Economic Insights with Sam Tenenbaum

This is an insightful conversation with Cushman & Wakefield's Head of Multifamily Insights, Sam Tenenbaum you won't want to miss!

Resources mentioned:
Glide Path Report

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George Tikijian/USA   0:10
 Welcome everybody to behind closed deals.
 Episode 2.
 I'm George Tijuana, member of the Midwest multifamily team, or Cushman and Wakefield.
 And joining me today is my colleague Cameron Ben and our guest today is Sam Tenenbaum, who's ahead of multifamily insights for Cushman Wakefield. He.
 Yeah.
 He heads the want to tell me research and thought leadership and he leverages data from over 170,000 units.
 Yeah, Cushman Wakefield manages, sells lens to and does construction management for an addition to valuation and advisory services.
 So Sam, welcome today.
 Thank you for joining us.

 Sam Tenenbaum/USA   0:54
 Thanks for having me.
 Pleasure to be here.
George Tikijian/USA   0:58
 So let's start with one of the questions that's on everybody's mind.
 With that interest rates rising.
 And markets unsure what's happening in the near term and mid term, when do you think the capital markets will fall?
Sam Tenenbaum/USA   1:17
 That's a great question, George.
 And we recently at in our our global think tank, which is a part of the group that I'm a member of, we recently put out a new paper that we call the Glide Path report.
 Uh, I think the formal title is glide path to clearer skies, where we sort of lay out how the capital markets will flow and what events need to happen until we get to that point.
 So the sort of glide path until we get to the point where we start to see the capital markets resume some sort of normalcy, some sort of of behavior like where you used to seeing because as you as you pointed out, it probably know better than most, it's a it's tough out there especially with treasuries hovering in the 43 range today.
 I saw this morning it it makes it hard for real estate to offer competitive yields.
 And so for that to happen and for us to kind of see the markets thaw, first and foremost, we need economic certainty.
 We need some sort of certainty from the Fed which is meeting this week on the path of interest rates.
 Hopefully they pause this week.
 We'll see, but they they still are.
 Are planning another 25 basis point increase by the end of the year.
 Once we have certainty on the interest rate front, we'll try and get some certainty on the economic front and then from there I think we can start to see the capital markets thaw.
 Historically speaking, this is a long answer to a short question, George, but historically speaking, we start to see activity resume and pricing start to pick up after the peak fed after the Fed reaches peak.
 After the Fed reaches Peak Fed funds and then starts to cut rates.
 So until we start to see rate cuts, I I think it's gonna be hard for the market to believe that rate cuts are coming and that I think is the the real trigger, right.
 Our view in the glide path report is the Fed funds start cutting in mid 2024 early to mid 2024.
George Tikijian/USA   3:24
 And and what do you think the extent of the rate cuts will be and how long will it take to get there and using the 10 using the 10 year Treasury which even though the Fed doesn't control that using the 10 year Treasury, what what do you think the amount and the timing is of those rate cuts?
Sam Tenenbaum/USA   3:32
 There's also a great yeah.
 Yeah.
 So we we see rate cuts coming in and there there's a few things that need to happen for that to feel for the Fed to feel good about cutting rates right now it's it's pretty, it's pretty obvious that inflation is still a little bit too hot.
 We we're averaging and kind of in the three to 3 1/2% range over the last year, we we approached 3% a couple months ago have found it very hard to break below that floor.
 And so if you remember back to your macro economic class, the Fed has two jobs, right?
 It's got price stability, so taming inflation and full employment, and for the last call it.
 Six months, a year or so, we've been hovering around 50 year lows, with the unemployment rate.
 So we, we've done mandate too, right.
 We we figured out full employment, we're there.
 We still have inflation that is well above the Fed target of 2%, so A3 percent, 3 1/2% were a hundred, 250 basis points above where the Fed wants to see inflation and for them to feel comfortable with seeing in inflation moderate, which we have seen, I mean it's gone from 9% to 3%.
