uncertainty forming while they're in their escrow period there's still a high probability of performance by them the buyers with the want again, it's got to be some compelling asset to get somebody to put their money to work now because there is a big disconnect we're seeing a lot of buyers pull back just waiting things out volatility. It's just it's got to be compelling out there. There's just a lot of uncertainty but we're still making deals. There's the offer activity we used to be able to put deals together hard day one, right, you know clean title, maybe a quick look on a couple of units and a buyer might go Immediately on contract you're not seeing that really at all anymore. You're also not seeing double-digit offer activity on your an average asset. So there's a lot of change within the market. I just think a lot of people want to see what happens in the second half of this year. Yeah. And so Paul are you seeing on the stuff that you are looking at less buyers at the table less people that you're competing which is good news if you're a buyer, but for the same reasons absolutely it's it's gone from you know, 20 offers on and these are all institutional sized deals over 100 units. It's gone from you know, 20 offers with the best and final that had five people in it to five or seven offers maybe total and a best and final with two guys that are left and is it and the certainty of clothes without the possibility of retrade or re-analyzing the deal is that as big of an issue on the institutional deals? I mean you think on the bigger deals the People that are at the table that have the capital it's not like they can't perform and and The Leverage is really not an issue or you still seeing someone. I mean, it takes people every everybody still getting a loan. So they're still the fear that they're gonna get retraded on their loan or you know that they're gonna pull out because the rates go up before they lock and so people do want certain they've closed still but you are getting now we're we were having to go hard at purchase contract at minimum on every deal. Yeah last year and now we're getting 30 day looks you know with a 60 day escrow after that we didn't have before that's a great point. It's it's Paul said, you know that go back two or three months and you typically get to go hard a million dollars plus to get a deal today, you know bigger initial deal and you know, forget title of books or whatever. It's he had to go hard period and that was especially the Sunbelt markets, you know Orange County. It wasn't that many sales, but even Orange County Inland Empire that was kind of really Getting a heart of million dollar number to get it get a building and then you figure it out later. That talk is completely gone away. I mean, they're still talk of it. But you know, we're not having to do it on pretty much any deal today unless it's some huge bargain. But so that hard money up front is kind of vaporizing thankfully because it's a scary game to play and I'm hearing stories of all kinds of buyers walking away from a million two million dollar deposits because they went not refundable kind of a couple months ago. And now they've realized the price have dropped five eight ten percent and realized and better off just walking away from the million two million art deposits. So hearing lots of stories about buyers, you know, not performing and losing a million two million dollars because it's not worth it and even her story about Grant Cardone Mr. Big syndicator walked away from a two million dollar deposit recently in it was in the Sun Belt cities, but so things are changing and Again, the biggest change I think is if you buy a deal today, it's negative cash flow. So even at these increased interest rates if you put on decent leverage, so that's kind of changed the equation and that was you know, pre what you know, 10 years ago and later if you buy dealing California was negative cash flow was a very normal thing, but we haven't had that for eight nine ten years. So it's weird seeing negative cash flow pop back up on apartment deals. Yeah, and you're used to seeing that in coastal cities Newport Beach and Huntington Beach. You're not used to seeing that with bread and butter a properties Dan I go back to you. I mean we operate in the small to middle-sized stuff. These guys are in the bigger ticket items, but we're seeing the same thing where if we're competing for a property. You're just not seeing eight nine ten offers and then you're also seeing people that are slinging offers that don't have their financing necessarily tied up and maybe you got one or two 1031 guys, but that's about it. I mean it is reading itself out. To give you an example. We went out with a large property. You know four or five months ago and got did a hired a major name brand firm full bloom marketing got zero offers that shows how bad things have gotten. So there are reasons for it wasn't our building. It was probably more the how the sea changed their rent control laws, but it's definitely put a Big Chill on the market today and I think people are worried a rates have gone up. Am I gonna buy this building and rents her lower a year or two from now because this recession kicks in so well and I think that that brings up another point, which is you haven't control Statewide. If you're in Santa Ana you got a another layer and control that makes it even worse. But how does that go? If you're looking at buying a property with a disconnect between the interest rate and the cap rate you have negative or little cash flow. Typically you have to put money in and then go do the heavy lifting to raise the rents. But yeah, you're capped on the rents and you have inflation it nine plus percent. I mean, none of those Dynamics really hunt yet. The market is hot and yeah multifamily other than the industrial is everybody's honest take it. Right. So the question I have is with all of those things in the pot and you have the mixing up does Supply demand that metric the fact that there's just very low housing very low availability. Does that for lack of a better word Trump all the other factors in the market that are going on. I I think I think it does. I mean it always comes back to supply demand and what we've seen is with the supply chain issues. Some of the developments been been slowed even more than it already has and so we're having even more of a Crisis as they called or a shortage of housing here. So yes that does trumpet. However cities like Santa Ana are shooting themselves in the foot because they're they're literally taking buildings like Jerry talked about interview saying what city that I building that would have