AI-Fueled Mini Housing Bubbles Form as Commercial Delinquencies Rise

0:00A boom in one corner of the economy can create a crisis in another. Today's headlines show just how uneven the market has become. AI data centers are impacting housing across the country, commercial delinquencies are climbing sharply, and higher mortgage rates are putting more pressure on fix and flip investors. Today, these stories show why investors need to look beyond whether a market is simply good or bad and understand what's actually driving demand, debt, and exit risk. I'm James Daynard with Kathy Fecky and Henry Washington to break down these headlines and what they mean for investors.

0:39This is On The Market. Let's get into it.

0:46All right, Henry, what do you got for us today? Oh, man, I have a local-ish story, but I think the headline carries weight for investors in particular. The story is out of Appling, Texas. It's from the Texas Standard. And what it talks about is the surge in housing demand in Abilene, Texas. This was a part of Texas where demand has been down. It's a small town population of 100 ,000 or less. But there's a massive data center going in there. The Stargate AI facility is a 4 million square foot data center complex being built in Abilene. So it's one of the largest AI infrastructure projects in the country.

1:26and to build something this size in the city with just 100 ,000 people, they had to bring in about 6 ,000 construction workers. So that's a 6 % increase in population essentially overnight. And those people need places to live. They need places to rent. They need hotels, right? So they need all this infrastructure. So it created this demand. And what they saw was that home prices went up 9.5 % year over year in the market because of this and rents increased in the market because of this. But the problem that this creates is that once the facility is built, they don't need 6 ,000 people. They need a few hundred people to run the facility.

2:11And so those 6 ,000 people don't just stick around and live in town. They move, they go to wherever the next project is. And so you're going to see an exodus in that town. And the reason I think investors need to be aware of this is because AI infrastructure projects are happening all over the country. There's lots of data center projects, lots of warehouses being built. And the more AI demand increases, the more you're going to see this. And investors just need to be aware, like you need to study the trends and what's happening. This has happened before. It's happened during the gold rush. It's happened during the oil rush where people fly into areas where there's infrastructure or where there's resources.

2:55And then once the resources are tapped dry or the project is done, they leave and demand drops drastically after that. People get stuck holding the bag, especially if you're buying to catch the boom and you pay an inflated price. When that boom is over, you end up stuck holding in the bag, you could cost yourself a lot of money. But the upside is if you time it correctly, you can make a lot of money, but that's a risky game. And so I just brought the article because all of us as investors, our job is to figure out how the real estate market is going to pay us. We make a lot of money when we time something right, but it's hard to time things right.

3:34Sometimes you're just in the right place at the right time. So you got to know when to get in and you definitely have to know when to get out. Yeah. It's a typical boomtown and it is really inviting, right? Because you hear people say, oh my gosh, I have this house and now it's, the rents have gone up and the value has gone up and I made so much money. And then people rush in thinking they're going to get the same without really looking down the road. If you're thinking short-term, you better think short-term. You know, you better have an exit plan and be very aware of when things are going to shift and get out before that, way before that.

4:08But most people don't. They come in right at the top and then the carpet's pulled from them and they don't know what to do. So you've got to be so careful. If you're thinking long term, make sure that there are jobs that are going to be there for the long term. I got caught in this, in the oil boom, you guys. There was no place for people to live. They were desperate. Builders were flocking there to bring on new supply. The belief was that it was going to be sustainable, that those jobs were there to stay. But oil could be manipulated. And it was. And those jobs just disappeared overnight. And there was way too much housing.

4:44So I've been there, done that. be in markets that have so much job diversity, that have so many different employers bringing jobs so that if one leaves, the community is not hurt by that. Do you remember, Kathy, in 2000, like seven, eight, nine, when there was these gold mine boom towns in like, oh, yeah, yeah, Dakotas, and everybody was going to build up these little towns. And I remember, and it's reminding me of the same thing, because like what Henry talked about on this article is really, really important because the structures, the housings for the electricians, the plumbers, the framers, the construction companies, and they will pay you a big premium.

