On-Demand: The State of the Multifamily Market

Scott Aiese:Thanks, Lisa, and thanks Jordan and Rahul, and the whole EisnerAmper team for having me. I've enjoyed these webinars through our COVID days together and pleased, to be part of today's an honor. When we're thinking about 2021, I feel pretty optimistic. There's a vaccine out. There's 10 million people already vaccinated. Hopefully, by this time in August, the vast majority of the country will be. I think a lot of our comments today from JLL will be about where do we see the world, if we fast forward, in 12 months, today and where do we want to be when that happens? We prepared a few slides. I think the idea of the conversation today is going to be, what are the national themes? What are the local themes? How to make sense out of that, and how do you stay optimistic with all the headwinds that are facing us on a day-to-day basis?

Before we even jump into these themes, I think it's helpful to think about the Treasury, the U.S. Treasury, which is the benchmark for all investments, but definitely the benchmark for real estate. Today, it's about 1.16 as of this morning. If you went back a month ago, it was below 1%, 17 basis points below. Go back three months ago, it was 35 basis points. If you go back six months ago, it was 50 basis points below. It's easy for me to get into a conversation with a lot of my clients that say, "Hey, how come we're locking a rate today at 50 basis points wider than we did in August?" The fact of the matter is, if you go back a year ago, the 10-year T was 185. I think we're still operating in a historically low interest rate environment, and that's really good for real estate.

The four things that we're thinking about, from a national perspective, are first like the economic and the political influences that are facing us. In the last month, the center of gravity in Washington has shifted left in the Senate, the House, and the White House. What's that going to mean for things like 1031 exchanges and capital gains? Then, what is it going to mean for the positives like infrastructure spending, and support for some of the states that were losing a lot of national support like New York, and California, and Illinois? That's one thing.

The second thing is, allocations are increasing. We're going to all benefit from that because allocation into hard assets continue to increase year-over-year, and the low interest rate environment is forcing more investment to go in that direction. A good example of that is in 2020, our fundraising business had a billion dollar investment from one single investor, which was shockingly large to me, and also shocking that in 2020, a closed-end equity fund would get that kind of commitment. It came from the EU, which is very telling as well. In the EU, investors are facing negative interest rate risk, and just the idea of putting your money in an investment and getting less in 10 years is daunting. That's some of the tailwinds that we're going to experience.

I think that the other thing to think about when we think about multihousing is the property type interest divergences in the global capital markets, and the equity markets, and commercial real estate. Clearly, everyone is talking about industrial, and life sciences, and multihousing nationally. People are very bearish, for obvious reasons, on hotel, and retail, and things like that. The question is, is there a breaking point where people say, "There just isn't enough yield to sustain my minimum return for me to be the next buyer of multi at a lower rate." The firm's view here at JLL is that there actually is room, and we think that there is continued tailwinds for multihousing investors because, again, where the interest rates are and where the 10-year T is compared, on a global basis.

Then the fourth thing that we're thinking about dovetails with the first three things, which is liquidity. How does that liquidity compare in a historical standpoint? Right now, there's about $200 billion in the closed-end equity space. That's just 11 billion below the 2019 record. 2020, we didn't see much of that money deployed. I think there's liquidity across all asset types. Even people would say to me, "Hey, there isn't liquidity in retail" or "There isn't liquidity in hospitality." There is, but I think, 2020 was a year of the big asset cap, where there just wasn't much transactional activity if you weren't in one of the favored asset classes.

I think, often, our fundraising clients ask us, "How do we beat the benchmark? How do we outperform the NCREIF for off years?" I think it's this right here and saying, "Okay. Where's the herd going? How do we play with the herd to benefit from the capital flows?" Also, "How do we do our own thing in order to get a little bit of alpha?" I think across all equity there's cap, but I think the thing that happened in March was the debt markets froze. Since then, we've seen all lender types come back into the space. This is flipping around on my end.

We've seen all lender types come back into the space and, I think, in the multihousing space. There's a slide later that just talks about the agency and how much the agencies have really just benefited in 2020, and the borrowers have benefited. When we zoom in and we say, "What are the New York themes?" There's three themes we highlight here. One is, we should not forget that 2019 ended with a record amount of office occupying jobs. Almost a million and a half office occupying jobs. Later on, there's a slide that talks about the bottom-up verse the top-down impact on the labor market.

Frankly, most of those jobs have been preserved through 2020, and we expect them to be growing in 2021, in fact, in New York. I think the other two things in New York are the geographic investment trends. We're seeing just a constant push toward the Sun Belt migration. The no income states, the business friendly states. How will we continue to track that, and what will that look like in 2021? We're closely monitoring that, and we have 26 offices nationally where we're seeing those capital funds.