garnered even in the worst of markets at least five offers is getting no offers because people are you know scared that that's and so what I worry about with rent control, maybe I'm skipping ahead here a little bit to to the end but my biggest worry to keep me up at night is rent control because you know, you have mayor sarmient to who is in Santa Ana who basically lobbied his City and got votes because he pandered to his demographic which was mainly renter occupied City and they in you know, they put rent control in and now he's running for County supervisor and you don't think that's gonna spread to other cities very much. Can I mean with rent increases going up as much as they've been that's our biggest hurdle now the ab 1482 that went to affect was actually a great thing. I had no problem with that rent control because there's reasonable CNA. It's 80% of CPI. Maxed I mean that's that's worse than the city of LA's rent control. So that was just they went way too extreme on that end. But if they kept it with ab-1482, I think we'd be okay. Yeah, so that brings me to my next question. I mean Dan when your packaging deals, what's the strategy you got a guy who wants to sell his property? He has low rents. He maybe did what Paul talked about which is I didn't really raise rents on my tenant during covid because I was being a nice landlord and I couldn't do it anyway, and now they got low rent the play used to be. Oh there's upside in there. That's it's a value at but your value adds cat. Well that buyer pool for that asset is dried up, right if there's ever if there's a forecast in the market. It's probably clearing the market if you're a two and a half cap and you've got this great value at Story the buyer pool that is is way way low. So if there's a seller that has to meet the market, you know, they're looking to find they're trying to find that balance. They're not every seller wants. Everybody would love yesterday. Prices but I think there are a good portion of sellers that want to find the market and meet the market today and they're looking for some guidance. It's just you're dealing with one or two buyers instead of six or seven and you know, the syndicators they're we've seen just recently they they're out, you know, they've kind of penciled down on a few assets just because they don't know where they're their debt is when they go to put permanent financing on right the challenge too with a syndicator is can't show these big cash on cash returns because they're going to be minimal at best with this higher interest rate in you know, fairly low cap rates. He writes the sinking here has gotten crushed. And the value add people think well if I'm Capital my rent increases, how do I improve my rents? Because I can only do it so much per year, but that rent control thing is definitely you know shocking that it hits Santa Ana which through surprised everybody that would hit Orange County but it's not just Orange County. If you look at a map of the US probably two thirds of its covered, you know, if they look at zones of going to rent control talking about it planning it about two thirds us is in discussions about doing it or voting on or something's happening and I think that's gonna get worse too because these people are hearing about these big 14 15 16 percent, you know, asking or increases going we got we got to stop that or some control on much like Santa Ana it's it's a great sales pitch if you're elected official to go. I'm going to put a limit on that to protect you because the owners are very small percentage and the renters are a big percentage. So it's Politically correct story for a lot of people in that that City unfortunately, but but I think would you keep in mind is if you run your property in a professional level and you keep your rates at Market? It's going to be okay. It's who this is hurting. Ironically the most are the mom and pop smaller landlords who usually have lower rents because they don't want to constantly churn their building over and and then all the sudden rent control goes into now their value just got capped because now they can't increase it. So it's a it's a backward system a little bit in that is not it's not and the big Lane they're turning the small land in the winners are the tenants because it's gonna become like the C of La where you have to offer cash for keys for move out and City of La used to be you know, low 20,000 range to buy somebody out. Now that number is you know, 40 50 80 100,000 to get a tenant out. So which doesn't pencil right? Yeah. So yeah, so that feeds to the other side of it which is is there an incentive to fix up the property and to fix up the unit. And of course there is when the tenant leaves because you're gonna go capitalize on the market but then the other person I think the tenants still hurt on the other side of it while they're rent is capped. The fact of the matter is you have a disincentive for the landlord to renovate their unit or give them upgrades or other good because I can't even afford to do it because it's gonna be blighted because of that. Yeah that you are not going to fix up the units and they're gonna they're like I said, they're shooting themselves in the foot with this and the challenge we see too is you're not gonna get the turnovers the turnover is gonna go from 50 60% to maybe 15% because people who locked into this way below Market at least that go I get a lot of equity here. I can't leave right? I can't find it cheaper a better place. So you'll just get much much lower turnover on those buildings and In La we see if someone's you know way below market and have been there five years the odds of them turning over about 15% So very very low so so as a strategy do you then take the 10% and give it to everybody you can across the board because they're already below market and if inflation is nine and your costs are continuing to rise don't you have to raise the rent the 10% Well, the system is encouraging to always be putting in the max or increase. You can yeah the old days you go. Well, I'll be nice. I'll put in three or four percent even the markets higher with these rent control laws. You have to kind of go the max because you don't know for me cap the next year. Yeah, and you have things I don't know Paul what you're experiencing. But you know, we have people that come to us and and we used to say hey, you're good tenant. You want to do it two year lease or three year lease and we'll build in like you say a two or three or four percent increase now, there's no incentive to the landlord to do a longer term, please you're exactly right. They move you want. Yeah, you want to be nimble you want to, you