 So we've definitely seen the good direction come for inflation, but the reality is we're not there yet and there are still too many signs that the economy could reignite and the I'm fond of of saying that the the shadow of Paul Volcker looms large at the Fed.
 And the reason I say that is because back in the 70s and 80s, we saw that double dip in inflation or double double heat and inflation.
 And that push interest rates up well above where they are today and and the Fed wants no part of having to do that again because if they push right interest rates up to ten 1220% like they were ohh a while ago that that creates real challenges for the US economy in a way that it didn't.
 Not that it didn't create challenges back in the 70s and 80s, but it it would create significantly more problems today given the size of the US debt.
George Tikijian/USA   6:01
 So do you think that?
 Uh, it will take.
 It will be long enough before rates come down significantly enough that it will cause distress, distress and multifamily real estate.
 In other words, owners of properties who are on floating rate debt or have maturities are hoping that that rates come down in time for them to refinance their loans.
 What do you think the what's the time frame?
 I mean those those who have loan maturities in 2024, you think it's too early and they'll they won't be able to avoid problems.
Sam Tenenbaum/USA   6:48
 It's a great question.
 I mean, I think it comes back to, look, if we if we see rate cuts, something has happened to the employment side of the mandate because inflation hasn't been fixed and if that's the case and we're tipping into a recession, George, I'm not sure that the cost of debt will move meaningfully because fannies investors who are investing via bonds or or the the securitized market or if we're talking about banks and life companies and other sources of liquidity on the on the debt side of the equation, they're gonna want an increase increased return as a function of the risk they're taking for lending or or, you know, owning up a bond effectively in in a recessionary environment and that it's not necessarily a problem.
 But I think the if that's the case, I'm not sure that even if we start to see rate cuts that the cost of debt, which is ultimately what we're what we're talking about here are not necessarily where interest rates are, but it's it's interest rates as a function of where debt costs are, if if those debt costs don't come in and don't move, there will be some distress.
 It's not to say that there will be no distress.
 It's not to say there will be a ton of distress, but the the staff that I typically point to when this question gets brought up because this is this is also a question that's on the top of everybody's mind in the industry, is how will there be the stress?
 How much distress will there be?
 I'm in.
 I'm in the camp of very limited distress.
 Some of it will be fairly high profile.
 Distress is, as we've already seen by right now, there's $125 billion that's been raised over the last few years, specifically targeting residential.
 The next closest space that the people are are raising funds for as industrial, and that's obviously no surprise there.
 But that's at about 55 billion.
 So we're seeing more than two X the capital raised for multifamily investment than we are for anything else and and that's not on top of all of the other diversified funds out there which we can't track well because they can invest in anything, right, that's sort of the point of being a a diversified fund, but the most likely deployment strategy and you see this with all the big tuitions is multifamily and industrial given offices, relative challenges.
 Retail, too, is interesting, but it's harder to deploy in the same way you can for multifamily.
 It's less straightforward.
 Uh, then multifamily and industrial.
 And so I think you'll, you'll still see the capital prefer multifamily investment and and industrial.
 And I think with that level of capital that's out there, there's the distress will exist, but it'll be relatively limited because there's capital waiting to to jump in and and buy these assets at at a reduced basis.
 It's not a, it's the classic economist answer, right?
 It's, uh, there will be some, but it won't be.
 It won't be a lot, but I can't give you an exact number, but that you're right that the the most acute issues are obviously that floating rate debt that was originated in 21 and and early 2022 because interest rates have floated much higher than anyone initially thought at the time.
Cameron Benz/USA   10:08
 So, Sam, what do you think is more important for the future of our economy and for the multifamily space jobs, population growth and income growth?
 What do you think?
Sam Tenenbaum/USA   10:20
 This is another classic economist that you're setting me up for all of the economist answers here.
 It's. It's some.
George Tikijian/USA   10:25
 Where you are the economist, Sam so.
Sam Tenenbaum/USA   10:27
 Yeah, it's it's some combination of all three, right.
 Ultimately, what we're trying to get to is what?
 What creates new households?