I think the last thing is just tech, and how is tech going to affect real estate? I think COVID's accelerated everything, and I think tech is definitely one of those. We're seeing that with the work from home. Many of you are watching this from your home offices. We're seeing that from, in the retail space, with this huge acceleration from brick and mortar, e-commerce, where we saw 10 years of expected growth happen in 2020 with conversion of brick and mortar to e-commerce, so all things that we're watching very closely.

I think this is one of the things that any New York investor should get excited about. When you look at New York and you look at the cap rates that are achievable in New York, it provides significant value compared to the global markets. You look at Tokyo at 3% and New York at four and a quarter, a point and a quarter of expansion. In Japan, all the sovereigns are telling us this year, and the pensions in Japan are telling us this year that they want global real estate exposure, and today they have zero. I think that's going to be one of the major benefits to New York landlords in 2021. You look around the rest of the world, in Europe where cap rates are sub-2% in certain markets. Just feels like there could be capital flowing to the U.S. I think the dollar value is something just to monitor throughout the year because as the dollar gets cheaper, if it does, that's just a discount for these global investors to buy U.S. denominated real estate.

As we look at the cap rate spread between the J.P. Morgan cap rate index, the NCREIF cap rate index and the RCA cap rate, the RCA is a private index, NCREIF is kind of institutional, all institutional real estate, and then J.P. Morgan is, effectively, the REIT index. We're 50 larger basis points above the long-term averages in terms of the spread between U.S. treasury rates and those indexes. If you go to 2007, that spread was actually negative, which we all know what happened in the years after that. We think there's room for compression, continually, as long as there's sustained revenue growth and control over the expenses, from an underwriting standpoint.

This last slide was about national cap rate trends to treasuries. This one's just about New York. If you look at this, this shows the spread between, call it 1.1, today's U.S. Treasury, and cap rates around five, plus or minus, depending on which vol you're talking about and the growth there. 350 basis points for low-risk real estate is exactly the rotational trend that we're seeing global investors start to pivot towards, as long as those assets have minimal CapEx requirements over time. That's why they're hesitant to lean into hotel or office at this point.

I thought this slide was interesting to share to a New York-centric multihousing group. It's easy to think about multifamily from a context of supply, and how much supplies being added to the market. Over the last 20 years, rent growth has almost one-to-one correlated with the average private industry annual wages, and I think that's so important as we think about job growth, job creation, attracting new industries to New York, and the diversity of the industry, of the office occupying workforce.

The next slide just shows different recessions. The amount of time it's taken to recover from those recessions. The other three recessions here are financially oriented. So far, this has been a health oriented recession. Hopefully, once we get the politicization out of this recession and vaccines distributed, ULI, their base case is 18 months, which puts us in September of next year. They're optimistic case is 15 months, which puts us in June. Their bearish case is like 30 months, which puts us, call it next summer or two summers from now.

I think in all three of those scenarios, you're at a shorter recovery period than we've seen in the last three major recessions. This is pretty important when we're thinking about the bounce back from this recession, and we're talking about the 2020 recession. On the bottom, you'll see that the office occupying job losses represent only 20% of the job losses in New York, verse 80% nearly in the last two recessions. It should be very helpful when we think about the recovery out of this recession. Again, remember, this whole conversation is thinking about, where do you want to be in 12 months from now when you're starting 2022?

A couple quick points. Just, it's hard not to talk about debt in a conversation where we're finishing a year where debt was down about 20% and investment sales were down about 84% in New York. Last year, the multihousing debt space was down about 17% nationally. Then you look at, hotels were down 76%. The agencies have a mandate to lend into illiquid markets, and that's exactly what they did March through December. The great news that came out last week from Fannie and Freddie is that their allocations are going to be $80 billion in 2021. We went into 2021 thinking that they were going to be 70 billion, so they increased their allocation by almost 15% last week.

 I think this slide is really important just to think about, a lot of our clients are telling us, "Hey, we're going to wait for the bottom. We're going to wait for a meaningful “Blood in the streets is the term we keep hearing. Just keep in mind, there is a tremendous amount of liquidity on the sidelines, and people are looking for places to invest. When we think about where to be in a year from now, we're not necessarily thinking about how much the market can fall because there's a natural floor, which is liquidity.

This is just context around when we went into the 2007 recession, over 50% of the market was CMBS. That shut off for good for the next several years. We went into the 2020 recession, and it was a very diversified lender pool. I think the big difference that we're seeing as a firm is that the last three or four years, most transitional deals were structured with senior mezz from third-party, different sources of capital. In 2007, they were often financed through banks' mezz programs, so the bank was giving zero to 85%, rather than this time around, where it's a third-party mezz lender, who's trying to protect their position, and will have a much more kind of a market oriented approach and quicker approach.

