BenMiller8.28.24_FINAL
00:00:00.000 | Hello, everybody, and welcome to the Financial Samurai podcast where we help you achieve
00:00:12.840 | financial freedom sooner rather than later.
00:00:15.120 | I'm your host, Sam Dogan.
00:00:17.520 | With me today, I have the founder and CEO of Fundrise, Ben Miller.
00:00:22.540 | Welcome to the show again, Ben.
00:00:23.540 | Thanks for having me, Sam.
00:00:24.540 | Hey, so it was great catching up with you in San Francisco over some steak dinners at
00:00:29.160 | Harris' Steakhouse.
00:00:30.640 | I learned something about you during that dinner, and I learned that you don't eat rib
00:00:34.900 | eye.
00:00:35.900 | No, is it rib eye?
00:00:36.900 | No, prime rib.
00:00:37.900 | Is that right?
00:00:38.900 | I don't know exactly what you're talking about, but I loved dinner.
00:00:44.760 | It was great.
00:00:45.760 | It was fun to actually hang out.
00:00:47.040 | I'm not a big fancy dinner person, honestly.
00:00:49.720 | Yeah, yeah.
00:00:50.720 | That was funny because I was like, "Oh."
00:00:52.720 | Because I always get rib eye and prime rib confused.
00:00:55.280 | Like rib eye, it's pretty marble-y.
00:00:56.640 | It's really good.
00:00:57.640 | You said you cook your own rib eyes, but then the prime rib is like that slow roast cut,
00:01:02.980 | and you weren't quite familiar with it.
00:01:04.320 | I was like, "Oh, really?"
00:01:05.320 | Because I've been a prime rib guy all my life, and I was like, "Oh, I love prime rib."
00:01:08.800 | Yeah.
00:01:09.800 | I do cook a lot of steaks at home.
00:01:11.360 | I try to.
00:01:12.360 | I have kids, and I feel like it's good for them to get some protein.
00:01:16.480 | But yeah, I don't think I've been to a steak restaurant in so many years.
00:01:20.560 | So I was like, "What's a prime rib?"
00:01:23.960 | You thought that was crazy.
00:01:25.120 | Well, because I'm thinking like New York City, like the best prime ribs.
00:01:29.640 | But you're in the D.C. area, and I think about Capitol Grill and Washington D.C. power lunches.
00:01:35.260 | So that's why I was thinking like East Coast prime rib rib eye, that's like a staple.
00:01:39.160 | So that was an interesting surprise.
00:01:41.160 | Yeah.
00:01:42.160 | I try to avoid that scene as much as possible.
00:01:45.120 | Right, right, right.
00:01:46.940 | So in this episode, I really want to talk about interest rate cuts and what it means
00:01:53.200 | for the future of real estate.
00:01:54.620 | Because we're at the cusp of the Fed cutting interest rates for the first time in four
00:01:59.440 | years in September.
00:02:01.840 | And expectations are for up to 100 basis points in Fed rate cuts by the end of 2024.
00:02:07.760 | And up to 200 basis points of cuts or 2% of Fed funds cuts by the end of 2025.
00:02:14.400 | So to me, this sounds quite bullish.
00:02:17.320 | But on the flip side, it also means that the Fed is seeing weakness in the labor market
00:02:21.760 | and in the economy, and it wants to ensure that the employment figures don't get too
00:02:27.080 | bad.
00:02:28.080 | So what are your thoughts, and how is Fundrise, and how are you thinking about investing in
00:02:31.840 | real estate going forward over the next 12 months to 24 months?
00:02:35.280 | Yeah.
00:02:36.280 | Well, let's start with basics that interest rates are the biggest driver of real estate
00:02:41.200 | prices.
00:02:43.160 | And so when interest rates went from zero to five and a quarter, five and a half percent,
00:02:48.840 | that dampened real estate prices, depending on the asset class, by a decent amount.
00:02:54.200 | At least in apartments, or self-storage, or industrial, prices probably came down 20 to
00:03:00.840 | 30%.
00:03:03.280 | So now, as you're saying, the rates are going to fall, and so expectations are the opposite,
00:03:10.840 | is that as rates fall, it's cheaper to borrow, and real estate prices should rally.
00:03:17.960 | And if they fall 2%, as you said, Fed Funds moves from five and a half, three and a half,
00:03:22.480 | which I think is reasonable expectation over a year and a half or two years on a conservative
00:03:28.440 | basis, that's almost a 50% move.
00:03:32.400 | And so it should spark a real estate bull rally.
00:03:37.240 | And then the countervailing force, as you said, is will there be a recession, and how
00:03:41.880 | does that affect the broader market and real estate?
00:03:44.840 | And so just the first point is that, yeah, falling interest rates should be very positive
00:03:51.680 | for real estate.
00:03:52.680 | I think the second point, which is, okay, how does a recession affect real estate and
00:03:58.080 | how does it affect the broader economy?
00:04:00.080 | I've been pretty consistent.
00:04:01.200 | I think there will be a recession.
00:04:03.440 | I don't think that we'll avoid one.
00:04:05.280 | I think it's a question of how severe it's going to be.
00:04:07.840 | In a mild recession, I think that actually would probably be bad for stocks because the
00:04:14.480 | forward earnings forecasts are assuming close to what they call a no landing or no recession.
00:04:21.680 | And I think that's unrealistic when we talk about how to reason that out.
00:04:26.680 | And then how does it affect real estate?
00:04:28.520 | And real estate is a big asset class, right?
00:04:30.840 | It's as big as a stock market, so you have to look at different parts of it.
00:04:34.760 | And so some of real estate's pro cyclical, as in it goes with the cycle, some of it is
00:04:39.200 | more counter cyclical.
00:04:40.720 | We mostly own apartments, rental apartments, and those are more counter cyclical.