know not be tied down by that you actually Is another thing to your cost. I mean, you know what everyone has to understand is the cost to run the properties has gone a tremendously over the last two years. I mean that insurance costs in some cases are 60% higher than they were before payroll costs is incredibly higher as everybody is seeing out there, you know repair maintenance costs getting materials. All of that is higher. So it's just hire to run the building. So yeah, most of this is just passing that through. Yeah, I mean look at trash right? I mean you have unfortunately recycle and you have to separate your trash goes up 100% Unfortunately, you know, unlike an office building you can't pass that through the tenants you just the owner absorbs it and who's blown Market just never moves out and stays there for 20 30 years. So Dan, what does that mean? When you go to pitch a guy to say, hey, you should sell your property or you go to pitch one of these guys or me on. Hey, you should buy this property. How does it change the dynamic go in forward. I mean, it's got to make sense day one, you know before talking in Santa Ana right specifically But we don't it's got to be pretty darn compelling. I mean just backing up to Santa real quick, you know, we when rent control was enforced towards the second half of last year. We were able to take a few assets to Market mom and pop sellers average deal size five six million and we were able to get there was really no discounted pricing because of the supply and demand in balance. And then now today we've got we're taking some out it's completely different story. So I mean the deal has got to be compelling enough or not. Like you're gonna go elsewhere. I think within Orange County outside of Santa Ana you got the max allowable rain increases of 10% right? So that's kind of help offsetting some of the costs of rising Capital but a lot of people want to match what Jerry's talking about, you know, at least match the debt with the cap so going in you're not getting penalized because you know, otherwise you just wait a lot of people feel like hey, I'll just wait six months and then see where pricing is then right? I mean, it's it just comes up to the asset a lot of these smaller Coastal. Bills that we're selling those are still pretty much like pretty fluid. Those are flying because people are buying a premium asset and it's a location thing then by putting on much lower leverage probably low to no leverage. So exactly the interest rate doesn't matter that much. So then what does that do Jerry for your game plan? Are you still bullish and like Orange County like Southern California just because of the whole market dynamics or does it drive you at other markets? Well, I better meetings like this with owners and we spend our bitching about all I hate LA or Orange County sucks. And then they say would you rather go by in Phoenix? Oh no never right. So it's so we grab about this we hate it. But you know, if you want to make money and do well in real estate, you know, Orange County's a fantastic place to do it. And if you buy something here 10 years later probably would look back and go I'm glad I bought it. So but La is kind of the same way, you know LA's worse with regulations the city but same thing by there probably do pretty well 10 15 years from now. So back to the supply demand thing we talked about right? Yeah, it takes the regulation hurt you to build but it's also your friend and that it keeps values where it is, right? Because it takes 10 years to get a project by the time you identify get it entitled get it built. It might be 10 years. And so you're not gonna have an oversupply Market here in Orange County just it can't happen. Well, then the vacancy rate for kind of The Bean sea properties in Orange county is the lowest ever. I think it's like 2% So if you're at 2% vacancy rate decent economy, I mean, we're gonna see double digit or increase Is here maybe you're captive 10, but you know, the Market's going to be going up pretty substantial and it already has and so you know for those that satin listen to the industrial piece before now, I mean, there's no cap on commercial rents. So when you raise your ins on on industrial building 30 40 percent on somebody and you have No Vacancy It's just tough. That's how it goes. And if you don't like it, somebody else will rent it the protection of the rent control at least saves that off for to some degree and potentially for a while. Then the question is, you know, how do I as an owner manage my expenses to try and control them. Do you try and pass those costs on to the tenant? Do you have a rubs program? Are you increasing those costs where you can are you charging for parking? Are you charging for upgraded appliances? And are there other creative ways that people are going to start to look at it going forward to try and maximize and get something closer. I don't know if you guys have thought about that. Yeah, absolutely. I mean you do penet pet rent instead of pet deposit even things like that words. You you have to it's the only way sometimes when you are up against the rent control and I think for the tenant I host radio show we talked about it this morning on the show things like cosigner doesn't have as big of a value as it had before things like double deposit if you have shaky credit are outweighed by I have a pet. I have low credit. I don't have the income to support it for those tenants that are out in the market. It's really going to be a struggle because they have limited opportunities and as a landlord you really take a tougher look at the tenant because you want a good tenant for the long. Yeah, and people are paying for upgrades and amenities still here. You know, that's still happening. We're doing renovations where if you do the math and you get a 200, you know dollar Rent increase you can actually if you cap that out at a five cap, you can you can actually spend $48,000 upgrading that unit to do that. You know, I mean, it still works out in this market now if we hit a recession. That's the first thing people pull back is they're not looking for the Frills. They're doubling up. So you're one bedrooms start having troubles because people double up and go into the two bedroom. So you get vacancy in the one bedrooms the studios and so that's what I think a lot of owners are a little bit wary about right now when they're sitting on the sidelines not wanting to catch the falling knife because they're going. Oh, it's it's still got a long way to go before before it hits rock bottom. And so Jerry on the vacancy side. Do you see higher vacancy rates outside of Southern California? And then