5:28And so you can go out and buy a traditional unit and just run your rents on your normal rents. And it's kind of like this enhancer for three to four years because, you know, if you do want to invest in these areas, there's nothing wrong with it because you can hit a huge payday It's just going to slow down. But you want to look at how many permits are in the area. What's the timeline for construction? What companies are building out there? Because they're usually the big ones too. So they'll pay you a premium rent. And then what hotels and amenities are in the area too? Because a lot of times they'll go to short-term housing because there's just no hotels.

6:05A client of mine bought four fourplexes. It was like in 2016 out in Quincy, Washington. Same type of thing. Very low utilities. is some of the lowest utilities in the nation. They're building these data centers and she absolutely crushed it. And she brought it to me. It was like, what do you think? And I'm like, well, I mean, this looks good, but we ran it on traditional rents. She bought it at like a five and a half cap at the time, which is a little bit low for that area, but she has been doubling up and now she actually just sold them all. Oh my goodness. Great timing. And I wish I was the broker that gave her this magical plan.

6:42So there is that time and window. You just got to run all your math a traditional way, and then you can enhance it. I mean, but it is a good two to three year cash flow run, if not longer. That's a great point. But I think when people see this boom, they're thinking quick money. How do I get in? How do I do it easily and make quick money? That's not the play. If you want to make money, it's going to take time, effort, and work. If I was going to do it, I'd be looking for properties that I could get at a discount in the path of progress, meaning that it's either a place in that town that people wanted to live before the data center was built or a property that's going to be close to the data center.

7:18It's going to be one that I probably get off market so that I can get it at like a 40 % discount so that it cash flows at current traditional rents, not inflated rents, cash flows at current traditional rents. And then I would be looking to get that thing filled with rents. Obviously, I'm going to try to get the higher rents. And then I'm going to be looking to sell that thing because I want to sell before the project is over, right? So that I can capitalize. But if you get stuck holding it, you want to make sure that this thing was cash flowing before the boom. You would hope that it could cash flow after the boom, but you still don't know because you don't know how many people are going to leave.

7:56So it's still a little risky, but that's how I would take it. You got to buy off market. You got to get it at 60 cents on the dollar, 50 cents on the dollar. And it has to make money at pre boom rents, then I'd consider it. If you really do want to jump into this, I think it's like you have to research before it's already been announced, right? That's when you want to buy it. You need insider information. And so track permits, track locations, track public proposals, then get into it and just know it's a, it's a, it's a very short term thing. But I mean, you can always make money and right away if just don't, just don't like Kathy says, don't be the last one to jump in.

8:33And you're not making any money. You want to be the one selling when people are buying, honestly. We're taking a quick break. When we return, Kathy's breaking down the sharp rise in commercial real estate delinquencies and what it could signal for investors. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes 10 % below market value in the best markets across the country without making real estate your second job. That's exactly what Rent to Retirement does.

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11:15Welcome back to On The Market. Kathy, what do you got for us today? Oh boy, this is from Credit IQ. There's some great data on that website. Property types feeling the August heat is the name of the article. It says where distress is showing up outside of office and multifamily. We know a lot of people in multifamily who are in a lot of pain right now. And my heart goes to them. I know just a few years ago, they were super stoked. Just exactly what we were just talking about, Henry. It's like jumping in at the very last minute, like so-and-so made all this money and so-and-so made all this money.

11:44I'm going in. And it was just too late. So industrial, hospitality, retail, and self-storage post$14.6 billion in new distress. So it's not just multifamily. It says the maturity wall is getting taller and there's lots of bricks, big bricks in it. So it doesn't sound great. Doesn't sound great. Office still being the most distressed. 10 of the 371 metro areas account for 57 % of the full$87 billion balance. New York, New Jersey City, then Los Angeles and San Francisco. So lots of empty high rises. Yeah, but I bet some smart investors with deep pockets are going to go in and buy those. Yeah, if there's runway, Seattle becomes more and more vacant by the quarter.