00:04:46.480 | Consumer staples like groceries and shelter end up doing pretty well in a recession comparatively.
00:04:54.080 | And so I think that a recession, a mild recession with falling rates would be really good for
00:04:59.880 | fund rises real estate.
00:05:01.680 | We would think we would outperform relative to most of the market if that's what happens.
00:05:07.520 | Can you talk about a little bit more counter cyclical?
00:05:10.720 | So what does counter cyclical actually mean in real estate, what you're referring to?
00:05:14.800 | And also how would you rank the best performing commercial real estate asset classes in a
00:05:21.520 | declining interest rate environment?
00:05:23.720 | What would the top three best performers be?
00:05:26.320 | Well, so after the 2008 financial crisis, which I went through, a lot of people went
00:05:32.120 | back and looked at what happened, which asset classes did better and worse in 2008.
00:05:37.800 | We can talk about how that would probably be different than the recession that may happen
00:05:42.120 | in 2025.
00:05:43.120 | But what happened in 2008 was that there were a lot of foreclosures, there was a lot of
00:05:49.120 | unemployment, there was a lot of financial instability because a lot of banks went bankrupt.
00:05:54.220 | And a lot of people moved from owning houses to renting apartments, and it was focused
00:06:00.920 | on affordability.
00:06:02.480 | And so the reason why rental apartments do well is that when people can't afford to buy,
00:06:09.000 | they rent.
00:06:10.440 | And so that's why it ends up being counter cyclical because you end up with more renters
00:06:15.280 | and less homebuyers.
00:06:16.280 | So you end up with more demand for rental product.
00:06:21.460 | And that's what happened to an extreme extent in 2008 because the housing market collapsed.
00:06:27.200 | In this case, I don't think it's as extreme, but generally, yeah, when people are trying
00:06:30.960 | to pinch pennies and be more cost conscious, they usually end up renting over buying.
00:06:38.880 | That makes sense.
00:06:41.280 | And then so residential, what would the second subcommercial class be that would perform
00:06:47.960 | quite well?
00:06:48.960 | Because how do industrial, commercial properties or office perform in a declining interest
00:06:55.340 | rate environment?
00:06:56.340 | Yeah.
00:06:57.340 | So like I said, the other extreme, notoriously office is the most pro cyclical.
00:07:02.000 | So it does really well when the economy is hot and really poorly when the economy is
00:07:05.780 | cold because companies that previously were renting more space and expanding and hiring
00:07:14.640 | now start to contract and lay people off and are more conservative and reduce their space
00:07:20.440 | demand.
00:07:21.440 | So office, which in this case now is obviously already pretty bad, would actually do even
00:07:27.520 | worse.
00:07:28.520 | And so I think office, this is what I'm expecting with office for a while, is that you have
00:07:32.720 | two things happening in any point, any part of the economy, you have cyclical drivers
00:07:37.000 | and you have some permanent or secular drivers and office has a permanent decline in demand
00:07:43.000 | because of work from home, that decline is somewhere between 30% to 50% less demand than
00:07:47.640 | previous to pandemic.
00:07:50.680 | And now you have a cyclical decline.
00:07:52.520 | So office, I think it's just going to get really beat up even worse.
00:07:57.040 | And I feel like that's still, I think one of the things you see consistently with financial
00:08:02.200 | investors is they really struggle with when norms break, they really don't know how to
00:08:06.360 | forecast when the past is not a good predictor of the future.
00:08:11.280 | And I think that's true with office and that makes it an opportunity and a risk.
00:08:15.800 | So I think office is the worst.
00:08:18.760 | Industrial is somewhat more pro-cyclical because obviously companies lease spaces when
00:08:23.440 | there's stuff moving through the economy where industrial is essentially about the economic
00:08:29.160 | flows of goods.
00:08:31.480 | And so industrial is not as resilient as apartments.
00:08:36.000 | And so then in the middle, there's retail can be very pro-cyclical, but grocery, grocery
00:08:42.880 | anchor chains.
00:08:43.880 | And so you get into it and it starts getting nuanced and then also nuanced by region because
00:08:48.960 | a lot of times regions have very different impacts from recessions.
00:08:54.040 | You could see Southern California could be, parts of Southern California are really driven
00:08:59.960 | by the aviation and defense industry and so you could see a lot of demand for defense
00:09:05.680 | driving that part, Orange County has been on tear.
00:09:09.880 | So you really, with real estate location, location, location, so you need to look at
00:09:13.800 | these big macro drivers like interest rates, but then you got to get into the specific
00:09:18.640 | like Texas has been about oil and fracking and that's obviously not going to go away.
00:09:24.920 | And so, yeah, but the most important point is that interest rates have a much bigger
00:09:32.160 | impact on value than operating income.
00:09:35.640 | So if you have apartment building that has 3% rent growth or 5% rent growth or 0% rent
00:09:41.080 | growth, that still won't have nearly the price impact as interest rates moving from a 5.5%
00:09:49.200 | fed funds rate to a 3.5% fed funds rate.
00:09:52.200 | That's a massive move and so even if incomes are hit by the recession, it's still not going
00:10:00.960 | to be as consequential as rates.
00:10:04.360 | Got it.
00:10:05.640 | So in that case, why wouldn't more funds or more firms invest a lot more in real estate
00:10:13.680 | in 2023 and 2024 when we know that rates are going to come down and things are going to
00:10:20.360 | turn around because eventually rates have to be cut because inflation is going to normalize
00:10:24.740 | back to 2%, 2.5% so you can't have the fed funds rate so far above that because that
00:10:30.200 | would be quite restrictive.
00:10:32.480 | Can you remind us how much has Fundrise deployed in capital over the past 18 months and logically
00:10:38.840 | why wouldn't more funds invest more capital during depressed commercial real estate pricing
00:10:44.440 | when they know that rates are going to come down?