you do here. I mean inside the lowest in Southern California that I've seen in lowest puppy Nationwide I can think of because we're again for the BNC product. I think it's 2% for the A's. It's like 5.6 other markets are higher, you know, some about markets are low too but there's a lot more new Supply and you know, Arizona and Florida and and Texas well here you've got very low vacancy rates with Prelimited Supply hitting so as an owner. That's a great combination for you know, big rank growth. Yeah. So I'll ask a couple quick questions and just in terms of your take on where we see the market going forward fast forward either six months or a year from now cap rates to day versus six months or a year from now Jerry. I'll start with you higher lower. I would say hire a year from now because we should be in this recession in the big forecasted relate increases will of tampered down dramatically. Well, I agree Dan. I think caps are going to be our all right, so we're all in agreement on that one. What about rents multifamily rents? Do you see a continuing to move up or does it flatten out? I think it'll be up another 10-12 percent. I I agree I think so too. I think we've got a little more run Runway before it slows down. I think a lot of that is dependent on the supply demand thing again. Yeah, I take a while before Supply hits again Dan thoughts. Oh great. Yeah interest rates. So we heard the finance guys talking early and we got a bunch of Bankers in the room. I mean, they're gonna raise the rate tomorrow. So thoughts on interest rates not so much tomorrow, but six months from now up same Down I think up probably. I'm guessing I'm having dinner with the Fannie May guys tonight. So I'll tell you tomorrow post it. I'll see. Dan would I think it just feels it's anybody's guess but it feels like we're gonna be close to five. You know, that's probably where we're gonna be looking at that pretty quickly here. So yeah, I think the challenge for Orange County is if you buy an apartment, you're not gonna get any cash flow going forward like we did the past kind of decade here. So and then I guess that feeds into part too my question on the lending side loan to value right? Do you see loan to values coming down because of those Dynamics? Well, it's very dropped a lot here in the past two months where You know, we're getting quoted. 45 50 percent, you know loan to cost or perch price financing. So the lenders have already chopped a lot and Even though cap rates have moved up. The interest rate costs have gone so much and the lenders are all getting nervous that we could be going into recession. They just gotten super conservative. So the leverage has gotten really bad recently. You know and I think the big story there that was the story last year's debt funds. Those were you had a lot of syndicators who were putting very small amounts of equity up in getting you know, 80% loan to cost debt fun deals. And what's happened. There is they've employed these rent cat or these rate caps that are super expensive and so it's basically stopped that market, you know on the debt fund side and that was a big pool that goes back to how many buyers for each of these buildings. Well that pulled all those low leverage buyers are sorry High leverage buyers out of the market right away. So you kind of lost the debt for Market the banks are still loaning Fannie and Freddie spreads are pretty wide still but they're probably gonna come in we're hoping like I said, I'll tell you after our dinner tonight. But other than that, yeah, you know, we don't really deal with cnbs much in our market. So really those are your lenders that you're looking at. A lot of what we look at is recourse debt, you know because non-recourse debt, I mean it's ultimately up to the buyer right but I think you've got to really track as a broker where the debts coming from and you know what the Surety looks like of performance and I think a lot of the borrowers that we work with go recourse High net worth family and you know, shout out to First Republic Bank, you know, they've been active we've locked a lot of deals with them recently. We can still get pretty good LTV and rate. We just locked one at 10 year 60% all TV 4.3% for the full ten, first, three years of IO, you know, if you're going recourse it's higher than that and Jerry saying the proceeds are cut and it just doesn't really get very compelling, you know, so a lot of our ways to kind of mitigate things is is finding, you know, the bank that you can get a quick turnaround get loan approval it cuts out the uncertainties, but you just got to know which banks are. In right now and don't you think that that cuts out a lot of the mom and pop players right on the small to middle-sized Deals. If you only have a certain amount of funds to put into the deal and your loan to value gets cut you're in a problem. You got a problem and then if you're predicated on fixing up the property and doing some kind of value add in your costs just start running away from you again, you're pinched. It's not just the mom pops are getting pinched. It's the I call it the machine buyers are putting on these debt fund financing semi same fat percent loan acost floating rate over so for and you know, a lot of those loans were a big consumer of that too. I have these bringing rate caps as Paul talked about where you know libraries so far goes a certain rate. You got to buy a cap on that and we bought a deal in Florida. I don't know six months ago or nine months ago and the lender sends us a bill for a million dollars to buy another rate cap and Please shock that wasn't our performance obviously. So but those are starting to hit the higher leverage buyers is these kind of springing rate caps that are popping up. So I want to ask a different question because they don't we don't have a residential panel here today, but I know we have escrow and title and one to four people and and residential folks in the room. So the expectation in the talk around the dinner table for a lot of people is with the rise and interest rates housing markets gonna flat and activity has already come down. You read the news. If you believe some of it at least activity has slowed. How does that then play back into the multifamily market? Because you have all these buyers first time buyers people that were renting that wanted to go by that now can't and then they just come back and renew. And so I guess I'm curious the thoughts Paul will start with you on where you think the housing market is headed and how that helps or hurts the multifamily market. It's a great question two points on it. I guess here one is. You have different rental pools. Some