Market Shifts & Opportunities with Aaron Appel, Kris Mikkelsen, and Ivy Zelman
Willy Walker: Good afternoon and welcome to another Walker Webcast. It's my great pleasure to have my three colleagues, Kris Mikkelsen, Aaron Appel, and Ivy Zelman join me on this week's Walker Webcast to talk about the state of the commercial real estate markets, the state of the single family housing market, and tariffs and anything else that we come across in the next hour. Aaron and Kris and Ivy, it's great to have all of you, as someone who spends a lot of time talking to really insightful people on the Walker Webcast. The three of you are three of the most insightful, so I'm excited to have the three of you here to talk about the markets. I want to open it up with this. Here we are, at the end of Q1, beginning of Q2. We've got the 10-year somewhere around 415, 416. We've had a sell-off in the equity markets over the past six weeks. That's been about a 10 percent correction and we've got on April 2nd the announcement on tariffs in the Rose Garden. This webcast will be published right around the same time as President Trump is gathering there to talk about what type of tariff we’ll see around the globe. Give me your state of the world/ state of market view. Ivy, let me start with you.
Ivy Zelman: Wow. Well, it's a big one. I think that the market is definitely challenged, despite the fact that rates have come in. We're seeing that the spring selling season has generally been disappointing for the housing market overall. There's been a slight improvement with respect to the existing market as inventory is now finally increasing, and people are getting tired of waiting. We are seeing more volume, but that's at the expense of price. I think the market remains pretty challenged, and I see more headwinds coming for the for-sale market, definitely with tariffs and other potential risks of uncertainty that will only make it more challenging for affordability.
Kris Mikkelsen: I think from a transaction market perspective, we're still very much in recovery mode. We don't see a sea change in volumes and activity increasing throughout the end of the year, but I would say on the margins, we are seeing an increase in the number of scaled opportunities we're reviewing. These are transactions that we know have been in the queue for some time. Our pace of awards is trending nicely. The conversion rates really troughed in 2023, where we were only awarding about half of the inventory that we took to market. We’re looking much better. There's a massive amount of liquidity, obviously, in the credit space that will enable a lot of would-be sellers to buy time. So we see that overall transaction market activity continues to recover, but the rate environment is going to play a big part in how much of that is breaking to the sale market versus the refinancing window. Aaron's going to talk a bunch about the liquidity in the credit market. But I think there is a conviction built that we're off the bottom. You can see it in our internal values where we're trading assets today relative to where we priced them 6, 9, and 12 months ago when they didn't clear. You look at the NSCI, which is a good gauge of private market activity. It was basically flat over the last 12 months, with retail and industrial the bright spots, up 45 percent. The year-over-year office is still down, but the pace of deceleration looks much more manageable. Multifamily’s had six consecutive months of neutral to positive marks after 25 consecutive months of declines. So liquidity and capital is out there. It's looking for opportunities in housing and logistics. Data is a huge focus. The capital needs there are unprecedented. High convictions around near intermediate-term growth stories are what we're seeing on our end.
Aaron Appel: Capital markets are good. They're very strong right now. We've seen spreads tighten anywhere from 25 to 75 basis points to start the year, both in the public markets and in the private credit markets and amongst the banks. We've seen some of the larger money center commercial banks reenter the capital markets finally, after a two-plus year hiatus. They are extending credit again to their best customers, certainly. We're starting to see them pursue some new accounts. There's been some disruption over the last couple of weeks in the public markets in terms of where credit spreads have been. They've gapped out a little bit, but they are still substantially inside of where they were toward the end of last year, and there's still a tremendous amount of liquidity in the markets for both single assets, single bar securitizations, multi-asset single bar securitizations, and conduit. The insurance companies all have fresh allocations. We're seeing them contribute capital. There's certainly no shortage of capital in the market. I think the sentiment around commercial real estate as a sector, and we can go asset class by asset class, but just as a sector as a whole probably feels the best and sort of where Q1 is probably since 2021. We're pretty optimistic for this year and going forward that we're starting a new quote-unquote bull market, so to speak.
Willy Walker: Aaron, is there a particular capital source that in Q1 surprised you as it relates to their aggressiveness on deploying capital, whether it be banks, CMBS, debt funds, or life insurance companies? Who seems to have, I don't wanna call it hot money, but who seems to be leaning in and getting deals done right now?
Aaron Appel: I think securitized markets have had a huge impact in the first quarter, and I was a bit surprised by the amount of demand that there was for bonds and where spreads went to. We saw that drive spreads down in the private credit markets as well. There's been an unbelievable amount of capital that's been raised in private credit, not just in commercial real estate but in corporate credit as well and other types of credit, but it's really driven those spreads down. There's a lot of capital out there. We understood what was going on in the private credit markets, but I was a little bit surprised to see the demand in the public markets for bonds, which I think surprised a lot of people, but it's very healthy for our business overall.