 Obviously, if we're growing the population in an outsized pace, you're gonna see just natural household formation as a function of of that.
 It's sort of like an offshoot of that, as it were, job growth, same thing.
 Income growth, though ultimately to me, is what we're really trying to solve for because, you know, we're talking about leasing a new apartment for a year, right?
 We're talking about renting a new apartment.
 You will need to see pretty significant increases in income for that to happen for people to make to feel confident in making that financial decision.
 You know, if you're maybe you are a roommate and so maybe you're sharing a A2 bedroom apartment.
 That was maybe 14 or $1500 a month.
 So you're you're spending 700 and 57150 to $800.00 a month, right?
 And that's fine.
 That's that's perfectly reasonable.
 That's a that's a decent amount of money, but if you're talking about getting your own apartment, maybe we're talking about 12 or $1300 a month, and that decision you then multiply that by 12 because that's ultimately the amount of money you're outlaying that's a that's a pretty big financial decision.
 And so some of that is a function of I got a new job.
 So I got a raise, but if you had a job and then you got a new job, that's not a net gain in jobs.
 That's maybe a shift in the jobs.
 That's not a net gain.
 Income growth is ultimately what we're trying to get.
 If more people have jobs, that's more aggregate income that can go to renting apartments.
 And so I I tend to lean a little bit more on the income growth.
 Ultimately, though, that's a function of how many jobs are we adding in particular areas.
 And there are lots of other proxies for that that are quite frankly more highly.
 Updated from data sources.
 Then income growth is, at least in a way that is econometrically sound, to say the least.
Cameron Benz/USA   12:33
 OK, it sure feels like we've had a lot of income growth here in Indianapolis over the past few years and the what I always think back to is Amazon advertising here a few years back and it's $1112.00 an hour and now all the billboards are 18 to 20.
 But we have had good income growth here so far.
 Hopefully we continue to see it in the future.
Sam Tenenbaum/USA   12:54
 Yeah, it's.
George Tikijian/USA   12:54
 And that's how that.
 That's helped the lower end of the rental pool the the lower priced apartments.
 We've seen big increases in rent and big increases in occupancies in the segment of the market that traditionally has been the toughest.
 And I think it's because of what Cam just described and big wage growth, especially on the lower end of the wage scale.
Sam Tenenbaum/USA   13:21
 Yeah, I mean you think about, you know, making $15.00 an hour is ± 30 to $35,000 a year.
 You put two of those households together because the median household size is 2.2 point one or 2.2 I forget the exact number, but it's it's in the low twos.
 So you put two of those incomes together and all of a sudden, that's $60,000.
 That's right.
 In line with a a pretty media and a price department, and that's a $15.00.
 An hour when we're talking about growing those jobs from $11 to $20.00 an hour, that's that's a huge increase on a on a marginal basis.
 That's almost a 50% increase, right?
 So we're seeing huge wage gains, to your point, George, at the bottom end of the wage scale in particular, and that's driving a lot of growth in the renter pool too, because those folks at the lower end of the wage scale are probably not buying a home, especially not with 7% rates today.
George Tikijian/USA   14:15
 Same with regard to rent growth.
 Do you think the rent growth over the next five years on an annual basis will be any different than the longer term rent will say over the next 20 years?
 How how would the more near term rent growth differ from much longer term?
Sam Tenenbaum/USA   14:37
 Sure.
 So let's start by establishing what that long term basis is and then we'll we'll talk about the near term.
 So over the last 20 ish years or so, we've seen rent growth average nationally about 2 1/2%, plus or minus a couple basis points.
 And that's that's through all cycles, right?
 So we've had a few up cycles.
 We've had a few down cycles in there, but over the last decade, which has been mostly an upcycle and also has had one of the biggest outsized rent growth numbers we've ever seen, average about 3.6 or so over the last decade.
 So in an up market, you typically see somewhere between 3 and 4% rent growth on average, though we're about 2 1/2% rent growth.
 Uh, so you could you can justify between probably 2 and 4% rent growth and any given year, but it'll fluctuate based on what's happening in in that year at a national level in the next two years.