are never going to buy a house. I mean, there's some there just always going to be renters because if they live in Orange County, they're not be able to afford the median house price and then the other question of the ones that are going to go buy a house. You're right. It is completely shut the spigot off. I did some math on what changing a 3% loan to a 5% loan means to somebody buying, you know million dollar median size house in Orange County. It's like a 67% increase in your payment. So, you know, which means you either need another job or a raise or something because where does that money come from? Exactly? And so and so yes, so I does that spill back to people rent it. Yes. I do especially probably that the being in A and B Class Market rental is gonna stay more full because of that because those renters are not going to Exodus to go buy a place. Well, it's interesting too because black Stones raising this. 50 billion dollar fund and they made the headlines recently for raising that much money and all my partners said. Oh, I think they think there's a crash coming and if you read There are for materials, they don't think there's a crash company. They think that both industrial and multifamily offer the best prospects for growth because they feel like It's an all-time low vacancy rate which Orange County. It's 2% now for BNC and then B is home price of shop so much coupled with high interest rating increases that buying a home or living there now is not an option for people. So you're gonna be stuck renting an apartment and then you have this covid problem where it slowed down new construction. So you've had kind of lesser new construction coupled with an all-time low vacancy rate and you know, the home prices and interest rate costs drop pushing people to renting so they feel like it's Kind of windsorca or the stars are aligned Now to create great ownership and multifamily. Yeah, and I think Dan I don't know what you're seeing. But you know folks that we're trying to buy a second home as investment. Oh, I'll buy it. I'll fix it up a little bit. I'll rent it out. I mean that seems to be off the table as well with the interest rates Spike. So where do those people put their money so that maybe they look at a four-plex or an eight-plex, except they run into the same kind of problems and then they don't have the the cash to be able to do it or protect themselves going forward. And they're very hard to find still I mean the going back to supply and demand there's very little on the market. I pulled some stats just 10 between 10 to 100 units not that's not gonna be your first purchase as a hundred unit building but I pulled a stat 10 to 100 units. There's only 21 assets on the market within Orange County the average days on Market 72 yes or days on Market are you know way up compared to last year but 21 assets. It's not like there's a hundred deals on the market and well, yeah, and if you if you said hey, I want to buy Ford at 12 units. I'll bet you that numbers, you know, you can not one hand probably right? So yeah, it really limits your opportunities. What's the alternative for that investor go put their money in the stock market exactly right by T bill or stick in the bank and get half a point. If some people think well just sit in cash because everything's gonna be lower you're from now too. So you got a lot of that sentiment too. Well, you're finally getting some money on your cash and in the bank, you know, they are raising rates a bit. So at least you're getting something there, but I mean a couple months ago is a perfect storm you get Field anywhere and you in a stock market that scared the heck out of everybody right? But if you rewind a year and you said I had available cash where do I want to invest it? You could buy Bitcoin and make a fortune. You could buy Amazon and make a fortune. You could buy an apartment building and make a fortune. You could buy a second home. You could do no wrong, right if I had some money and I bought real estate. I'm an expert all the sudden I made money and now you can do no, right because you have risk across the board sure. So so let's look at what the expectation is going forward. Just trying to bring it all together it in if the housing market flattens The commercial real estate market has to have some sort of adjustment in terms of balancing cap rate and return with interest rate does the potential for the housing market to flatten or dip then push out? What happens in in the multifamily market? Does it prop it up a little bit because of that and then just where do you see yourself six months or a year from now. Do you see opportunity where you could take advantage of other people's problems. Do you still see it difficult to try and make deals and be smart is my pencil up and and working or is it down? Jerry yeah, good question. I mean where I don't think we'll see distress Orange County because it's like you haven't gotten the higher leverage buyers by here. Now you've seen that in the Sun Belt says where people got a you know, a bridge loan tacked on prep faculty or mesloan and now rates have gone up and they're gonna be crushed but Orange County. You just haven't seen that much of that kind of buyer. So I don't really see much stress and Orange County or you know, distressed buyers or sellers or owners, but other than maybe just kind of a stagnation of not a lot of transactions this coming year because people are Too, you know weirded out about is the price can be lower or she hang tight or wait till later. So I think it's going to be just a from a like dance perspective a broker probably a slower year as we kind of get through this. Well, yeah, I I totally agree with Jerry, you know, if you look at the last major recession 2008, you know, that was a recession where we did have over leverage right? Everybody was doing 95% cmbs loans and even then I think there was maybe four. Deals in Orange County that were really distressed sales that went down. We all wish we bought them because it was such a short period we're all waiting to buy these distress deals and it never happened. And so I don't think it's gonna happen this time because we we have we had more you know, the you didn't have that that leverage issue like you had back then now because Banks aren't they're being disciplined. They're not over leveraging so I think going forward. Yeah. I mean, I think you have a ton of capital waiting on the sidelines until somebody says, okay. We're at the bottom of the market then everybody's gonna jump into start buying it, but I think that's gonna take six months to a year. And so Dan should just go on vacation for a little while another