Willy Walker: Ivy, given Aaron’s comments as a backdrop to where the commercial real estate markets are today, the single family world right now, consumer confidence, the University of Michigan Consumer Confidence Index has sort of fallen a stone over the past month and a half down to a level that we haven't seen in a very, very long period of time. It feels there's some storm clouds on the horizon as it relates to the consumer. How big an impact is that going to have on the single family market?
Ivy Zelman: Consumer confidence is the number one variable that will drive housing. When you put the hierarchy, it starts with consumer confidence, job growth, and rates. Rates will trump everything when it comes to stock valuations or stock prices, but fundamentals are driven by consumers feeling good about their personal situation. I think it's definitely a negative. We're seeing that as people are on the sidelines saying they want to wait; they're worried about the economy; they are worried about their jobs. No question, it's definitely probably the number one headwind, and we need to see stabilization before we see people jump back in or be willing to sell at a time when they know that the price of the home they're buying might be under pressure. There's a lot of concern in the market.
Willy Walker: There's a lot of talk about tariffs, and there'll be the announcement of what we're going to see. Hopefully there's some visibility, if you will, into what the future tariff regime is going to be after the President's announcement tomorrow. I’m curious how much tariffs impact the single-family housing market as it relates to new supply if you think about a consumer sentiment graph that's falling down, and rates at a relatively high level. Up until now, the single family home builders were building roughly a million new units on an annual basis, and as your research has shown, we've been undersupplied in single-family housing basically since the GFC and the increased inventories that were created pre-GFC had gotten worked off. Given tariffs, does that then slow down further production of single family and only put additional pressure upward on home prices?
Ivy Zelman: Unfortunately, I think that you're right. It is unlikely that builders would be more aggressive in speculating and building to a pace that they've been currently operating at. We're seeing a pullback in spec starts, but right now, the number of completed specs is back to the 2009 high. There's a lot of inventory that needs to be worked through. Now, we talk about tariffs. How much of the tariffs do you think will impact your overall cost to build a home? We asked our private builders in our proprietary survey that counts for about 15 to 20 percent of the market overall, and they said they thought they'd see about a four to six percent on average increase in the cost to build, but they're not very confident that they can pass that along to the consumer. There is a lot of pushback to the suppliers that they don't want to take that price increase. For those that are large builders, the largest scale operators will, in fact, have the ability to push back, but not the smaller builders. I think it's going to put a squeeze on profitability, which will deter new construction, at least at the same pace that we've been seeing over the last 12 to 24 months.
Willy Walker: Zelman also covers the big box retailers focused on housing, the Home Depots of this world. Does that trickle down to impacting them similarly as it relates to their overall sales, or do we get sort of the same effect that we got during the pandemic where home improvement spiked up because no one was moving into a new home or building a new homes so they were doing a lot of home improvement?
Ivy Zelman: I think that was an unprecedented time, and I would say the answer is no. I think the fact that we have so much uncertainty is delaying or keeping people from moving forward on any type of big home improvement projects. You still see maintenance in the market that's required, but there's no question that we've seen a decline in overall activity in home improvement and the correlation when you look at consumer spending on home furnishings, on home improvement is about 70 percent correlated to consumer confidence with about a one- to two-month lag. We are seeing the slowing, and it's getting worse, not better.
Willy Walker: Kris, as it relates to the supply of multifamily, we've seen a big surge. As I turn it over to you, I'm going to pull up a slide that shows the starts as well as deliveries into the multifamily sector that we've seen over the past couple of years. But as you think about the backdrop that Ivy just talked about on the single-family side, what's the corollary to that on the multifamily side?
Kris Mikkelsen: I think the two are interrelated. Ivy and I talk a lot about just the general shelter picture. I think a difficult picture on the for-sale side is also sort of what's driving some of the positive things that we're seeing on the for-rent side as we work our way through the absorption of this unprecedented level of construction. These are two numbers that I think are important for the people listening to take with them. The first is 76 percent, and the second is 667,000. So 667,000 is the number of units that we will absorb in 2024. That's two and a half per year; that's two and a half times the amount of inventory we were absorbing on an annual basis in that 2013 to 2019 time period. We're doing a very good job absorbing a lot of this new product that we've delivered. I think a big part of that, and Ivy can probably speak more directly to the levels of correlation, but the fact that principal and interest payments in the for-sale side to buy a new home are up 76 percent over the course of the last two and a half to three years means the affordability math has just been flipped on its head. It's hard for me to think about tariffs and think about all the pressure on the home builders that Ivy just put out there and think how we're gonna work ourselves out of this housing shortage that we're in. I mean, clearly, we're overbuilt in a few markets, but we have turned the supply spigot off. Aaron talked about this the last time we were all on the phone or all on this call about the difficulties around development economics and what's going to happen if we turn the spigots off of development capital. RealPage is reporting that we started 213,000 units last year. A lot of that is capital A, affordable construction. When you start to filter out those numbers and do the math on how much just conventional workforce-oriented shelter we're creating, we're setting ourselves up for real pressure in the housing market, real shortages of housing inventory as we work our way through the balance of ‘25 into ‘26 and ‘27.