We think there's a lot of things that will support a bounce back quicker than what has been previously thought in the New York multihousing space. I think I'll leave the group with just the comment that the calendar's turned. In 2021, we're seeing a record level of BOV requests for new property sales. We're seeing constant dialogue with all the special servicers and the mezz lenders about trading assets. We think that 2021's going to be a great year. I think at this point, I'll turn it over to Jordan. Thanks again for having us today.

Jordan Amin:Thank you, Scott. That was terrific. I like, he ended on an optimistic, positive note going into 2021 and as we would, our panel. Very interesting information for us to think about. I'm sure our panelists will expand on some of the topics that you covered. Again, I wanted to thank you for being here today. I thought that was fantastic.

Good afternoon, everyone. I'm Jordan Amin. I'm a partner at EisnerAmper. I'm the firm-wide leader of our Private Business Services Group, and a member of our national Real Estate team. I focus on real estate clients on the tax side and a wide variety of industries, of assets. We're here today to talk about the multifamily space. Since that's of greater interest to the folks listening to my biography, let's jump right into our panel discussion. Before we start, I do want to mention, that I think was mentioned at the outset, that there's a place to submit some questions. If you have some questions, as we're going through, for our panelists and you want to submit those, we're going to do our best to leave a few minutes at the end to throw some questions at our panelists and see how they answer on the fly. I'll do my best to keep them engaged as we go through.

As I mentioned, we have a great panel for you today. I'd like to start by introducing our panelists. We have Arik Lifshitz, chief executive officer of DSA Property Group. Greg Gleason, president of Corigin Real Estate, and Eddie Setton, who's the managing partner at Shamah Properties. Gentlemen, I want to thank you on behalf of the firm and everyone listening for being here today. We appreciate your time, and looking forward to your insights.

To set the stage, I'd like you to each give just a brief introduction of yourself and a little about your portfolio and business model. Just the highlights, and then we'll get into some more detail. Arik, would you mind leading off?

Arik Lifshitz:Thank you. Thanks for having me. It's a pleasure to be on. I also want to thank Lexi for helping me out with all my technical issues. Appreciate that. DSA Property Group, we're an owner-operator. We own mostly residential property in New York City. We're oriented mostly in Downtown Manhattan, but we have buildings Uptown, in Queens, Brooklyn as well. Just by chance, we happen to cater mostly to young professionals, a lot of roommates, some students, but mostly tenants in their 20s and 30s, somewhat transient. That's our portfolio.

Jordan Amin:Terrific. Thank you. Greg.

Greg Gleason:Hey. Thanks, Jordan. Corigin's a real estate owner, operator, developer, and lender. We focus primarily in residential, so luxury for-sale, multifamily, and student housing. We're New York-based, so we have a student housing and multifamily portfolio in New York. In the last roughly five years, we've been more active in other markets, the Southeast and the Southwest from an acquisition and development perspective, and we've been pretty active during the pandemic. Mostly on the development front is where we've done the most opportunity on the front-end.

Jordan Amin:All right. Eddie.

Eddie Setton:Hi, Jordan. Okay, thanks. Thanks for having me. Eddie Setton, Shamah Properties. We're multifamily owners and operators. Our portfolio is primarily focused in New York and New Jersey, although we've been branching out to different markets in the Southeast and other markets, locally. We are multifamily buyers and operators, and I've been doing so for the last 40 years, traditionally focused on a combination of value-add and core product.

Jordan Amin:All right. Thank you, gentlemen. I think it goes without saying, but this has been a year unlike any other. I don't want to get too far into the weeds of operations, but I thought it would be helpful for the audience, just if you could recount your experience in the past year. Maybe walk us just through a little bit of the roller coaster that was this past year. What we started back in March, when the pandemic really took hold. What we were anticipating, what we ultimately experienced, and where we are now, maybe in terms of collections, vacancies, or anything that you think would be particularly interesting to get us to where we are now. Greg, do you want to take this one first?

Greg Gleason:Sure. Thanks, Jordan. It's been a really interesting and mixed experience. Our student housing portfolio is largely locked up in master lease structures with high credit tenancy in New York University, Berkeley University, so it was certainly nerve-racking early on, but those master lease structures have helped certainly insulate us. Then, the different geographies have had really divergent exposures. Manhattan got hit a little bit harder. Our renewal rate was decent, but it was really difficult to fill in the vacancies during the pandemic. Whereas, by contrast, we were leasing up a 400-unit complex in Raleigh. We leased 50% ahead of our underwritten expectations. It's like the pandemic didn't happen there.

Then there was places in-between. In the Northeast, we experienced mixed results. We haven't been able to increase, or we haven't pushed our rents. Certainly favoring renewals and taking a conservative posture. There was a little bit of a tick up, certainly in vacancy. Then on the collections front, it's been modest increase in collection issues, slightly higher incident level, and then they tend to sustain longer, so maybe two, three points of economic vacancy driven by collections in the other markets.