broker told me that it's gonna be it's gonna be a tough time, right because we're transitioning and in the market right now and I think going back to what Paul mentioned the last cycle. Oh wait if we kind of looked at some of that is Clues the transaction volume was really what was the biggest change in the marketplace. I mean, I think Drop like well over 50% So a lot of Brokers love the space or teams thinned out. I think you'll probably see a little bit of that. I remember When the when the cycle was happening multifamily didn't really feel the cycle first, right? It felt it later. It was like the one of the last product types to feel it and one of the first to recover so I think if we look at that as potentially a clue, we don't know how hard the recession potentially is going to hurt the tenant to see any softening there. But as far as like cycling that's why I think a lot of people are just waiting out because it's not priced in yet. But there was really like Paul said there's no just there's really no. Reos, we got all I remember getting in the business. I was all ready to you know, all these RTC days are coming back that I heard about back in the day, you know, 50 adore whatever even lower but they never did. You know where the disruption was was in the single family home market and the two to four plexes if I was smart, I would have went and you know broke her to bunch of REO plexes, but I didn't in the transaction volume between five to 100 units. It was sluggish at best. So I think I think that the likelihood of transaction volume getting Cut substantially is is a high likelihood. Yeah, just until things turned out. So again, we're not oversupplied here. Supply always goes back to economic teacher everything comes back to supply and demand. So yeah, you know, if you went to Florida and Phoenix and Vegas during that last recession obliteration, I mean, it was terrible over Supply. You don't have that here and your land constrained here too. So unlike Texas or Florida where you could go build something else. You can't really do that here and they are building and those Sunbelt markets are building a lot because you can build it a decent return on cost and you know, you could saw the three maybe it's a fourth day but still a pretty lucrative margin to develop in the Sunbelt and just a lot easier to do it and they're doing build for rent down there. There's communities in the Sun Belt that are building thousand homes built for rent guys, like Blackstone will own them and run them out because it's people that can't qualify to get loans, but they can rent they want to have a big house down there. So final two-part question, then we'll open it up for some questions and then get everybody out of here and Steve can start giving out those hundred dollar bills. So a do you think that the election in November is going to have any impact directly back to the multifamily market or the real estate market as a whole in Orange County that's part one part two is what keeps you up at night in terms of the biggest thing that you think is a factor going forward that will make a difference in how the next year plays out. yeah, I think the election is good because I think it's we have to kind of get there over can people can put more owner friendly laws in place because again in California, especially Bay Area La a little bit Orange County, it's we're still stuck in this you can't do anything. So someone doesn't pay rent. You're stuck. Right? I mean you can try to evict and as Paul said, oh, we got a couple evictions done. Like let's you know, crack out the champagne, right? I mean, that should have been just no big deal if someone didn't pay rent, but so we're still stuck in this Can't do much environment La you can't do anything right now. And so hoping after these elections are over people go. Okay. I'm elected. I can kind of let things get back to normal. So hoping that's a plus. But it always seems like there's some other election coming up. So keep punting the ball. I get the other thing I think keeps me up at night is that I keep me up at night, but I worry about is just the spreading of rent control because I never would have predicted Santa Ana go back control. I would what happened. I was shocked and I heard we're rumors about it and Rumblings that might happen, but just thought they were kind of weird rumors not reality. And when that past was a major shock, especially in Orange County which people thought would never happen. So, you know if a passing Orange County, you know, why wouldn't it pass in Garden Grove or Anaheim? So, you know that fear with these big rent increases that are outlined in the paper. You know are just going to push people to start doing more of that unfortunately. Yeah, I agree with what Jerry said and it you know, and that's maybe a commercial for everybody here to you know, be active when it comes to those political issues when they come up whether it's you know, getting rid of Prop 13 or 1031 exchanges or right can you know spreading right control? You know, we we as a community as an industry you have to be active or we're going to get steamrolled because they're not, you know, we're not the people they're looking you. We're not the faces of people, you know that they are looking to try to help we're institutions. We're making money and that's a you know, that's something that you know doesn't bode. Well when I was in that CNN, I actually went to all the Santa Ana meetings when they were doing the rent control and we were trying to be as you know polite and kind and we brought up statistics when we came up to the dyest to speak and statistics didn't matter. I mean, we literally sat there and people were screaming at us practically throwing stuff at us. And so it was it was it was a lot of animosity and I get it. I mean rents have gone crazy. It's been a tough time, but I think what they don't understand is So have all the expenses of running a property, you know, I mean, it's not like the property it's not like the profit line just gets increased with rent increase that all that stuff. Like I said 65% increase in your insurance. That's a lot more than a 5% rent increase. So well in Minneapolis passed rent control too and who would have thought Minneapolis the Midwest, you know, it's conservative kind of Bastion. They passed a bad version of rent control too and transactions dried up new new construction dried up. So everyone thought I'm not gonna building there. So they've actually shot themselves a foot because you're gonna make even less vacancy by doing all these rent control laws. So, you know, I mean the opposite is gonna become a great case study why you