Willy Walker: I just want to show a couple of quick slides. To those people who are listening to the webcast this week rather than watching it on Zoom, I will try to talk through these slides really quickly. Kris just talked about this slide here, which shows the deliveries and the starts as they relate to the absorption of multifamily. As you can see on this slide, we went from being in a very undersupplied market in 2021 where you had massive amounts more absorption than you had deliveries. Then you flip that upside down in 2022 and 2023, where deliveries far exceeded absorption. As Kris pointed out, 2024 absorption on a record delivery year was extremely strong at 667,000 units, and as this slide clearly shows, a really strong showing. The next thing that Kris talked about was the supply, and this slide here shows the starts in the light blue line and then the deliveries and completions in the black line, dark blue line. As you can see, starts peaked back in 2022, which has driven up the number of deliveries into 2024. But because starts have come down so dramatically to what Kris just talked about, you're going to have a wildly undersupplied market on the multifamily side starting in 2026 and 2027, which many investors and buyers are looking at as the opportunity to buy assets and with limited new supply, be able to, if you will, re-implement rent increases that will drive NOI in their properties.
Kris Mikkelsen: Willy, if you're me and you only consume this content on a podcast and you're just listening to this on the audio, we'd be happy to share some of these slides. Folks can reach out to somebody at W&D, and we can get you this information. But the slide that we're looking at right now with multifamily construction, if you're listening to it on audio, you can picture just the makings of essentially an infinity symbol. We've sort of worked through the first loop, and we've intersected, and now we've crossed over and we're sort of halfway through building that second loop of the infinity signal. The question is, how long is it going to take for those two lines to ultimately converge? What we see going on right now across the country in some of these oversupplied markets, yes, there still is some pressure from an operating fundamental standpoint, but look at the markets where supply remained in check over the course of ‘22 and ‘23. These are markets where you see pretty consistently mid to high single-digit type rent growth numbers, so that's escalating cost of housing. That's exacerbating the affordable issues that we know these households are stretched with. We need to address this. This is something that's going to continue to exacerbate some of the challenges that we have.
Willy Walker: Let me jump to the slide that you teed up for Ivy to talk about, Kris, a moment ago. Let me do a quick descriptor of this for people who are just listening and not watching and also for those watching. As you can see here, the bar graph is the median cost of a single-family home and if you back up to January of 2020, you can see on the right axis that the average median home in America cost about $280,000 back in January of 2020. Follow those gray lines all the way over to the top and in Q1 or January of 2025, the median home was costing $385,000 or $100,000 more than it did five years ago. Then go back over to January of 2020 and you can see that the light blue line is principal and interest payments on a mortgage on that medium home with 10 percent down and the P&I payments on that on the Y axis is showing that principal and interest payments were a little bit less than $1,200 a month and at that time, the median apartment building, apartment would cost you about $1,400 a month to rent. So you own the home, and your principal and interest on your mortgage was about $200 less than renting an apartment. Now go over to the right-hand side where you bought that $385,000 home, and you can see that the cost of principal and interest has gone up almost 100 percent to $2,200 a month, and the cost-of-renting has moved from $1,400 a month at the median level to $1,800 a month. You've gone from being net positive about $200 a month on your mortgage payment to being net negative on your mortgage payment of somewhere around $500 today. Ivy, dive into this slide for a moment because I think it's super important for people to understand how the cost of housing has gone up so precipitously and the rent versus buy.