The one area that's been hardest hit is the ground level retail in our multifamily portfolio. Our posture there has just been to keep the tenants alive, so to speak. We want somebody to turn the lights on when this is all over, so we've been very aggressive working with tenants, both in absolute relief, and then structuring flexible percentage of rent type of structures, but that certainly got hit a lot harder than the multifamily components of those buildings.

Jordan Amin:Terrific. Thank you. Eddie, are you seeing similar things? What's your experience been?

Eddie Setton:Similar. We've definitely felt it on the vacancy front, that units are filling slower at lower rents in some portions of New York than they had in the past. I would tell you that even different pockets of New York operate differently, so the stuff that we have in Upper Manhattan operates different than the stuff that we have in Brooklyn. We're definitely seeing concessions given out more than we ever were in New York.

In terms of collections, going back to March, nobody really knew what to expect. I would tell you, very early on, collections were very strong, especially while stimulus was being given out, and the expanded unemployment benefits were being given out. We did start to see a tail off on collections as that burned off. Now, we're waiting to see if that stimulus comes back, and if those collections get a little stronger, but we're not sure yet what's going to happen there.

Jordan Amin:Terrific. Arik.

Arik Lifshitz:Much the same as everyone else. Really, New York, you can't paint with broad brush strokes. Every building is its own living business, in a way. Some buildings do great, 100% collections or 100% occupied. Other buildings, the opposite. It was case-by-case. Certainly, one thing I would say is correct, I think with a lot of us, this started as a collections issue. In early March, April, as the pandemic was becoming a reality, everyone was worried about collections. No one I knew was asking about vacancies, thinking that this would extend as far as it has, as long as it has. I think, for us, the vacancies started hitting in May, in June, when a lot of leases turn over.

Again, as I mentioned before, a lot of our tenants are young professionals. They all moved away. Everyone moved out, so whether it was people who were in their 30s moving back home to mom and dad, or even some tenants who decided to take a year off and live on a lake somewhere, and who could blame them? If they didn't have to be in New York, and New York was kind of shut down, just no one was here, so that was an issue.

Then, I think also, the direction people thought they were hearing from government. Even tenants with the means to pay their rent, some of them just decided not to. We have one building where someone organized and kind of encouraged seven or eight of their neighbors just to not pay their rent, and they're still not paying their rent a year later. These are people that haven't lost their jobs. They're just, I don't know, either just trying to negotiate and play the game, or just hold out for maybe, who knows what they're thinking? We certainly had some of those problems as well, but that's targeted in one building, and other buildings are doing perfectly fine.

Jordan Amin:Thank you. I'm glad you mentioned that. I was going to ask. We got through three panelists, and you read a lot about, there's a lot of publicity around eviction moratoriums and I was curious if you guys had experience with that. All right, I guess you have a little bit of that. Eddie, Greg, anything you're experiencing related to that? Or is it a little overblown?

Greg Gleason:We've currently invested a lot more personal resources into having relationships with our tenancy, and we think that that helps. Usually, there's a more amicable resolution than an eviction proceeding, in most cases. That said, we do have some longer-term delinquencies and we haven't had the mechanism to enforce that, so it has had an impact, but it really has been, so far, it's been marginal. I would say in Manhattan, most of our properties are relatively higher rent point, and when you have younger professionals some of those are actually, are backstopped by co-signers, so there's alignment, even though theoretically, it can be gamed for credit, reputational reasons. It hasn't been a behavior driver.

Jordan Amin:Thank you. Eddie, anything, you want to jump in on that?

Eddie Setton:Yeah-

Jordan Amin:I didn't mean to jump on you.

Eddie Setton:No, that's okay. I was just going to say that the impact of the eviction moratorium has definitely, I mean, we do see in our collections that there are some tenants, and I'm saying all, but some tenants who are just taking advantage of the system, who are just waiting it out for whatever reason it is. Like everybody else said, it's really on a property-by-property basis that it happens. We, early on, made a very big effort for our teams to be in touch with all of our tenants, for the people who were struggling, to try to work out plans to make payments, and just trying to get collections to the best spot as they could. It's definitely been more of a struggle than it has in the past.

Jordan Amin:Terrific. We're going to come back and talk about New York in a little more depth, but I wanted to ask you guys about debt for a minute. Can you give us some perspective, what you guys are seeing out there from your lenders? I think it's important for the audience if you guys can tell us what you're experiencing in the market. Eddie, any recent financing activity or experiences that you think are instructive?

Eddie Setton:We're always financing something. We've gone to our current lenders, back oftentimes, and they've still been open for lending. Of course, they have different underwriting that they're using today. I'm sure I'm not the only one experiencing COVID reserves that are being taken, like high COVID reserves that we have to put up on every loan that we close. I would tell you that many, many times, right now, the most aggressive lender and the best option has been agency debt, although we're doing a lot of bank debt, but agency has been very aggressive lately in terms of their quota.