shouldn't do rent control but it still sounds great for politician because it feels like you're helping the constituents do it. So it really isn't helping him. I mean, like I said Sandy become a blighted blighted city now because of that which is just a shame we own a ton of property Insanity. We keep our properties up we Have you know rents that are at market and so, you know won't hurt us as much as the Mom and Pops which is sad to see people that work their whole life to buy a fourplex from Dan or something in Santa Ana and then all the sudden, you know, they they can't raise their rents. They all the value got sucked out of their building soon. I think they cover the politics side, but what keeps me up at night sleep pretty good, but I got three little kids at home. So I don't sleep. Yeah, it's more of like a spin on like, you know, just be not being I guess what keeps me up at night is like not potentially not being prepared to take advantage of the opportunity. It's not I mean sure Wars rent control like big curveballs or out there but like There will be opportunities. I'm not saying if it's going to be some big change in the market, but you know, if it's growing the broker's business growing Investments that you want to be prepared to take advantage of opportunities that are going to be in front of you. So I think it's what keeps me up at night is trying to figure those pieces out. Yeah. Yeah. The other thing that we didn't talk about is It's not just a brain control fears. But you know, if you're a leveraged buyer like us that's shooting for you know, Max leverage when you look at your financial models now and build in these so for increases that are forecasted. The deals are massive negative cash flow and you can budget for that and build a reserve for it. But you know, you hit a recession would if that doesn't end and so, you know, we worry about buying some deal with a big negative cash flow and somehow you can't grow out of it, which is a pretty ugly situation. Yeah, you bet you'd rather buy somebody else's problem. Right? Exactly. So I think what we're hearing is nobody's a big fan of rent control up here. Not particularly thrilled with Santa Ana and how their policies are my recommendations from what I take from talking with these guys is I would buy low and sell high if I were you and and so at this point, I mean I'm tapped out in terms of questions we could go all day but everybody's ready for us. Yes or any questions if anyone left their phone out there we found a phone so it'll be out either on the table or at the front desk. any questions Frank so I think the short version of that question was with really low cap rate and higher interest rates. What does that do for getting alone? No, I we've had this debate in our office because we're always debating, you know, look at these models and go my gosh I buy this or not. And so I talked to our guys in Acquisitions and they're they tell me oh and these are again larger Hunter plus units Orange County the sellers all want a mid three to three point seven five cap rate, but the math works at four point two four point five. So a big gap, you know, if you're exchange by me, you just have to kind of pony up and pay that hey whatever. So there's that gap of what a buyer can make work and what the seller thinks where it was because a lot of these sellers think oh, I keep hearing about three cap rates, you know word that market go. Well, it's gone. That's just going Orange County what's going on Nationwide and so that's changed a lot and how do you compensate the lender Cuts your leverage from? 70% of 55% So the Leverage is being cut dramatically to make all those coverage tests work. If you're buying a building with 50% leverage, it gets really hard to show a good return because it's just too low Leverage. Yeah, your irr your irr will end up shrinking and your fire pool therefore shrinks. Yeah, that's what we can see and your deals have minimal to no cash flow or cash on cash which you know, if you're a syndic here, that's not very attractive go pitch go. Hey, invest my deal and I'm gonna solve for a big profit in the future, but you get no cash flow. Well, even if you're trying to spend the money, you don't want to put your name on that deal, right? Yeah, so I don't buy it. I don't do that. But the lenders doing it. Yeah, there's they're making big down payments and you're not going to get any 75% loan. You're gonna probably get a 50% loan today. Any other questions? Man, no questions everybody. Actually, I'll hit on that one. It's interesting because in this asset class in this room inflation's terrific because we're on short-term leases. Now if you were in the triple net, I don't know if you had a session on Triple net leases, but it was funny to me a lot of people, you know cashed out and jumped into triple net leases because you know, we're going into an interest rate. It blows my mind. Now you're capping you buy a triple that lease deal you're capping what you can increase your you know, your rents at 3% or whatever that triple net lease is that and you know inflations at nine ten percent. Your negative negative Arbitrage, so we're in a good space with Apartments because you can capture that. But if you're at fixed rents for long term, not good. Yeah, I agree. Well, I think it's great for apartments. You know, I think we're gonna end up. In Orange County a little bit like La where it's not uncommon to see a deal where? A bunch of people are paying, you know, $1,200 the mark runs 2500 because that lost lease is just gonna keep growing because you're capped at what you can raise rents, but maybe rents have gone up 15% So I think we look at a typical deal today or Dan looks at underights. You're gonna start seeing these big, you know lost leases that you kind of Hope over time. You can Whittle away at but if the person doesn't move out you can only do so much. Another question in the back there being sure. I've heard like was a 2500 affiliate fairly small number. I mean it seemed like we had a big wave, you know, right on the airport and Irvine area of it, you know, if you start going if you exclude a few of those old Pockets, it seemed like there's not much being built. So so the big story there is the housing element change. So the if you've been reading about the the state has Rena numbers that they have each city has to have a certain amount of of units and it was supposed to be October that they were supposed to have all that solidified give their plan to the state the city of La didn't have theirs in time. And so they argued for the state to give them until 2024. I believe now, I gotta look up the number and because