00:10:46.480 | I think a lot of people didn't know rates were going to come down and that there were
00:10:49.800 | very clear moments when people started arguing they wouldn't come down and you saw it happen
00:10:55.160 | twice in the last 18 months.
00:10:57.840 | Happened in October 2023 when the treasury rates got it to 5% and Bill Ackman and a few
00:11:07.880 | other people were saying that treasuries might go to 6% or 7%.
00:11:12.800 | Inflation was a norm.
00:11:14.440 | I think that I never thought that was true but I definitely recognize that the market
00:11:19.040 | for...
00:11:20.040 | It happened again in Q1 where we had a re-acceleration inflation, Q1 of 2024 and in both cases treasuries
00:11:27.600 | went close to 5.
00:11:28.760 | As you said, now treasuries have fallen to I think 3.8% and probably still falling, the
00:11:35.080 | 10-year treasury.
00:11:36.080 | Yeah, there was no consensus that rates would come back down so funds were not deploying,
00:11:41.520 | that's one.
00:11:42.800 | Two, is there's kind of an idiosyncratic dynamic of how funds make decisions where you have
00:11:49.880 | somebody who does the analysis, an analyst, they take it to the investing committee, investing
00:11:52.880 | committee signs off on it.
00:11:55.280 | A funny attribute of investment committees is they really don't want to buy real estate
00:12:00.720 | where there's negative interest rate ARB, where the interest rate is higher than the
00:12:05.320 | purchase price.
00:12:07.280 | Real estate is priced on yield and so you'd say, "Okay, I can buy a real estate deal at
00:12:13.120 | a 5.5% yield," and somebody says, "Yeah, but I can get a mortgage, the mortgage is going
00:12:19.040 | to cost 6% or 6.5%," and that's negative, it's literally the mortgage is more expensive
00:12:24.080 | than the yield, that's called negative carry.
00:12:28.320 | And essentially the entire real estate industry investment committee almost entirely can't
00:12:34.120 | get that through investment committee, it just looks really bad on paper.
00:12:37.440 | Even though that's a static situation and we're about forecasting the future?
00:12:42.200 | Yeah, as I said, it's idiosyncratic and I like to tell the institutional establishment
00:12:49.000 | that like, "Look, in 2021, the exact opposite was the case, right?
00:12:53.840 | Interest rates were close to zero and you were buying a yield of 3.5% and you had positive
00:12:59.200 | ARB, right, because the interest rates may have been 2.5% and you were buying 3.5%, it
00:13:04.800 | looks smart, but in retrospect, right, prices moved so much that you lost money."
00:13:09.220 | And that was everybody who was in the game saw that in 2021, nevertheless, when the opposite
00:13:16.120 | is true, but prices are low, but negative carry is high, you can't get it through investment
00:13:21.480 | committee.
00:13:22.480 | It's just like very...
00:13:23.480 | Almost no investment committees will green light negative ARB, negative carry.
00:13:27.320 | But that's like one of the reasons why funds didn't deploy.
00:13:29.760 | And then lastly, the fund is not actually the source of the money, right?
00:13:34.440 | The fund is an agent of the LP, of the pension funds and the true capital sources in the
00:13:42.360 | market.
00:13:43.840 | And most of these funds, they have to raise the next fund by liquidating the last fund
00:13:49.040 | and because what happens is the structure of the market, so there's structural reasons.
00:13:53.240 | So if you are a fund, let's say you're KKR, Harbor Group, some big fund manager and you
00:13:59.480 | have a...
00:14:00.480 | Let's say I'm just going to say round numbers, a billion dollar fund and you're fund five,
00:14:04.880 | you go back to your...
00:14:05.880 | And usually you have the same investors in every fund, there's probably not that much
00:14:09.720 | turnover, let's say 80% same investors every time.
00:14:15.200 | And they've allocated 1% of their portfolio to KKR.
00:14:19.320 | And so that 1% is already invested in funds one, two, three, four.
00:14:23.100 | When you go to raise fund five, they need you to liquidate an earlier fund to fund the
00:14:27.840 | next fund.
00:14:28.840 | It's just like, there's kind of like a cycle.
00:14:32.160 | And without liquidity, which is what's happening in venture capital too, it's happening across
00:14:36.320 | the whole private markets.
00:14:38.480 | Without IPOs, without sales, without turning over capital, the LPs just don't have liquidity
00:14:45.420 | for the next fund and they don't want to increase their allocation today.
00:14:50.480 | They actually may want to decrease their allocation because they can now put their money into
00:14:55.360 | bonds and credit at high rates.
00:14:58.560 | So there's just a lot less money in the market in real estate and in venture than there was
00:15:05.640 | before.
00:15:06.640 | And that drives prices down and makes it a good time to buy.
00:15:10.960 | Got it.
00:15:11.960 | Can you remind investors and listeners how much Fundrise deployed in capital?
00:15:16.920 | Because I know you guys also got a line of credit from one of the big banks to deploy
00:15:22.280 | capital.
00:15:23.280 | How was your thought process behind that and how much did you deploy over the past 12 to
00:15:27.080 | 18 months?
00:15:28.080 | It's more than a billion dollars.
00:15:29.080 | The lesson I keep learning and I have to relearn it is that whenever the market goes left,
00:15:33.940 | you need to go right.
00:15:35.560 | It's really the market reflexivity, as they call it, is that doing the opposite of what
00:15:39.880 | the market is doing is such a consistently good strategy.
00:15:44.560 | And in 2021, we were conservative but not conservative enough.
00:15:50.800 | The whole market was so bullish and I was not as bullish, but I should have been more
00:15:55.600 | bearish.
00:15:56.600 | And now the market is bearish and I've been more bullish.
00:16:00.960 | So to get good returns, you really have to move counter-cyclical or counter to the consensus.