Ivy Zelman: Yeah, there's no question consumers are better off renting than owning right now. Just due to the math itself. We didn't even talk about some of the escalating costs of homeowners insurance and the challenges there and property taxes that have, in many cases, more than doubled from two to four percent. We've seen a lot of increases that are challenging to the consumer. We look at it similarly to what you just conveyed, but we also look at “If I have median individual income, how much of my income am I going to spend on my mortgage, overall mortgage payment, property taxes, and insurance?” For a single household or a single income earner, it would be 59 percent of your income to buy the median existing home price in the United States, which is just not obtainable. We know the people generally are buying that are dual income earners, but they still couldn't afford the median and existing home prices, even with two incomes. There's no question there are significant challenges now that's been really fascinating to watch over the last few years, and it's not new, but the builders have been aggressively and yet prudently offering mortgage rate buy downs to overcome a lot of these issues of a lack of affordability. If you're buying a new home today, it's really a buyer's market for a new-home buyer because, despite the almost $400,000 new home price as you just pointed out, they're getting mortgage rates for 30 years at 4.99 or below. But what's happened is that they've gotten used to that. Even as rates have come down to start the year where we are now relative to where we had been, we're not seeing that create the catalyst to get more buyers in the market. I feel that the buyers right now are a bit on strike, not only because of the lack of affordability but also because of growing uncertainties of what's gonna happen to home prices. I think there's a lot of angst in the markets. But no question: the math speaks for itself. You're better off renting than owning, and I think that we have a real challenge in this country. I think at some point, renters are gonna reaccelerate. They're gonna see more rents are gonna reaccelerate to what Kris was talking about. We're already seeing rents that, in the non-challenged markets with respect to supply, to his point, are starting to see rents moving back up. We're seeing a lease up competition that's already peaked. That's still there, but it's starting to decelerate. I think there are a lot of favorable attributes for the multifamily industry. Maybe not if you're a renter, because your rents are gonna go back up, but you're better off renting than owning.
Willy Walker: Ivy, one other quick thing on that, the rate buy-downs that you talk about that the single-family home builders have been doing, that obviously has a cost to it. Do they get to the point where, with tariffs and increased cost of production, they don't have the margin left to be able to do the rate buy-downs, and therefore, that's not a great day for them as far as moving inventory?
Ivy Zelman: Great question. I think we'll have to wait and see. But right now, it could be anywhere from 400 to 800 basis points to gross margin, depending on how much someone's putting down. But it's a pretty expensive incentive. They could shift to other types of incentives, but there's no question that today, when you compare the average selling price, what incentives account for the average price? Historically, it'd be 3 percent to 6 percent. When Lennar reported earnings a few weeks ago, they indicated they were spending 13 percent on incentives as a percentage of the average selling price. There's no question profitability is under a lot of pressure, and there's not gonna be a lot of cushion as margins have now pretty much normalized or are headed to more normal levels.
Willy Walker: Aaron, we've been talking a lot about housing. We've been talking about median-priced housing. You and your team have done a lot in both the hospitality and the luxury residential market. Does luxury as a central market, whether in condo or high-end multi, keep these same pressures or is there a lot of capital going after that because the high end is less susceptible or vulnerable to inflationary pressures?
Aaron Appel: Certainly there are certain people that live above their means, but it just keeps going up. The supply-demand metrics for the luxury markets where people want to be, where they want to visit, are just supply-constrained. There's just a finite number of assets in those markets that continue to prop those markets up. A lot of those markets historically have been susceptible to economic conditions and downturns and some level of boom or bust. But for better or worse, there's been a wealth effect, or at least the common knowledge and the thought process is there's a wealth of fact that's been created. There's a certain amount of wealth now that has been retained. It makes some of these markets unsusceptible to what market conditions are for the balance of the country or for the majority of the population of the county. That's the case to a certain extent.
Willy Walker: You and your team do a ton in Florida. Would you make the generalization that the entire state of Florida is, if you will, immune to this? Or is it really just South Florida that's seeing that type of behavior?
Aaron Appel: The entire State of Florida is certainly not immune to this whatsoever.
Willy Walker: I can see your colleague Ivy going, “Thank goodness he just said that because if he said anything different, I was going to jump in on top of him.”
Kris Mikkelsen: We've got some folks in Jacksonville and Tampa that might be disappointed with Aaron's hand.
Aaron Appel: There are a slew of markets in Florida that have tremendous amounts of supply. There's a lot of free rent in those markets, two to three months of free-rent. There are homes that can't be sold, lots of inventory in the market, and houses that are definitely well below the price that people paid. But there are segments of the South Florida market that are incredibly strong. We had a client that built a house in Miami on the water. He built a house for $12 or $13 million and just sold his house a year after moving in for $65 million to somebody. It's an astronomical number. It doesn't make any sort of sense. We've seen that type of activity in those markets.
Ivy Zelman: What, call it above 10 million maybe in the stratosphere? Somewhat of an anomaly. But when you look at the community that I'm in, Naples, in North Naples, which has at least a million to sort of starting price to 3 million and 4 million, you're seeing price reductions every day, unfortunately. I think that the sweet bread and butter of the market is really under a tremendous amount of pressure. There is no question there is more resiliency. But even builders that are at that higher price point, maybe not 10 million, are finding that traffic is slowing. They had been, up until literally a week or two ago, sort of defying the weakness in the spring selling season, but maybe that 10 plus million buyer is unique and has all cash and doesn't really care what the economy or tariffs are doing. But we're feeling the pressure throughout the food chain for housing right now.