they allowed to LA to do it. They're now allowing all the other cities more time because if the cities didn't have it there in time, they were gonna lose funding they were gonna start getting fined like and they get sued too. It's sued a hundred thousand dollars a day. They didn't have this that is going to increase once those go in that is going to increase Supply I believe. The problem is you still have groups, you know, there's a building in Hollywood that's trying to be built right now and the the Aviary Community which is the bird Community came out and said that you got to shut down this development because this high rise is going to restrict, you know, bird paths and and this is in the middle of Hollywood with high rises all around already and so Pita jumped in and so that's gonna easily be another year of a stall so there's still enough regulation that it still stalls that supply and demand the other Dynamic of the new development. You see it down the street with all the new apartments that are going on right here. The fact of the matter is there's no rent control for these new properties. So that developer has to get a return for his investors or for himself and he will charge top dollar and he will get it because they can see is low and because got brand new product. So they're not restricted by the same things as existing product and that stuff will get gobbled up because number one vacancies low number two. It's really nice. And so I don't think that there's Enough of those projects in the pipe that's going to tank the market or soften it to any degree. And when you talk about a minus B plus b property and compare that to brand new a product. It's just not the same. Anyway. Yeah, I don't see any new Supply risk, which is different than if you look at like an Austin or Phoenix or Florida and some market. So the great thing about Orange County is yeah the cap rates are low and you know scary with all these regulations and rent control but your new Supply risk is pretty minimal, I think and even when they built it like Barry said they have to charge such high rents that it's not really competing with the existing product out there. I mean their rents are probably a thousand dollars a month more than your existing product that you own. Yeah other questions or something back. people Just yeah. Yeah, I think it's a pretty minimal supply of that as an option. And usually it's a long waiting list to get into it. So it's not like there's a plethora of low-income units saying there they can move into it's you have to apply and wait several years to get into it. So yeah, the waiting list for Section 8 at this point I think is is at least five years from when you sign up maybe longer. Also, we have tenants in our portfolio that are elderly or that qualify for just low-income properties. So it's not so much that it's a Section 8, but it's actually a property that provides low-income housing and gets subsidy and the wait list for those could be about the same. I mean you could die before you got it. I'm sorry. What was that? Yes. Yeah, I mean yeah, the scariest thing ever is if we go to vacancy decontrol and so far nowhere in the state has gone to vacancy decontrol and that's where they even restrict what you can go to after somebody moves out how high you can go and none of the rent control Santa Monica, West Hollywood They try and I think the this guy Weinstein trying to pass that law on thankfully got shut down and that's how the whole kind of Statewide rent control came into place. They were fearing he would put in some kind of vacancy control measure and so the owners pushed this kind of owner friendly rent control to kind of stop that and apparently they kind of deal with Newsome. If we pass this, you're not gonna bring it up again. So but yeah, if you get a regulation, you can only raise so much on a vacancy that would be devastating to her the industry and New York City that it crushed the industry. Because everybody was banking on. Oh, I got this big loss to lease. I'll pay you a big number because they'll move out and I'll go to market eventually and then they passed a law vacancy control law where you can't go to market and you know devastated tons of owners in that market, so I think it's minimal. I think that's right all the bucket. I think that's more probably PR move by the Irvine Company because that's a tiny drop of the bucket and I'm sure if he doesn't do it the state's gonna assume or pressure them to do it. So he and he's doing a nice hearty. I think he has to do it. So final question well, it's I don't yeah, I don't think you'll see as much an Orange County you're going to see more of it in. Florida taxes Phoenix because there were a lot of buyers that went out and You know put on 75 80% flowing rate Libor or sofa base debt that they're all saying huge increases and they bought it at three cap rates thinking they'll you know grind it up to Market. So probably more distress than those markets but Orange County, you just didn't see a lot of those buyers or wasn't a lot of Trades and you didn't see a lot of the higher leverage floating rate people, you know, it was three. Those were three year loans. Oh, yeah, those debt fun deals. So in two years from now, those are all gonna come to you. Yeah. I also think you have to look at some of these other Sunbelt markets that fluctuate pretty dramatically you look at Phoenix or you look at Florida been there and I used to seeing three caps and four caps and those markets and when the market gets soft. It's an eight cat, right? And so where's in California? You have continued property growth and but you never get an eight cap, right? Somebody said, hey find me an eight cap, Dan and say good luck, right. So yeah, I do think that if the economy Putters or struggles that you're gonna see it harder and other areas. Fort gets here if it gets so bad like it did the recession when it hits here if it does it's just gonna be bad because we drop further and go up higher but in the meantime if you can get through and it's not a full-blown recession and it's a blip or it's a period of time then I think we're all here going to be better than most of the rest of the folks out there. Yeah. That's why I think Orange County even recession hits. things will slow a bit maybe take a little longer at least but Not a big crash not much distress. It'll just be a slower period of no rent increases and not many transactions happening, but I think the bigger issue is going to be the Sun Belt cities some I'm gonna I think we're gonna call it there. They got the cleaning crew ready to come in. Yeah, let's let's give these guys a great Round of Applause bar.