00:16:10.760 | And the consensus was to not deploy, and we deployed pretty aggressively across our strategies,
00:16:18.320 | which is built for rent and industrial.
00:16:20.720 | And also we do a lending to, it's called pref lending to multifamily.
00:16:26.140 | So yeah, I mean, a billion was good.
00:16:28.800 | I wish we could have done 5 billion.
00:16:30.840 | I think it's great in retrospect, but it's right now, there's been no material markups
00:16:36.960 | because it's still like, you can't really show the results of that until it's clear
00:16:42.600 | in retrospect.
00:16:43.600 | And I think it's not going to be clear for, as you said, end of next year, where I think
00:16:48.920 | we'll really see what you sort of presumed at the beginning, rates are going to fall
00:16:53.840 | a lot and the market is going to be in a different environment.
00:16:57.860 | What is a 1 billion as a percentage of total investments, roughly speaking?
00:17:02.820 | It's a pretty decent percentage.
00:17:04.800 | It depends on the fund.
00:17:07.800 | The flagship fund in the income fund, which are the newer funds are more aggressively
00:17:12.540 | deploying now.
00:17:13.540 | So it's sort of a bigger percentage of those funds.
00:17:16.560 | Okay.
00:17:17.560 | Yeah.
00:17:18.560 | How does it work in terms of getting the line of credit?
00:17:20.560 | Do you basically pull the line of credit, pay the interest rate, invest in a property
00:17:26.560 | and then hope to make a better return than the cost of the credit?
00:17:30.520 | Yeah.
00:17:31.520 | I mean, so as I said, we went left when the market went right.
00:17:34.880 | And so about a year ago, we closed a $770 million line of credit with JP Morgan.
00:17:43.440 | That line was designed to allow us to go buy, build for rent communities.
00:17:48.640 | So those communities are typically 100 to 200 homes that we build and then rent, kind
00:17:54.760 | of like apartment buildings, horizontal apartment buildings.
00:18:00.160 | And so, yeah, and the rate was negative.
00:18:04.720 | The yield on the debt is higher than the yield on the acquisition price.
00:18:10.880 | Same with industrial.
00:18:11.880 | We went out and bought a bunch of industrial buildings and typically when you're doing
00:18:16.360 | build for rent or you're doing a new industrial, it's vacant, right?
00:18:20.000 | It's leased up.
00:18:21.000 | You had to lease it.
00:18:22.000 | So there's a negative carry.
00:18:23.360 | And we did that because you could get really good basis, like the price per square foot,
00:18:28.800 | the price per unit, it was really low.
00:18:31.020 | So we were one of the few, I mean, we must've been, there's a very short list of people
00:18:36.960 | who are out there active at that scale.
00:18:40.040 | So I think it's going to pay dividends, but it's going to take a little bit of time to
00:18:44.920 | see if that was right, that basically prices do recover, rates come down and sort of the
00:18:51.960 | COVID inflation spike ends up being sort of like ancient history by end of next year.
00:18:58.560 | You know, it's interesting you talked about the investment committee not getting these
00:19:02.520 | deals through the investment committee during a negative carry situation.
00:19:07.040 | So once there is a neutral carry or positive carry, and this sounds to me like a lot of
00:19:12.920 | these deals will go through and then there's going to be a boom cycle again.
00:19:16.840 | So no wonder why there's a boom bust cycle in real estate and other investments, because
00:19:22.120 | it seems like people don't invest until it's clear that there could potentially be a positive
00:19:27.280 | return and then it just goes crazy again.
00:19:30.920 | Yeah, there's these virtuous and vicious cycles.
00:19:34.920 | And so let's paint a picture of what it would look like for it to start to boom again.
00:19:39.760 | So today, Fed funds at five and a half, and typically you're borrowing from a lender at
00:19:47.240 | let's say 200 bps or 2% to 3% higher than that.
00:19:51.840 | So you're going to be borrowing five, six, seven, seven to eight and a half percent.
00:19:55.840 | And somebody looks at that and gets sticker shock and nobody wants to pay 8% on a mortgage
00:20:03.600 | until they don't buy anything.
00:20:04.600 | Okay, so now let's say rates fall 200 basis points or 3.5% and you add 200 bps to that,
00:20:12.240 | you're buying at 5.5% interest rate rather than a 7.5%.
00:20:16.520 | And so all of a sudden, most of the market is pricing real estate at about 5.5% to 6%
00:20:24.160 | on the class A sort of high quality, industrial or multifamily.
00:20:28.560 | And so the market doesn't clear, like nothing, transaction volumes fall in 80, maybe 90%.
00:20:35.040 | So all of a sudden, there'll be a moment where either the interest rates will be par, is
00:20:41.400 | it neutral, or it'll be really clear, like imminent.
00:20:45.960 | And then the entire market will probably clear overnight, clear, like transactions will just
00:20:52.000 | skyrocket.
00:20:53.000 | And then all of a sudden, fund three will, as I said, the earlier funds will get liquid,
00:20:59.280 | they'll turn the money over and that money will then flow back into the market again.
00:21:05.120 | So yeah, this is always the way the markets work, right?
00:21:08.760 | They happen in these sort of like waves, just like we saw, I remember we went to short the
00:21:13.760 | market in February, 2020, because they were looking at pandemic and you're like, well,
00:21:18.000 | this is crazy.
00:21:19.000 | But it's peaking February, 2020.
00:21:21.040 | And then overnight, the market woke up to the pandemic.
00:21:23.440 | So like, I think overnight, the market will wake up to low interest rates.
00:21:27.760 | And once that's clear, we'll see a wave of transactions and then pricing will start to
00:21:35.200 | move.
00:21:36.200 | I think that's exactly right.
00:21:37.200 | I think there's a lull right now in the residential real estate market.
00:21:42.200 | Because I think individuals, well, first it's summer time, depends on when this publishes,
00:21:47.360 | we're going to be after summer, obviously.