Aaron Appel: Listen, I think in that range, it's not the range I'm referencing. I think there are different levels. I don't disagree. I mean, I see it with people that we work with. I see it with clients. I see it with family members in the housing market. It's a tough thing. I think there's a certain segment of the market on deals that we finance where we still see lots of liquidity, and there doesn't seem to be any sort of end in sight.
Ivy Zelman: The rebuild, I think, is where you see the remodeling projects are slowing because of the confidence problems. But in a market where there's not a lot of new construction, in Cleveland, their inventories are very constrained; you still see bidding wars, especially at the higher price points. I do think that you're seeing new builds at the highest price points in land constraint markets. But in Florida, where you now have lots of choice, that's where we're starting to see the high-end feel, but not as much in those markets that have very tight inventory, just to clarify.
Aaron Appel: The best, and I would tell you, the best rental markets that we're seeing in the country right now are the markets where nobody institutionally wanted to invest capital over the last four years.
Willy Walker: I was just going to say, Ivy had to work in the great state of Ohio at some point in this conversation.
Ivy Zelman: It was 8 percent in Cleveland, I mean, the highest markets with respect to rent growth.
Kris Mikkelsen: It got bolded and underlined in all of Mark Franceschi's research reports. I would say on this Florida conversation to peel it back toward the for rent space. I mentioned earlier that it's a conviction market. There was a lot of conversation five or six months ago about whether Florida is going to remain investable in the long term. Two storms, insurance market dislocation. Real question marks, a lot of conversation, not a lot of action. And what I would tell you is, you can't draw too much from an anecdote. But we've been as active across central and south Florida as any market in the country. We've run some of the most competitive processes with some of the most institutional blue chip firms when we're selling assets across Tampa, Orlando, all across southeast Florida, Dade, Broward, Palm Beach. There is no slowdown of liquidity and institutional capital with a long-term conviction around having a position in those markets.
Aaron Appel: I don't think the investing theses that have changed since COVID-19 have the long-term views that have changed in these markets. I think there are intermittent supply and demand imbalances that exist because in real estate, any asset class people find that they think is a great asset class to invest in tends to get over their skis, and we overbuild constantly. Regardless of location or segmentation, it just happens. I don't think those tailwinds have changed at all. I happen to agree with you.
Willy Walker: Kris, I'm gonna throw up a slide here that focuses on what you just talked about, which is cap rates. I'm going to talk this through for a quick second, particularly for those people who aren't watching this. But this slide here on the bars shows W&D tracked institutional sales volume. So, this multifamily sales volume is on the X-axis. On the Y axis, we've got cap rates in light blue, and we've got the 10-year treasury in dark blue. I'm gonna have Kris talk about this first, and then Aaron, you jump in on leverage levels and inverted, if you will, negative leverage. As this slide shows, multifamily cap rates were up in the fives back in the 2018 to 2019 level and then dropped into kind of the mid-fours and then came collapsing down in ‘21, ‘22—down into sort of the three-and-a-half range. You're now up in the low fives on average on a national basis., Kris, if you had bought an asset or if you were trying to sell an asset at that low point on cap rates in Q1 of ‘22 at that 3.5 cap, and now we're at a 5.25 cap, you've seen about 40 percent degradation in value in just that cap rate movement of where you would have sold the asset back then to where we are today. Yet, at the same time, as you can see on the bottom right of this, volumes are coming back quite nicely right now. How is it when you look at that cap rate graph and the financing cost graph and negative leverage on so many transactions that we still have the type of volume that you see in the bottom-right-hand side of this slide?