Jordan Amin:Thank you. Greg, I know you've had a couple of, you mentioned earlier, development projects and acquisitions. Can you share with us what you've been seeing and how the debt environment's impacted the decisions you guys are making?

Greg Gleason:I think the debt environment's really been a driver of the decisions, almost more than anything these days because the agencies, as everyone's mentioning, it's so divergent in the terms that they can offer in the current environment. Finding deals that work well for that type of financing is a part of the strategy. What we have seen within the agency is the FHA product offering, if you can find a deal that works well for it. It's a relatively rigid structure, but it's extremely compelling right now. It has offered some really interesting opportunities for us. We actually, we have a few projects that we've closed since pandemic, a little over 1,000 units in development, all under the FHA program, the (d)(4) development program. The rates that you can achieve there, it's not just the rates. I mean, the rates are extremely compelling, but it's also you have the built-in permanent financing so you can take a more aggressive position because you're hedged on the backend, that you don't have the takeout risk, which is a major concern for us.

We did take-out one of our properties out in California at completion with CMBS execution. We kind of snuck it in under the wire right at the beginning of the pandemic. I think we were the last one in the issuance to close, but the takeout is nerve-racking when times are uncertain, so having that built into the execution is really nice. Just from a rate perspective, so for 43-year financing, three years with 40 years permanent, three years construction with 40 years permanent in that structure, and roughly 85% leverage, we locked in rates inside of three and a quarter, which is just incredible and, obviously, results in pretty compelling yields.

Jordan Amin:That's terrific. I'm sure it helps make the decisions a little bit easier to move forward. Arik, what are you seeing?

Arik Lifshitz:I just want to say I have nothing but the highest praise for all the local banks here in New York. I think they really stepped up to the plate and really helped a lot of people out with their forbearance terms that they offered. By now, of course, most of those options have expired and people are either not paying or digging into their pockets to pay the monthly mortgage payments. I think it'll be interesting to see, at least in New York, where I'm involved pretty much exclusively. Rents are certainly; forget it. No deal could possibly underwrite at the same standards as they did last year with rents now where they are, and banks looking closer at the concessions, and not looking at a net effective rent versus a sticker rent when a tenant's getting a month or two free, and only factoring in what the tenant's actually paying.

It will be interesting to see what happens over the next couple years. Again, I think a lot of borrowers are going to have to pony up a few dollars and lower their debt balances in order to refinance, so we'll see what happens. At least in the meantime, the banks have been great and I think a lot of the local community here has been very thankful and appreciative.

Jordan Amin:Thanks, Arik. You're all heavily involved in New York and a day doesn't go by where you don't read something about the death of New York in an article, and that New York's never coming back again. In that light, with pretty high vacancy rates, comparatively, in the past and estimated decrease in rents, 5 to 10% depending on where you get your statistic on, can you share your perspective on investing in New York City given the current economic climate or other climates? While I don't want to be overly political, I do know that the political climate in New York and other areas impacts your investing decisions, so maybe we could spend a little time talking about New York, and what you think in the short-term, what you're experiencing. Arik, I know you have some thoughts on the matter, so why don't we start with you?

Arik Lifshitz:I have thoughts. I don't know if everyone wants to hear them. It's pretty rough here. I mean, we took a couple weeks off in March during that first pause, I think they called it, and then we were pretty much back to work. It was ugly. It's been an ugly year since April, what is it? Seven months, eight months, since April. The streets are disgusting. The homeless have really taken over. Long-time New Yorkers are looking over their back constantly. We're not just talking about the subway. Even just walking to the grocery store. Just the other day, I was walking from a friend's office, it was 10 blocks away from my office, and was accosted by just crazies. You almost run away in the other direction. Of course, I walked, but it was scary.

You really have to be concerned with the long-term direction that New York is going in. Is the city going to prioritize a mentally ill, drug addicted homeless person over a taxpaying citizen? We all have empathy, and we all want to help out those who are less fortunate, but we need to have a base of hardworking New Yorkers to pay for that. Not just that, it's also the right thing to do. Let's also be cognizant and recognize the sacrifice of regular New Yorkers. I think we need to get some of our priorities straight as well. Just the other day, I opened up, I got sanitation tickets from the city.

Christmas morning, at 1:00 a.m. on December 25th, they're issuing sanitation tickets. Talking to some of our retail tenants, bars, restaurants, who even in a short period of time, when they were allowed to open, getting 30, 40,000 fine from the state Liquor Authority because it started raining when they had some people outside, and they quickly huddled under an awning, and the inspector happened to have been there and issued tickets for not socially distancing. I think there just has to be some reasonableness to the way the city, the way the bureaucracy legislates and how they practically go about following the rules. Then I think you'll see businesses start to come back, but who knows how long it's going to take? At least in the meantime, it's just not looking good.