 My expectation is for pretty weak rent growth, I would say below that average, that's a function of the fact that there are 1,000,000 units under construction depending on what source you look at it.
 But it's in the upper 900 thousands to 1,000,000 range.
 That's just a lot of new supply.
 That's about 5 1/2% of the overall US multifamily market.
 That will have an impact on fundamentals.
 It's not a function of demand.
 It's just that's a lot of new supply based on where vacancy was a couple years ago in the wake of the pandemic and a lot of those projects getting started.
 After that, though, we see deliveries falling off pretty hard in 262728.
 Our expectation for deliveries is somewhere in the neighborhood of.
 7050 to 75,000 units per year nationally, which is really low considering the fact that this year we're gonna deliver close to three 350,000 units across the country going from 350,000 units to 75,000 units, which is our expectation of 2026.
 That's a huge drop off, so I would expect the near term to be a bit weak, but then really ramp up hard in 262728 is the supply wave crests and then falls off pretty dramatically.
Cameron Benz/USA   16:58
 Interesting.
Sam Tenenbaum/USA   16:58
 Is that?
 Is that what you're seeing buyers underwrite?
 I mean it's I live.
 I live in the sunbelt, where where?
 That's a pretty common theme because we we tend to see a lot of construction here and a disproportionate amount of the construction here.
 So when you're when you're looking at underwriting from buyers, are you seeing them underwrite stronger outer your rent growth or is it just kind of a straight line 3, three, 3 1/2% or so?
George Tikijian/USA   17:22
 Well, I I would say one of the I'm gonna turn your question around a little bit, the one of the reasons we've seen continued strong demand to buy in the Midwest and in Indiana has compared to the Southeast is because I think people are less fearful of the amount of supply coming online here.
 So they're willing to underwrite some rent growth?
 Umm, not as much as they were willing to underwrite a year ago.
 So it was a year ago, year and a half ago, they were underwriting 3 to 7% rent growth.
 I think people are now back down to 3% and not willing to underwrite anymore.
 But I think that's better than negative, uh, rent that some of the sunbelt markets with a lot of new construction is experiencing.
 So that's helped continue to drive demand to invest there.
Sam Tenenbaum/USA   18:24
 Yeah.
 I mean there there's a lot.
 I'm.
 I'm not just saying this because I'm on your podcast, George, but there's a lot to like about about Indianapolis is a market right now, and I think, you know, we're starting to see a lot of that national attention get get pushed towards the Midwest in a way that it may be passed over it for most of most of the last decade, there were faster growing markets, more exciting opportunities and the southeast development yields that we're still really strong.
 And you could point to all of the population growth that these markets were seeing and is very easy to attract capital right now.
 I think we're seeing a shift towards more, a lot more wage growth in the blue collar sectors, which is sort of typified the Midwest.
 You know, average employee and so because of where the wage growth is happening and because quite frankly a lot of that rent growth happened in the Sun Belt probably at A at a faster clip than people thought and probably should have seen because we're seeing some markets give some of that growth back in, in the last year or so.
 I I think that has.
 The the Midwest is a whole is starting to see its time and the sun as it as it were and and starting to attract a lot of attention as a function of that too.
 On on the Indianapolis Front though, because I I can't help but give you this fact, George, I was looking the other day in terms of long run demand and trying to think about where renters are going to be in the next decade plus right where we're seeing demographic shifts and we're seeing population growth move in the wake of the pandemic.
 You know, this is this is a fun stat.
 I live in Austin, TX and it surprised me to learn that today there are more 10 to 24 year olds.
 Olds.
 So over the next decade, these will be your your bread and butter apartment renters, who will be 20 to 34 year old, which is typically speaking the most average apartment renter today.
 Indianapolis has a higher portion of the 10 to 24 year old population than Austin, TX does.
 And that's that's there's a lot of reasons for it.
George Tikijian/USA   20:35
 What do you tribute that to?
Sam Tenenbaum/USA   20:37
 There's a lot of reasons for.