Kris Mikkelsen: It's a good question. There's a lot in there. Whenever we talk about mid-three cap rates, the first thing that I remind folks is that we were selling assets at mid-three cap rates when you had the least trade-outs that were 10, 15, and 20 percent lease over lease. What yield an investor was underwriting where they felt they were stabilizing to was not in the mid threes. There was some incremental growth upon that. That 40 percent value degradation is just because of the multiple expansion math that ignores how much your NOI profile improved, as you still experienced some of that rent growth that we were seeing when rent inflation was really at its peak. Now, the question is, how late in the cycle did you buy? How much of that rent growth did you sort of pay to the seller versus what you were able to ultimately enjoy? The one thing that is just for everyone that's listening: that's not just Walker and Dunlop sales. That's everything that is trading in markets where our team is paying attention. We're going out really trying to pull as accurate data as it relates to in-place financials. We're looking at T3 revenue and T12 expenses, adjusted for taxes. We're looking at institutional quality trades. I think at this point there are 4,000 or 5,000 transactions that are included in this data set. It's a pretty clean set of data. The one thing that it doesn't portray here, Willy, and why I think you've seen cap rates remain range-bound over the course of the last four or five quarters in and around 5 percent is Basis. Basis is driving a lot of the investing today. I think we're in a situation where we're still talking about the haves and have-nots. If there is some sort of near to intermediate term growth story, then cap rates are very much inside 5 percent today. Buyers are trying to figure out a way to stabilize around neutral leverage, but they're willing to absorb some of that for the first 12 to 18 months of their hold, provided that they're comfortable with the basis that they are buying into vis-a-vis replacement cost. How much do rents need to increase before you can justify putting a new shovel in the ground that gives them comfort around sort of a defense from near-term supply pressures? We haven't seen a lot of distress selling. We haven't seen cap rates gap out into the mid-upper 5 percent range unless we're working our way down the quality spectrum. This is a different conversation if we're talking about deep value add 1990 vintage secondary market products. But when you think about primary markets and institutional quality assets, this is a pretty clean set of data.
Willy Walker: Aaron, at the top of the call, you talked about spreads coming in quite a bit during Q1 and that there's a sort of an abundance of debt capital. But as that slide showed, since about early 2023, if you were tracking that 10-year and where cap rates were, you're basically upside down on leverage. How are your clients justifying going in where they're paying a five cap and they're financing it at $525 or $550.
Aaron Appel: Basis, as Kris said. That's all smart investors understand: basis. If the basis is cheap enough on the real estate over time, you tend to make a lot of money. I think that's how people are looking at a lot of these deals when you start to talk about some of the supply getting absorbed, the lack of new development, the lack of regulation or deregulation from the government, even the tariff noise certainly is good for existing assets to a certain extent, again, which helps to limit supply. I think that there are a lot of the demand drivers in place to push rent growth at some point in the next two to three years. Listen, I think a lot of the premises are better to be early than miss the train. At some point, what's going to happen is you're going to have a year where you have 10-15 percent rent growth in a market, and all of a sudden, you're gonna be cash flow positive again pretty quickly. I think that the spread between the cost of funds where cap rates are trading is tight enough now that you can buy an asset with a little bit of negative leverage and see some light at the end of the tunnel and sort of justify your return thresholds. When we were looking at financing rates for multifamily on a fixed rate basis in the 6.25, 6.5, even close to 7 percent range, that was paralysis for our marketplace, and really all asset classes across the board. With where rates are today, with the supply, demand, and balances starting to regulate, you're starting to see investment activity pick up again. Basis play is starting to make sense, and things are trading well below replacement costs. It's not just in multifamily. We're seeing it in the office sector, specifically in Trophy Class A offices and in buildings where tenants want to occupy and be. We're seeing investment activity pick up substantially in the major metros. The basic story is even better there; the barriers to entry and the supply-demand imbalance are even better there. It's not just a multifamily story. I think you'll start to see that move into industrial at some point. It's moved into retail. And candidly, I think it's moved into housing to a certain extent.
Willy Walker: Aaron mentioned deregulation. I think that the expectation of the new administration was going to be significant deregulation, as well as probably so far disappointment as it relates to sort of a pro-business/pro-stock market economy. But at the same time, I think there has been a general sentiment that we'll be in a more deregulator pro-business environment. What deregulatory moves should people be watching out for that will be net beneficial to the commercial real estate markets? One of the things that we've seen at FHFA just over the past three weeks since Bill Pulte became director of FHFA is in his first week on the job, he removed some of the tenant protections that were being contemplated to be worked into Fannie and Freddie loan documents that were tenant protections designed for COVID era and not post COVID era. We did away with those. Then, just this past week, there was a big move from a radon testing standpoint. Fannie and Freddie dramatically increased radon testing in apartment buildings that they were lending on. He came in and said, “That's overreach from a regulatory standpoint. Let's get rid of that.” So in just FHFA and their impact on the agencies, that has been a welcome sign as it relates to sort of a pro-business, pro-landlord step. For anyone who wants to talk about something from a deregulatory standpoint, that will have a major impact on markets.
Ivy Zelman: I think that the new construction market is optimistic that there'll be deregulation as it relates to energy codes and environmental headwinds that they've been facing. That has yet to come to fruition, but that's something that at least the industry is very optimistic about. On the flip side, there are concerns related to other policies that offset that a little bit, such as the risk of deportation and what it's going to do to the labor force. But for the banks, deregulation could mean a positive impact on the bond market, on the treasury market, because if the banks are allowed to hold more treasuries, they can be back in the market buying treasuries, and that has a lot to do with the way the Basel rules are today that would deter them from owning them, where the ratios could be adjusted, allowing them to buy more treasuries, which could be favorable for the long end of the curve.