00:21:49.080 | But I think a lot of people are waiting for the Fed to finally cut for the first time
00:21:53.440 | to see the actual result.
00:21:56.120 | And then I think a lot of individual home buyers are going to be like, okay, this is
00:21:59.880 | go time.
00:22:00.880 | We got a green light signal because once the Fed cuts, generally cuts multiple times over
00:22:05.720 | a long period of time, one or two years.
00:22:08.360 | And so it does seem like the horses are in the stable right now, huffing and puffing
00:22:13.080 | and ready to go.
00:22:14.240 | But people are just holding back, holding back.
00:22:17.300 | So in this regard, what is the right strategy at the very beginning of the Fed funds interest
00:22:24.400 | rate cut cycle?
00:22:25.960 | You said you wanted to – you wish you invested five times more than you guys did.
00:22:31.120 | But we're still at the beginning.
00:22:33.360 | So does that mean there's still opportunity?
00:22:35.440 | Yeah.
00:22:36.440 | I mean, there are some assets that are interest rate sensitive, right?
00:22:40.760 | So you saw, if you kind of look at the extreme, the long-dated 30-year mortgages that bankrupted
00:22:49.700 | Silicon Valley Bank, you saw treasuries fall 50% in value, the long-dated in October of
00:23:00.560 | 2023, almost a year ago.
00:23:04.620 | That's how much the duration on interest rates were just crushing value.
00:23:11.000 | So interest rate sensitive assets are like how you play moving interest rates.
00:23:17.760 | And so real estate is interest rate sensitive and so is debt, right?
00:23:21.960 | So it's like bonds and if you have a strong view on it, you want to get duration.
00:23:29.440 | So real estate is obviously a long-dated duration and so are other kinds of bonds.
00:23:35.160 | So that's typically how you'd play and then you'd have to get more tactical in terms of
00:23:40.320 | like where, what.
00:23:43.720 | And so I'll tell you what we've been doing.
00:23:45.920 | We try to boil things down to simplicity.
00:23:48.000 | I feel like simplicity is underrated and so population growth is the biggest driver of
00:23:54.040 | real estate.
00:23:55.240 | And so the population growth continues to be in only like four or five states.
00:24:00.800 | And it's wild to me, those four or five states last year had millions of people added.
00:24:07.520 | I mean, Texas, Florida, North Carolina, South Carolina, Georgia, Arizona, added potentially
00:24:13.640 | like, I mean, depending on legal and illegal and migration, I mean, it could be three to
00:24:19.640 | five million people.
00:24:20.640 | I mean, just astronomical.
00:24:22.320 | That is, think about how many apartment units there has to be built.
00:24:24.880 | Think about it like this.
00:24:25.880 | And that's one year, one, and it's probably next year, it'll be another million, 2 million.
00:24:31.640 | So that is just such a driver of real estate.
00:24:34.560 | It's not really priced into the market.
00:24:37.620 | It's really opaque.
00:24:38.620 | It's really hard for people to understand what's happening with immigration and migration.
00:24:44.400 | But if you get to simplicity, you know that drives demand for real estate.
00:24:48.600 | And so we've been focused on built for rent and apartments and industrial in those markets.
00:24:54.360 | We bought a big industrial building in Charleston, South Carolina.
00:24:58.320 | We bought one in Tampa, buying and building housing in Atlanta and Savannah.
00:25:04.720 | So it's like, to make great returns, you want to hit as many sort of growth drivers as possible.
00:25:10.520 | One is interest rates.
00:25:11.520 | One is population.
00:25:12.520 | You're going to get really micro in terms of which neighborhoods are going to get more
00:25:16.640 | growth versus others.
00:25:19.360 | And so that's how we've been playing.
00:25:21.160 | That's sort of our expertise.
00:25:22.660 | I'm sure that people have other views in terms of the bond market.
00:25:28.460 | We have been buying a lot of asset-backed securities actually too, or FASB, FASB securitizations,
00:25:35.800 | which is another way to play it, which is a little bit more obscure probably for most
00:25:40.280 | people.
00:25:41.280 | Yeah.
00:25:42.280 | Well, tell me about demographic shifts, because one of the reasons why I started investing
00:25:45.880 | in private real estate and in Fundrise is because I live in San Francisco, I'm stuck
00:25:51.020 | in San Francisco or Honolulu, very expensive cost of living area, but I like it and I want
00:25:57.800 | to diversify my real estate assets into the Sunbelt, the Midwest, higher rental yields,
00:26:04.840 | good demographic shift towards lower cost areas of the country, thanks to technology,
00:26:09.220 | work from home, all that good stuff, and illegal and legal migration trends.
00:26:15.880 | But the one thing that I do worry about, which is what I did worry about before 2016 when
00:26:21.440 | I started investing, is the endless amount of capability to build the supply side of
00:26:29.320 | the equation, whereas in San Francisco, New York City, Seattle, Washington DC, it's very
00:26:35.040 | hard to build.
00:26:36.960 | So how does one look at on the one hand, the positive of the demographic growth, job market,
00:26:43.560 | market valuations, and then the ability to build ever amount of new housing to meet that
00:26:48.880 | demand?
00:26:49.880 | Yeah.
00:26:50.880 | That was a concern for us and it really didn't play out, it didn't see oversupply until 2021.
00:26:59.320 | So we've been investing in that Sunbelt for almost a decade and finally in 2021, when
00:27:07.080 | interest rates went to zero and there was all stimulus, you saw a spike in new supply
00:27:13.960 | of particular rental housing, and then particularly in the Sunbelt, and then in particular, in
00:27:20.640 | these sort of like super dense locations like the Gulch in Nashville, like Austin, Nashville,
00:27:28.960 | it became really concentrated in certain markets where there was very little zoning constraints.
00:27:35.520 | You could build high density and money was cheap.