Jordan Amin:Oh, well. Thank you. In the short-term, you're not bullish-

Arik Lifshitz:Not bullish.

Jordan Amin:Additional investment dollars into New York.

Arik Lifshitz:Real quick. If rent's going down 25%, and you showed me a building for sale 25% below where it was last year, come on. I can't buy it right now. Not now. Sorry. By the way, in the last recession in 2008, 2009, 2010, we were one of the first ones back in the market buying, investing. We don't share the same bullishness this time around.

Jordan Amin:Eddie, how about you?

Eddie Setton:I'll tell you, there's a couple of things going on right now, and I think some are more easily overcomeable than others. I'll tell you. I know what Arik's talking about with the way the city looks right now. I think that's a short-term issue that will pass. I think as schools reopen, universities reopen, the kids come back, I think, as offices start to reopen, I think people do come back. It may not be exactly the same as it was last year at this time, and I don't think anybody's expecting that, but at the same time, I don't think this is the new normal for New York, for the boroughs and the city.

I know you don't want to talk about it too much, but I think the other thing that's really impeding investment in New York, at least in multifamily, are the rent stabilization laws that they put into effect last year. They really disincentivized anybody from investing into their properties or into new product. Even if I was telling you that it's, okay, rent stabilized buildings are different than free market buildings, and free market is going to be okay, it's an overall theme that's going on politically. I think a lot of people don't trust how the state is going to put rules into place for anybody, even free market units.

They could easily put some controls there, even though they're free market. I think that's the harder thing that we're going to have to overcome going forward than just the COVID results of what's happening right now in New York. Because when you look at the rest of the country, or certain parts of it, investment in the Southeast, Florida, the Carolinas, Georgia has been very strong through COVID, but then when you come back to New York, it's down a staggering amount. I think that's the political plus the COVID, and I think but once COVID goes away, you still have the political issues ahead of us that have to get overcome.

Jordan Amin:Eddie, I think you're going to steal my job because I think that's a great segue into Greg. Greg, what I wanted to ask you on that topic was, I know you mentioned that you have been expanding into other geographies, particularly some acquisitions during the pandemic. Is there anything you can share with us contrasting what you're experiencing with your properties in New York, verse some of the other markets that you're in? Whether it's a little bit of an easier political environment, or whatnot.

Greg Gleason:Yeah. It's hugely divergent. This is an interesting recession because it's almost completely inverted. Typical recession, it's a flight to quality and inner-Manhattan is where you want to be. It goes down the least and recovers first. Here, because of the pandemic, it's the exact opposite. The high-density, urban living's affected more dramatically. Yeah, that's clearly, it's just not the political. I mean, COVID has disproportionately hit New York versus some of these other markets. It's certainly easier to build in other markets. There's higher visibility and you can get quicker to construction and execution. Part of it just has to do with you can build more quickly on a 12-acre plot than you can in an inner-city environment.

I think with respect to New York, and I think all of these political considerations, theoretically, can be priced in. Where we see it as a difficult investment environment, there's two real issues there. One, the yields are low enough and the debt that you can put in a property, it's not very compelling right now. The community banks have done a really nice job of staying in it and holding their relationships. We've been able to refi with them, but they're not offering higher leveraged, compelling rates, so you're not able to tap into this low interest rate environment in the same way.

Then also, it's not just the political risk but also the tax base risk that we're worried about in the medium-term. Real estate taxes keep creeping up and eroding the margins, so you get hit from both sides, the revenue and cost side. We do believe longer-term in the city, but I just think that there's a lot in the way right now, and it's not necessarily priced in. We'd be willing to be active again in New York, for sure, as soon as we see a lot of these variables price through the asset prices but so far, we haven't seen it. I think that there's a lot of capital, a lot of liquidity that's active in the city. We expect that to keep pricing up, at least for a while. I think, as the other panelists on here would probably agree, long-term, I think we're all bullish on New York. In the short-term, these headwinds are a lot more difficult than they are in other markets.

Jordan Amin:Thank you. Eddie, we had some requests for you to run for mayor, so you should consider that as we're moving forward into the next cycle. Seriously, I know you've mentioned that New York is a tough environment and Greg, you're invested in some other areas. Eddie mentioned, you're looking outside the city, and we had the Sun Belt migration that Scott mentioned earlier. In addition to just looking geographically in different places, being that you guys are primarily multifamily, have you considered movement into other asset classes, or is multifamily what you do and where you plan to stay? Greg, you want to lead us off with that?

Greg Gleason:I honestly think where we've been investing has been a direction we've been trending. The pandemic has only just accelerated it further. I don't see us moving in a big way outside of multifamily. We just think that it's a stabler asset class than most others. It's an asset class we know very well, and so we haven't seen a compelling reason to steer away from that. I don't see it in the near-term. I see us more doubling-down than backing off.