Willy Walker: Kris, you have anything to add there?
Kris Mikkelsen: Ivy and I were talking earlier about that exact point. Secretary Bessent gave a long-form interview a week or so ago that I'm sure some of your listeners, if they are curious enough to listen to the Walker Webcast, probably have a podcast called Rolodex that includes this.
Willy Walker: It might include the All In podcast.
Kris Mikkelsen: It might include the All In podcast. Willy, you should be a bestie at some point. I think you'd fit right in.
Willy Walker: I should just go walk around the White House and try and grab them in the All In podcast. I was wildly impressed that they could just walk in. Not that they don't have carte blanche in the Trump White House, but that they would just walk around and all of a sudden grab the Commerce Secretary and the Secretary of Treasury and be able to do an impromptu podcast. That's quite something.
Kris Mikkelsen: That's right. I shared with Ivy earlier that the one very interesting thing that I've heard just recently was this idea of supplementary leverage ratios and the fact that we've got a regulatory framework that assesses a capital charge to banks for holding US treasuries. The Secretary talked about an overhaul of that regulation. It was a little bit flippant, what he threw out, but an impact to the long end of the curve on the order of magnitude of 30 to 50 basis points. I went back and listened to the last time we were on this call, two years ago, and it was March of 2023. Silicon Valley Bank had just gone down, and Signature Bank was being absorbed. There was a lot of concern about what relief on the long end of the yield curve meant for the underpinnings of the economy. It's nice to think today about a deregulatory framework helping out on the rate front without having to do it with massive unemployment and GDP backing up.
Willy Walker: I would say Secretary Bessent talking publicly about not really focusing on the equity markets, but very focused on the 10-year treasury and trying to get borrowing costs down is welcome to the ears of anyone who's in the commercial real estate space.
Kris Mikkelsen: You take some encouragement by the fact that the person sitting in that chair is probably one of the 10 most insightful macro investors on planet Earth, right? So encouraging.
Willy Walker: Thank you very much. Aaron, before we run out of time, I want to talk a little bit more broadly on commercial real estate. You touched on it lightly, but do you think we've hit bottom in the office? The leasing numbers—you and I went to a closing luncheon yesterday with one of our clients who's an investor in an office here in Manhattan. They were talking about the leasing market being sort of on fire and that they have law firm after law firm crawling all over them to take space. This investor also has a debt fund, and they're writing their first office, first trust loan out of a debt fund, which, if they're writing office loans, tells me that there's some real capital that might actually start going to the office. Have we turned the corner on the office market?
Aaron Appel: We have. I don't even think that's up for debate.
Willy Walker: Right, but hold on a second. Let me broaden your aperture. San Francisco CBD office.
Aaron Appel: In the locations where people want to be, it's turned a corner in the buildings people want to be in. There are different types of products. I was coming back from the airport the other day, and I drove by an office building in New Jersey and took a look at it. That building shouldn't exist anymore in the form or fashion it's in if you're talking about a Class A high-rise office in the plush district in Manhattan. There's a tremendous demand for it, and there's a lack of supply. The numbers are getting close to where it may make sense to build a new development, a new spec development. They may not quite be there yet, but they're getting very close. You go to Los Angeles, Century City, as tight as it could be. Rent is higher than it's ever been, and Downtown LA can't give the space away. It just depends on where you are. Those trends of those markets that have never really been desirable were sort of price alternatives. I think those price alternative markets are really having a hard time and aren't gonna come back. But I think that the places where people wanna be will come back, and I also think there's a huge sentiment change in the country around going to the office, going to work, and that tone has been set by the current administration and what they've asked the federal employees to do in DC and CEOs, yourself, Willy, and others. The sentiment has changed around how we work and how we're gonna go to work. I think we've normalized a little bit, and the vacation is over, thankfully.
Kris Mikkelsen: Willy, I mentioned listening to the last call that we were on, and you probably took two years to have us back on because it was dire when we were on.
Willy Walker: I think Ivy was actually pretty cheaper on the single-family market. It was a bottom signal.
Kris Mikkelsen: Well, we used office as sort of the poster child for death and destruction, whatever you want to call it. If you had gotten off of that webcast call and you had bought a share of Cousins properties, (I sit here in a Cousins building here in Atlanta) with a great portfolio across the Sun Belt, there’s been 50 percent appreciation from the last time that we were on the call. Industrial was the safe haven. If you had bought a share of Prologis, you'd be down 10 percent over the last 24 months. If you had gone into the multi space and bought a share of a Sun Belt Reef, you'd probably be up 20 to 25 percent, a home builder 10 to 15 percent. But I looked at that, and I saw sort of the performance and how much the public markets are ahead and confirming exactly what Aaron just said, that the sentiment has shifted and it's really not even up for debate at this point.