00:27:38.640 | And so we ended up, I think a lot of people who think about real estate think about zoning
00:27:43.480 | as the primary barrier like San Francisco versus Houston, but actually the cost of money
00:27:51.000 | was even more important and the cost of money got so cheap in 2021 that you saw this massive
00:27:57.760 | number of starts and those starts began delivering in 2024 and there was a concern that rental
00:28:07.000 | rates would collapse.
00:28:10.000 | And what surprised everybody in the housing business is that they didn't.
00:28:16.920 | And so two things are what sort of tactically what happened in the near term, and then we
00:28:23.160 | talk about the long term, tactically in the near term, what ended up happening is there
00:28:27.160 | was millions of immigration, illegal migration, whatever you want to call it, and that drove
00:28:34.120 | more demand.
00:28:35.120 | That was a surprise and it was mostly in these markets and drove housing demand.
00:28:39.040 | And second is that rates were so high, to buy a house last year, mortgage rates were
00:28:45.380 | high sevens, 8%.
00:28:47.040 | So they rented.
00:28:48.040 | It drove up rental demand.
00:28:49.800 | And so we ended up absorbing that, absorbing that rental influx of new supply.
00:28:56.080 | And that ended up being not as problematic with a couple exceptions.
00:28:59.160 | Let me just go with the longterm and we can come back to exceptions if you like.
00:29:03.160 | The longterm, now if you try to build an apartment building, you're going to be paying 9% interest
00:29:10.520 | rate probably.
00:29:11.520 | And so starts or new construction has fallen off a cliff.
00:29:16.600 | And so you look at the back half of 25, 26, and essentially supply is going close to zero.
00:29:22.400 | I mean, it's fallen off the lowest maybe in decades.
00:29:26.440 | And so we're likely to go into an environment where you have low supply, high population
00:29:32.560 | growth, high migration, low interest rates.
00:29:37.520 | And so apartments are probably going to go into a really bullish environment in the back
00:29:44.120 | half 25.
00:29:47.080 | And so I think apartments are likely to be a huge winner of this sort of like – coming
00:29:54.800 | out of this environment and so then see a huge price run.
00:29:59.760 | Got it.
00:30:01.080 | No, that makes sense.
00:30:03.160 | Again, it sounds a lot again like boom bust, supply, low supply, no supply, boom.
00:30:10.800 | Whereas demand seems to continuously rise relatively stable – in a stable fashion.
00:30:17.520 | I'm curious to know your thoughts on the coastal city markets, especially since there's
00:30:23.360 | innovation fund, you're coming to San Francisco more, you're meeting a lot of these companies
00:30:27.800 | that are based in the Bay Area or maybe based in New York City.
00:30:32.040 | Does your view of the coastal city markets change?
00:30:35.560 | Does it become a little bit more bullish based on what you're seeing out here?
00:30:38.400 | Yeah.
00:30:39.400 | I mean, I've been bearish on coastal markets and it's why we shifted – I've been real
00:30:43.560 | estate for 20 some years and we were all coastal investing in like 2011, '12, '13.
00:30:50.960 | That was where the growth was.
00:30:52.840 | And we shifted away from New York, San Francisco, LA, DC around 2015, '16.
00:30:59.280 | The reason we did is it got unaffordable.
00:31:01.680 | The prices were just outrageous and I just thought that over time that would matter.
00:31:07.920 | What's happened is that it's gotten more affordable relative to – or actually the
00:31:12.640 | Sunbelt has gotten more expensive and so the affordability gap has closed a lot.
00:31:18.680 | It's still more affordable than Sunbelt by far, but it's not as big a gap.
00:31:23.120 | I mean, just to give you a sense of – we were buying apartments in the Sunbelt for
00:31:27.920 | like $90,000 a unit in 2016 and now it's $200,000 a unit.
00:31:34.960 | Okay.
00:31:35.960 | That's a big move.
00:31:36.960 | What does it cost to buy housing in San Francisco?
00:31:40.560 | Apartments are probably $500,000 a unit.
00:31:42.600 | So the relative affordability I think is less and I think that's important.
00:31:49.200 | And there's still very little supply, which is keeping the rental market actually in some
00:31:54.160 | ways has been better in the blue cities.
00:31:57.400 | But it's so challenging when you look at what's happened with office.
00:32:01.200 | The collapse of office, there's been a lot of second order consequences and the biggest
00:32:07.560 | second order consequence in my opinion has been the collapse of downtown cities.
00:32:12.400 | And so you just take – I mean, I'm going to do New York as an extreme.
00:32:16.560 | With New York, there's a trillion dollars of real estate in New York City, right?
00:32:21.600 | DC, 50 million square feet is probably – I mean, I don't know what the number is, but
00:32:26.440 | you're talking about that real estate has lost half its value and that means that the
00:32:32.360 | city's tax bases are gored, it means nobody's down there, it means a lot of foreclosures.
00:32:37.400 | And so that negative cycle is going to hit cities, hit crime and it makes it really hard.
00:32:46.060 | I think that my experience is that you can keep it simple.
00:32:50.200 | You just want to be where the tailwinds are and where there's headwinds, maybe the price
00:32:56.040 | is worth it, but usually my experience is like it's so much easier to make money when
00:32:59.600 | there's a tailwind.
00:33:01.280 | And so there's the headwinds in the blue cities and I just – that's – I think that makes
00:33:06.200 | it tough.
00:33:07.200 | It's not – I mean, you can do it, but you have to really be good at sailing into the
00:33:10.980 | wind and that's like a lot of tacking and skill and some luck because you could see
00:33:17.940 | an environment like – so let's do some black swans.
00:33:21.440 | There's a recession and cities are hit harder and there's – this is what happened in '08,
00:33:27.200 | a lot of cities end up having like real maybe bankruptcy risks and things like that.
00:33:33.280 | Chicago could go bankrupt.