Jordan Amin:Eddie, what do you think?

Eddie Setton:Yeah, I would agree with that. We're really not looking to shift into different asset classes right now. We're very good multifamily buyers. We know how to operate those properties well. We know how to underwrite them well. It's not to say we wouldn't look at other asset classes, but our main focus would still be multi.

Jordan Amin:Arik?

Arik Lifshitz:Yeah, same here. We'll wait this out, and wait for things to improve. Every time we've tried branching out a little bit, it never worked out as planned. It's the famous advice, "Just stick to what you know," and what we know is New York City multifamily.

Jordan Amin:That's fair. I figured you might have a hot tip on some other asset class that you could give the folks watching from home or their office. We talked about, briefly, you guys touched on the rent control in New York. I know you talked about how tough that is, but do you see any changes being made to that? Do you think it's going to get better, or do you think it's going to get worse? Arik, you can start, since you're on the screen still.

Arik Lifshitz:Good question. I'm not a political expert, but following what happened on the state and local level, it looks like those who are calling for a decommodification of housing and more rules and regulations have only gained more power. Reading the tea leaves, kind of what Eddie was saying, to what Eddie was saying before about maybe free market units are now not subject to rent regulation, but the possibility that they will be down the road is certainly a real fear of ours. It's not looking good.

It's not just that. Also, everyone talks about those big items. No one talks about the smaller local laws that have been passed. Every year, it's more, and more, and more. It's funny. Just the other day, I was working on local law 152, which means that there are 151 other local laws, by the way, just for that year. Every year, they're passing hundreds of local laws, it’s just like, we're trying to keep track of everything. Each one of these laws costs money, so it's just a constant barrage, almost impossible to stay on top of, and we do our best, but it's not looking good. It's looking like it's going to get worse before it gets better, unfortunately.

Jordan Amin: Eddie, Greg, either of you have a different perspective, or are you kind of in lockstep?

Greg Gleason:I think that's probably right. I think a lot of the mechanisms that were in rent stabilization laws went from being reactively, so I think it was realized that you need to incentivize reinvestment in buildings, and so some of these provisions came into the law. I think that needs to probably happen again once you start to see it drop off, and reinvestment in properties. Now there's some realization that the laws need to be modified, but that's probably going to be reactive, and that's going to take some time.

Eddie Setton:Yeah, I wish I had something better, but I really have to agree with that. Nothing's going to change in the short-term, at this point, unless something pushes it off a cliff.

Jordan Amin:Okay. Given what we've talked about, it appears, if I can summarize that if we look three years out, you guys are going to look to be opportunistic in New York, and look for some areas outside of New York that might be a little easier to invest in. How else do you think your business may look different in three to five years, or not at all? Eddie?

Eddie Setton:Geographically, I see us in the next three to five years, definitely buying just much more outside of where we are right now. Geographically speaking, we'll probably move to that Southeast, which we've been looking at a lot of product in. Not to say that we wouldn't buy in the tristate, but outside of the New York specific pocket. Other than that, I don't know if there'll be any huge changes.

Jordan Amin:Greg, anything you think, based on what you know now, might look pretty different in a few years?

Greg Gleason:I think, geographically, continually more diversified. Part of that is just the financing's really attractive, but everyone else has the same financing, so it all starts to get priced through the assets, and then it gets priced through wages, and construction costs, et cetera. As markets heat up, the pricing gets to a point where it gets hard to be feasible, and so you need to look at new markets. I see us entering more and more markets over the next five years, I think, on the development side. Then, building where we have a presence in maybe a more diversified way, and buying existing assets in markets we already have a presence in.

Jordan Amin:Thank you. I want to give you each an opportunity to close out before we try and squeeze in a couple of questions from our audience, and being mindful of everyone's time, and likely 3:00 Zoom calls. I'd like to ask each of you to give a final thought. What I'd like you to do is, I'd love to end on a positive note, the same way Scott did. If you could share one positive outcome that you experienced during the past year as a result of the pandemic, whether it's on an operational side, something with your team, a new opportunity that wouldn't have presented itself otherwise, or whether it's just being able to work from home in your pajamas for nine months. Whatever that silver lining is, if you could share that with the audience, we can close on a positive note. I think that'd be great. Greg.

Greg Gleason:The remote experience has definitely, there's been a lot of silver linings. Personally, seeing my kids more. Also, realizing how much we can do remotely. I think that's increased our confidence to invest and develop, increasingly, remotely across the country. It's also given people on the team just new opportunities and new exposures beyond anticipated. There's actually been, surprisingly, there's been a lot of positives in the experience.

Jordan Amin:Good. Arik, Mr. Positive.