Willy Walker: As you and I discussed, Kris, when we opened up our London office seven weeks ago, and when we announced that we were opening up an office in London seven weeks ago, Europe was still flat on its back. I had a whole list of responses to analysts asking me why Walker would open up an office in London when Europe has no growth to it. Seven weeks later, Europe seems to be the place everyone wants to be. This world is changing at a very rapid pace these days. It certainly feels like it's time to kind of tighten your seatbelt and hang on a for little bit of a ride.
Kris Mikkelsen: And I would be remiss, Aaron, to say that if you had gotten off the phone and bought a Bitcoin, you would have done it for $29,000, and today, you would be up. What's that? Three and a half or two and a half X? Go ahead. You're right. You were right. I was wrong. I got texts from this guy last night, “You owe me a public apology.” I'm telling you’ve been correct.
Aaron Appel: You should have led with the apology, and by the way, it will be higher next time we do this also.
Willy Walker: All right, Aaron, we're gonna have to put on one of those disclaimers at the beginning of the Walker Webcast that say none of the opinions expressed on here are Walker and Dunlop trying to get you to go buy something. With that in mind, I'm gonna go back up to my interview with Peter Linneman at the beginning of January. I said to Linneman, “Look, all real estate is local. There's no ability to just sort of paint a brush, but if you had to pick one asset class to invest in right now, what would it be?” And Lineman said to me, “Well, if you want to stay rich, I'd go with multifamily.” When he said that, I sort of said, “Okay, well then, what about getting rich?” And he said, “Office.” And I said, “What about getting poor?” And he said, “Data centers.” With that as the backdrop, pick whichever. I'll go with the get-rich asset class right now. Ivy, let me start with you. We're in either commercial or residential. Are you placing a bet right now? If you had to put your own money into it, what asset class are you going after?
Ivy Zelman: I am still in the single-family rental market. I think that it's a better buy there, and it's better off renting in a single family than owning. I still think people want the white picket fence in the backyard and there's a shortage of that product. I'd say whether built for rent or existing SFR, I'd want that in my portfolio.
Willy Walker: That's great. Aaron?
Aaron Appel: Tough question. Office, Class A office or very high-end homes.
Ivy Zelman: You need more homes, Aaron, besides Hamptons, right? Aspen.
Aaron Appel: It was surreal. Someone just quoted me a 25 percent increase to replace the door in my apartment. I wasn't happy about it. They said the doors are made in Canada.
Ivy Zelman: There you go.
Kris Mikkelsen: This is the answer for the “get rich.”
Willy Walker: It is the answer for where you are putting your money right now, if you want to grow.
Kris Mikkelsen: I agree with Aaron. I think that there are still some opportunities in these overlooked sectors. I think two things: there's so much capital that's still trying to get deployed in housing. If you take a stock set of assumptions about what the third-party providers are throwing out there, conservative spread in your residual cap rates to your going-in cap rate, it's really challenging in conventional housing to see through to a return profile that is much better than sort of a low double-digit return. There's plenty of capital being deployed right now that is underwriting returns well in excess of that. They're just doing it with really high conviction levels around what rents look like on the recovery curve, or they're taking a pretty aggressive view as to where cap rates normalize over the course of the next three to five years. I think I would agree with Peter on multi being a great place to stay rich. I'd take the other side of his data trade. We brought on a subject matter expert. Aaron and I spent a lot of time with Andrew over the last couple of months working on a couple of capital markets executions and really understanding the space. There's an unprecedented amount of capital needed to meet the near-term demand of computers. There are a lot of different ways to play along the value creation chain there. I think investing in and around some of that infrastructure is going to be a safe place to invest for a long time. I think given the cost and the scale of development, we've got a situation where I think demand is going to consistently stay ahead of supply for quite some time.
Willy Walker: Ivy, I know you're a little under the weather, and I'm super appreciative of you coming on and gutting it out over an hour with some Kleenexes and giving us your great insights. Aaron, you're right down the hall. Thanks for tuning in, and Kris, thank you very much for all of your thoughts and insights. Thanks, everyone, for joining us this week. We are back next week with another Walker Webcast. I appreciate my three colleagues joining me today. Have a great one.
Kris Mikkelsen: Thanks, everybody. Good seeing you.
Willy Walker: Thanks. We're out. Thank you guys so much.