00:33:35.520 | Another one is Trump gets elected and he really passes policies that are bad for blue cities.
00:33:42.480 | That could really be problematic.
00:33:44.200 | So – and I think technology and work from home is not going to slow, I think it's going
00:33:49.880 | to accelerate.
00:33:50.880 | I think people are underestimating the technological impact of virtual reality, AI, driverless
00:33:57.560 | cars that I think will make working remotely even more attractive over time, over a decade,
00:34:04.120 | which I think is a headwind for downtown cities, blue cities.
00:34:08.120 | So all things being equal, it just doesn't seem like the uncertainty is worth it on a
00:34:15.560 | sort of global basis.
00:34:17.480 | Interesting.
00:34:18.480 | The way I look at it is two ways.
00:34:21.440 | One is you can move your money to the Sunbelt, Midwest, cheaper areas of the country to invest
00:34:27.560 | for higher yields, more passive income.
00:34:31.160 | The second way is if you live in a coastal city, a blue city, San Francisco for example,
00:34:36.440 | you just live in a place and take advantage of the region in the city that's farther
00:34:41.460 | away from downtown that's cheaper.
00:34:43.760 | So you invest for example on the west side of San Francisco, which is near the oceans,
00:34:48.080 | a lot more parks, a lot more space.
00:34:50.040 | It's less expensive and then you just buy up as much real estate there and it is downtown
00:34:55.760 | which is on the east side.
00:34:57.320 | Will it recover?
00:34:58.320 | It is recovering, maybe slower than expected and then you just kind of wait it out and
00:35:03.040 | see what's there.
00:35:04.040 | So there's like a micro geographic arb and a bigger picture, bigger country geographic
00:35:10.360 | arb which is being held by platforms like Fundrise which invest in those areas.
00:35:16.760 | Yeah, it's the same principle.
00:35:20.080 | It's just like I work from the top down to say, "Okay, we're in the nation, we're in
00:35:26.800 | the region, we're in the state, we're in the city."
00:35:30.080 | And you just want to look for that arb, that growth arb where it's less expensive with
00:35:36.120 | more growth and then affordability is like gravity.
00:35:40.720 | People flow to where it's affordable and nice.
00:35:45.040 | An interesting question is how much is policy, national policy, the election, how does that
00:35:54.360 | affect real estate?
00:35:55.720 | Because you have two policy platforms that are both actually fairly populist and just
00:36:04.040 | like Kamala Harris has $25,000 down payment assistance policy plus actually credits for
00:36:12.280 | builders who build entry level homes.
00:36:16.840 | There's worlds where that kind of policy could end up stimulating a ton of housing demand
00:36:22.600 | and housing supply and so that could be really consequential.
00:36:27.640 | And then Trump's policy, at least his platform is high tariffs, 10 to 60% tariffs on imports
00:36:37.040 | and so that could be really consequential to real estate as well.
00:36:41.160 | So there are definite uncertainties around the policy landscape that could really matter.
00:36:52.840 | Yeah.
00:36:53.840 | It really does seem like there are two things, Fed funds and straight cuts and the election.
00:37:01.840 | Those two things, everybody is just waiting because people are thinking, "Well, we're
00:37:05.960 | almost there.
00:37:06.960 | Might as well just wait to see what happens and then whatever happens, then we can plan
00:37:11.000 | accordingly."
00:37:12.840 | And I think for the presidential side, it's interesting because I don't think the president
00:37:17.880 | really moves the needle too much from our day-to-day lives or how we invest and it depends
00:37:23.960 | on checks and balances with what happens with Congress.
00:37:27.160 | But from Harris' point of view, if you provide a $25,000 credit for first time home buyers,
00:37:33.040 | the economist in me says, "Well, that means first time homes are going to increase in
00:37:37.400 | price by $25,000 immediately."
00:37:40.940 | Of course it's going to be gradual but I think the logic is, "Well, you have $25,000 more
00:37:45.720 | to spend on a home.
00:37:46.720 | I'm going to raise my price by $25,000 or at least by something because we know you
00:37:51.980 | have more money in your pocket."
00:37:54.160 | Does that make sense?
00:37:55.160 | Yeah.
00:37:56.160 | I went and read the policy and there's not enough detail to really be able to unpack
00:38:01.480 | it and have a good forecast.
00:38:03.280 | I think there's, as you said, there's like I think two or three possibilities and they're
00:38:08.360 | not mutually exclusive.
00:38:09.360 | I think it increases prices.
00:38:11.680 | Draws in demand, could increase prices more.
00:38:14.600 | But it could also like you're seeing actually today is there's no supply of existing homes
00:38:20.920 | and one of the reasons prices haven't fallen for single family homes is that there's no
00:38:25.880 | supply and prices set by supply and demand and so high interest rates lower prices for
00:38:34.120 | institutional real estate because real estate in institutional world is priced by yield
00:38:39.640 | but that's not how home prices are priced.
00:38:42.520 | And so there's a world where interest rates fall and that drives up supply a lot and then
00:38:50.320 | you could see prices fall actually.
00:38:54.720 | So, if you could bring more demand to market actually there could be kind of really dynamics
00:39:01.440 | there that are more complicated.
00:39:03.840 | And then the second is that we're fairly active in the home building business.
00:39:07.760 | We lend to home builders, we build homes, we have 10,000 lots that we own that we supply
00:39:13.800 | to the housing industry like the big home builders.
00:39:18.080 | And so I was sitting with our team trying to game out like kind of a scenario that would
00:39:23.240 | surprise people and they just give this scenario to you because I thought it was interesting.
00:39:28.320 | So, I know that a home builder if they wanted to could build a entry-level home for $200,000
00:39:36.480 | which they don't today because it's not profitable and the market is not there.