Arik Lifshitz:Now you're trying me. There's been less traffic, that's been great. Love it. Less of a line at the pizza store. Great, love it. We all have to get back to the city. We all have to get back to work in person as much as work from home. For those who have been doing it, sounds wonderful. I just think we all got to get back to work. It's a responsibility we have, not just to ourselves, but to the local bodega guys and every other small business. The restaurants, the cafes, the coffee shops that everyone went to before the pandemic. They need your help, they need your business.

I think we all got to look at it as a personal responsibility, get back as soon as we safely can so things can return to normal. On the positive side, we're all bashing New York just now, but yeah, we've all been saying, at the same time, it's a short-term problem. Eventually, it's going to bounce back like it always does. That's why we're here. That's why we're not making any drastic changes here at DSA, and we're just excited and waiting for that to happen, whenever it does happen.

Jordan Amin:Thank you. How about you, Eddie?

Eddie Setton:Sure.

Jordan Amin: What's your positive takeaway?

Eddie Setton:Early on in the pandemic, we were all very concerned about collections. It was one of the biggest things that we were all talking about early on. There was an eviction moratorium in place. It's still in place, and nobody really knew what to expect. The thing that I took away that was very positive is that while there's always going to be some exceptions to it, most people are good, and trying to do the right thing. Most of your tenants are paying rent. We do have collection issues like everybody else, and there people who are struggling, but for the most part, everybody who's able to pay is paying. You're just seeing that people are intrinsically good and not always out to screw you.

Jordan Amin:Can't think of a more positive outcome than that. I did want to get to a couple of questions that have come in from our listeners, if you guys wouldn't mind indulging us for a few more minutes. Greg, there was one directed towards you. You mentioned the increased use in technology. Do you think the trend will continue of people contributing to use all this technology when things get back to, quote, unquote, normal?

Greg Gleason:I think we accelerated that trend towards a higher technology, higher remote sort of operation, but I do think there's going to be a significant shift back towards the equilibrium that involves people being in the office. I mean, there's plenty of things that have worked well for us remotely, and there's certain things that we really put on hold. I mean, we haven't really been hiring. We don't see that we can create an environment that's good for training and mentorship in the same way that you can in person. We see this transitioning more towards a hybrid kind of experience. I think there's a lot of positives that come out from being able to have the confidence to realize what you can do remotely. I think that opens up a lot of doors, and then we'll have long-term changes.

Jordan Amin:Great. Thank you. My question just moved off my screen here. Arik, one for you. Besides cap rates, what are other metrics that you're using to measure valuation and asset pricing, understanding the current conditions we're in?

Arik Lifshitz:I was going to say, well, pre-pandemic, when we were looking, we didn't look at cap rates. We really just looked at price per square foot. Ultimately, to me, New York City boils down to a very finite market. There's only x amount of buildings in this city. Sometimes, you look at a property and you recognize that, "In my lifetime, that may be the only chance I have at buying that property," or let's say, a similar property in those few blocks, and every asset being different. Especially when you factor in rent stabilization, every rental being different. Sometimes, it's just a matter of, what's that building worth? You're not going to find the answer on a spreadsheet. That's my final answer.

Jordan Amin:Eddie, anything to add to that one?

Eddie Setton:Valuations in New York, specific, I think are very difficult today. I think that it's definitely going to be all cap rate driven right now. Nobody's really looking at future potential, especially when you're so hamstrung by the rules that are in place. I think the other part that's very difficult is something that, I think, Greg mentioned early on, is that you can really be walking into a deteriorating income, net income that is, where rents are not moving, expenses keep going up, like your taxes and insurance, which have continued to go up throughout the pandemic. I think those things are making it very, very difficult to price things locally.

Jordan Amin:All right. Well, Greg, did you have something to add on that?

Greg Gleason:Definitely agree with that trend for pricing in New York starting to be more fundamental, and just price per pound kind of approach. That's interesting to see. Then, there's been a lot of cap rate compression in the rest of the country, including with even tertiary markets and whatnot, even different asset classes. Everything seems to be converting. Whereas, New York now is actually feels like it's at a higher cap rate, and it's more fundamentally driven than it's been, in my memory.

Eddie Setton:That where the cap rate could be deteriorating as you go, so you might get in at a high cap rate today, and then maybe a lower cap rate tomorrow by the time, your yield just may be that much lower next year.

Greg Gleason:Yeah. I have no idea how to value that either.

Jordan Amin:Right. All right. Well, gentlemen, we're at a couple minutes before 3:00. I wanted to thank you, Greg, Arik, and Eddie. I thought this was terrific. You guys were all terrific. Thank you so much for sharing, first of all, your time and your insight with us. Again, thank you to Scott Aiese from JLL. Thank you to everyone listening. We really appreciate it. In the interest of time, I will say so long for today, and throw it back to our wonderful moderator, Lexi, to close out the session. Thank you, everybody, again. Much appreciated.