 It often tends to attract the geriatric millennial age cohort, and that it's a nice it's a nice way to say the older millennials maybe not so nice of a way to call the older millennials, but it tends to attract a relatively a lot of the population growth for Austin has been folks in their late 20s, early 30s to kind of early 40s and it's it's over the next decade, I would expect population growth to.
 Uh, it's continue to shift towards the sunbelt.
 People will still move there.
 People will still move to the Midwest, too, because it's more affordable then your coastal markets that are two times more expensive than a lot of these markets at a minimum that that said, uh, a lot of a lot of the population growth in Austin has been a function of people moving, which when they're moving in that age cohort, they probably don't have kids in the 10 to 24 year old range.
George Tikijian/USA   21:33
 Yeah.
Sam Tenenbaum/USA   21:40
 And so that's just, that's just why so?
George Tikijian/USA   21:42
 Yeah, it.
 It's kids going to Austin after college because it's a fun place to live, but then they then they start thinking about having families.
Sam Tenenbaum/USA   21:48
 Yeah.
George Tikijian/USA   21:51
 Uh.
 And then when I come back to places where it's, umm, you are affordable and also it isn't 120 degrees every day.
 So they come back to the more moderate, temperate climates of the Midwest, and they have families here and the families grow up.
Sam Tenenbaum/USA   22:01
 You're rubbing it in, George.
George Tikijian/USA   22:07
 And so that's why there's 10 year old cause.
Sam Tenenbaum/USA   22:08
 Yeah.
George Tikijian/USA   22:10
 It's children of people who don't wanna be burned to a crisp and Austin.
Sam Tenenbaum/USA   22:16
 After this summer, it sure feels that way.
George Tikijian/USA   22:19
 Uh, OK, Sam, so we're gonna.
 We're gonna end the podcast with this final question.
 What concerns you?
 The two questions, what concerns you the most about the outlook for multifamily and then uh, alternatively, where do you think the most the greatest opportunity is in multifamily?
Sam Tenenbaum/USA   22:45
 Both great questions.
 I'll start with the the second one first.
 The greatest opportunity and again I I can't help but say this on your podcast, George.
 But I do think there is terrific opportunity in the Midwest, a lot of the rent growth that we've seen nationally has been in the Sun Belt and then it kind of moved to the East Coast and the West Coast.
 And it's sort of bypassed the Midwest, except for Indianapolis.
 Indianapolis has actually seen pretty strong rent growth over the past few years since since the pandemic, and also has very limited construction.
 So you look at markets that tend to have pretty good demand fundamentals.
 We talked about the 10 to 24 year olds over the next decade and where they are today.
 Uh, so you you mix that demand with the levels of supply, they're coming in the the Midwest more broadly, but Indianapolis specifically, you know as tend to to been glossed over by developers because it really was a local developer market.
 Most of the folks building there were, you know, people who knew Indianapolis or knew the Midwest markets much better than someone parachuting into a Nashville or Atlanta or an Austin and saying I'm gonna.
 I'm gonna build a building here.
 I don't.
 I don't necessarily understand the market at a fundamental level, or maybe maybe they do, but they they haven't necessarily put down as many roots as as you would see in a a less.
 This is forgive the the lack of of terminology or the maybe the off color to reserve well, less sexy market in in the Midwest or in in Indianapolis.
 Her perception wise.
 In reality, though, I think Indianapolis is a lot of long term growth drivers and if you start to then incorporate the fact that we're we're seeing an elevated level of work from home and an elevated level of remote work and you start to do the math of well, maybe people won't move as much over the next decade as they did over the past decade.
 And if that's the case, I wanna be where they are today.
 I don't wanna wait.
 I don't wanna wait and bet on the fact that they're going to make this decision.
 I wanna figure out where they are today and meet them where they are and build apartments where they are.
 That to me is is a really interesting proposition, especially for an Indianapolis which has a pretty good renter population that's coming of age now and maybe it doesn't have to relocate for a new job because they can get one of those fancy remote jobs and and work from anywhere, and they chose Indianapolis because they grew up there.