00:39:42.600 | And so, but they could supply $200,000 homes to market and with a $25,000 tax credit to
00:39:50.480 | home buyers for first-time home buyers.
00:39:53.560 | And then I think there's inner plan tax credits for home builders for first-time or for entry-level
00:39:59.920 | homes.
00:40:00.920 | There's a world where you could see $25,000 to the home builder and $25,000 to the home
00:40:05.120 | buyer on a $200,000 home.
00:40:09.520 | And so you could see like, I mean, that would be a 50% profit margin to the home builder.
00:40:14.920 | And so you could see a world and this is not, I mean, this is not necessarily what I'm forecasting.
00:40:19.240 | You could see a world where there's just like a huge incentive to build that product.
00:40:25.640 | And then, I mean, they would build it if there was demand for it.
00:40:30.480 | And I think what ends up being the limiting factor is actually they would need to be building
00:40:34.520 | it in the exurbs.
00:40:39.240 | So it depends on where you are, but it's probably like 45 minutes to an hour away from the city.
00:40:44.000 | And so do people want to live 45 minutes to an hour, hour and 15 minutes from the city?
00:40:50.240 | No, unless there's a technological breakthrough.
00:40:53.120 | So there are some constellation of events where Facebook introduced the virtual reality
00:40:57.320 | or something.
00:40:58.320 | It's a thing.
00:40:59.320 | This is not what...
00:41:00.320 | The reason why it's interesting to think about this is that these sort of surprises is how
00:41:05.080 | you make a lot of money and you own 10,000 lots and all of a sudden they're twice as
00:41:09.960 | valuable because of these sort of like two or three things.
00:41:13.760 | This is what happened with AI.
00:41:14.760 | This is what happened with pandemic.
00:41:16.920 | These shocks have these huge, I mean, look at Nvidia, right?
00:41:21.680 | Huge consequences to value.
00:41:23.740 | And so it's not because I think it's likely, but because I think it's asymmetrical and
00:41:28.160 | it's impact.
00:41:29.160 | Got it.
00:41:30.160 | No, that makes sense.
00:41:31.840 | Well, Bet, it's been great chatting with you.
00:41:34.400 | It sounds to me like there are a lot of tailwinds and the main tailwind is fed funds cuts and
00:41:41.160 | mortgage rate declines over the next one to two years.
00:41:45.460 | So I think I'm bullish.
00:41:46.760 | No, I know I'm bullish.
00:41:48.640 | And if I had $5 and I had to split it between investing in stocks or real estate, I would
00:41:55.120 | invest $3.5 in real estate versus $1.5 in stocks right now.
00:42:00.440 | How would you split that $5?
00:42:02.520 | I'm very worried the stock market is overpriced.
00:42:06.840 | So I would do real estate and bonds and venture.
00:42:12.880 | I just think the stock market at the moment is pricing no recession.
00:42:17.140 | And I think that chance of a no recession is low, but I'm not in the consensus today.
00:42:22.280 | Okay, that's good.
00:42:23.280 | So $0 out of five in the stock market.
00:42:26.360 | So out of the $5, how much of that in real estate versus bonds?
00:42:29.960 | I mean, I'm splitting it across venture, fixed income or credit, and real estate, I don't
00:42:37.160 | know, third or third or third or something like that.
00:42:39.960 | They're all tailwinded today.
00:42:42.640 | And so I'm not saying that any one is that much better than the other.
00:42:49.880 | I think the stock market potentially has...
00:42:52.840 | If there's a recession because interest rates are coming down, that's the thing, typically
00:42:57.040 | interest rates come down before the stock market collapses.
00:43:01.400 | And the reason those interest rates come down is because there's a recession and the equity
00:43:06.360 | market is pricing no recession and the credit market is pricing a recession.
00:43:11.560 | So they have two different markets with two different opinions and the credit market is
00:43:16.440 | actually the much bigger and usually the more predictive market.
00:43:20.880 | Yeah.
00:43:21.880 | But the credit market has been wrong for the past 18 months.
00:43:24.280 | Totally.
00:43:25.280 | Right.
00:43:26.280 | So again, this is my view and it's possible that the equity market is right, but there's
00:43:31.160 | just like – I think the downside in the stock market is much more than the upside
00:43:36.800 | today.
00:43:37.800 | Yeah.
00:43:38.800 | I agree with that.
00:43:39.800 | Well, in terms of where I'd allocate my capital between real estate and stocks, yeah, okay.
00:43:43.520 | Maybe it's $4 to real estate, $1 to the stock market.
00:43:46.040 | I can see that.
00:43:47.040 | All right, Ben, well, it's great chatting with you.
00:43:50.280 | Let's catch up again maybe after all the cuts start and see what happens.
00:43:55.680 | Yeah.
00:43:56.680 | Okay.
00:43:57.680 | All right.
00:43:58.680 | Excellent.
00:43:59.680 | Thanks, Sam.
00:44:00.680 | Thanks.
00:44:01.680 | I hope you enjoyed my interview with Ben Miller, co-founder and CEO of Fundrise.
00:44:04.680 | If you want to invest in Fundrise, go to financialsamurai.com/fundrise or click in the show notes below.
00:44:12.920 | I have personally invested over $270,000 in Fundrise to gain more exposure to Sunbelt
00:44:18.800 | real estate.
00:44:19.800 | I believe in the long-term demographic trend of people moving out of expensive cities to
00:44:25.280 | lower-cost areas of the country thanks to technology and the internet.
00:44:30.480 | Also, I believe in private growth companies and particularly in artificial intelligence.
00:44:36.560 | It is the technology of our lifetimes and I want to gain exposure.
00:44:41.040 | Finally, you can join 65,000+ readers and subscribe to the Financial Samurai newsletter
00:44:47.240 | at financialsamurai.com/news.
00:44:51.360 | Take care.
00:44:52.120 | [music]
00:44:57.120 | (whooshing)