 They know the people, they've got their family, they've got their friends.
 Maybe they went to school in Chicago, but decided to move back.
 I think there's a lot to say for for the Midwest as a whole in terms of of growth over the next decade on top of the fact that we talked about the blue collar wage growth story and that I think is going to drive a lot of growth across some of these Rust Belt states or or formally Rust Belt states.
 I guess at this point.
George Tikijian/USA   25:50
 Excellent.
Sam Tenenbaum/USA   25:50
 And then the the first question, because we we can't not answer both questions for you.
 What concerns were the most I I grew up in the Northeast, so I'm I'm inherently a skeptical guy by nature, so this question is my favorite question to answer.
George Tikijian/USA   25:54
 Right.
 So that's why it's.
 But that's the reason.
Sam Tenenbaum/USA   26:04
 Yeah, the, the the thing that concerns me the most today really is a recession.
 I mentioned the million units we have under construction today.
 That is a lot of new units.
 Multifamily has benefited from the housing shortage that's benefited from the national storylines around that housing shortage.
 And just generally the tight market we saw over the last couple years in the in the post pandemic environment, if we start to see the bloom come off the Rose a little bit on the multifamily side because fundamentals start to erode, we start to see vacancies increased.
 We don't see rent growth show up as much as we thought it would all of a sudden, maybe multifamily isn't where we want to place our capital or as much capital as we thought and some of that capital gets diverted away to other uses or other asset classes and that that to me is where things start to get a little scarier.
 I don't think that's my base case, or that's definitely not my base case.
 But you know, if we're talking significant job losses that will have I think, an outsized impact on the multifamily space only only to be buoyed by the fact that well, if interest rates don't move and we solved 7% mortgages, who on Earth in their right mind is buying a home in that environment when the the market is just so disjointed from the multifamily market.
George Tikijian/USA   27:09
 So you can.
 So your concern is it deep recession and mild recession, you're less concerned about impact of multifamily?
Sam Tenenbaum/USA   27:28
 It you don't have an impact, but the labor market has been the big firewall against fundamental erosion in the multifamily space.
 And if that starts to weaken considerably, I think there's real trouble if it if it kind of if we see more of a rolling recession, kind of like what we're experiencing now.
 We're certain industries go into recession.
 Certain things go into recession, but broadly speaking the, the, the aggregate economy doesn't go into recession.
 I think that is OK.
 The market can withstand it, but that said, you know if we see.
 55 million job losses.
 That's a that's a lot of job losses, a lot of weakness in the labor market, which I am concerned about the impact on the multifamily market there.
 There are.
 There are reasons to be a little bit more optimistic and and think that the multifamily market can be a little more resilient.
 It is typically speaking, to housing of last resort.
 People have a lot of equity in their homes.
 They may choose to sell their home.
 Try and cash in some of that equity and then rent.
 Uh.
 But like we saw during the financial crisis, you know, multifamily saw a relatively minimal impact on fundamentals as a function of that recession.
 But there are so many more units under construction today nationally than there were at that time that I think there's some lease up concern that I have from those from those new builds.
George Tikijian/USA   28:52
 We'll Sam Tenenbaum, thank you so much for your awesome insights into the market.
 Joining us today on the podcast, we appreciate it, know we love having conversations with you.
 We'll do it again.
Sam Tenenbaum/USA   29:04
 Thanks for having me.
Cameron Benz/USA   29:05
 No.
Sam Tenenbaum/USA   29:05
 I can't.
 I can't wait to do this again.
 It's this is really fun.
 I I really enjoyed myself.
 Thanks George.
 Thanks Cameron.
Cameron Benz/USA   29:11
 Yeah.
George Tikijian/USA   29:12
 Thanks Sam.
Cameron Benz/USA   29:12
 Yeah, no problem.
 Well, thank you guys for spending time with us today.
 We hope you've gained some valuable insights and not a little bit of fun with us.
 And as George always says, you're only as good as your next deal.