12:32Like the office, it is not. It's eerie. Like with how much vacancies there. I mean, Seattle is up 28.2 % in vacancies. It's the highest rate in the Puget Sound region. Yeah. And then I love this. It says to air is human, to mod is to bank, basically. So loan modifications are pretty massive. It looks like mostly in multifamily, they've done the most loan modifications. But what's interesting about multifamily is the amount of delinquencies have gone up six times in the last couple of years. Not 6%, six times, 600%. I mean, it's nuts. And I know, again, a lot of our listeners, I don't say that lightly because I know our listeners are in pain.

13:20and it's nothing to laugh about. It's, they are in the thick of it. So you're not alone. Let's just put it that way. No, it's very consistent across most asset classes right now, right? Because it's not, I mean, I can't really think of one that's just like, oh, this thing's on fire. Everyone's making money on it. I would say mine is, I mean, you know, one to four unit is doing pretty good. Right, Henry? Yeah, absolutely. I was just sitting here thinking, I've got to go sign docs today for a loan renewal. I had a, I bought a duplex five years ago, one bed, one bath units, you know, it was 4 % interest rate, interest rates going up to 7%.

14:02It's still going to make money. Obviously not as much as it was making, but like, it just got me thinking like compound that to the people that have these, you know, three, cash flow drastically decreasing the value of that property goes down because it doesn't make as much money anymore. Whereas, you know, two units, it's still valued based on comps and it's still going to cash flow and it's not going to kill me. I'm going from five to$700 a month cash flow to three to four, right? Like it's not, it's not a big deal, but the larger that project, the more impact that that has. And that's the, that's the crunch people are feeling with a lot of these deals.

14:45One to four units. Most people are on fixed rate loans. They're solid. They, what, like$18 trillion in equity and home equity. It's so one to four unit housing is doing pretty good in my opinion. And the values keep going up. Yeah. And it's all the same. It's like if you get into expensive flips, right? And you have a market correction. It's like the bigger the deal you get into, if you have a 5 % correction on income value, when you're talking about million dollar properties, 5 % turns into a very big number. And so it's, you know, going big is not always good, right? Like, I mean, if it's up to me and I could do a bunch of$300 ,000 flips, I would, I just can't in my market.

15:26James, are you saying big is not always better? I don't know that I've ever heard you say that. Did you not have a rock star this morning? You know, our multifamily portfolio is smaller units. I mean, they're 10 to 20 unit instead. And the reason we buy that is because we can actually create value on those because they're heavy fixers, right? We're construction guys. So it's like no one wants to fix a 100-unit building that you have to take to studs. It is a nightmare. And so the construction alone keeps us out of that. But, you know, the 10 to 20 have been fine because you can refinance and pull things around.

16:01Or when you're buying heavy value add, your basis is lower. And so the construction is where you're earning your equity and your basis goes down. so you can kind of stomach it a little bit more. But to Henry's point with the refinance, one thing everyone should do who's a listener, if you have a commercial loan, call your bank and see what options they have for you. Because I was shocked. I had a 12-unit building, and this building since day one has been my nightmare building. We bought it. COVID hit. We can't get people out for a year. We're eating the rent, the hard money cost, heavy value add, very bad building.

16:40Now, it turned around. We finally got it renovated. We're cash flowing. And then my rate just reset to the sevens. But I called my banker, and I'm like, hey, look. And what we did is we just did – it was a very light low mod. It was like an instant approval. We gave them$3 ,400, and they fixed my rate at six for the remaining five years of the term. Wow. Done. I was like, that's all I got to do? And we had to send an updated financials on the building. I couldn't refinance it for that rate. Or if I did, it was going to cost me a lot more. And so just, you got to communicate with your bank. Talk to your bank.

17:17Yeah. Anyone who's listening, who's in pain, just talk to your bank. I had a doozy of a deal back in, I don't know, 2014. I could go into the details about a hundred unit building. And it just had so many issues that, that I just literally went to the bank and said, here's the keys. I don't want it anymore. And they were like, well, we don't either. what we wanted. So they took a million dollars off the loan balance and worked with me and were like, fix it, you know. So you'd be surprised at how. And again, in this article, it shows that multifamily, they're having the most modifications. Talk to your bank.

17:55They don't want it back. They learned. Banks learned in 2009 that it was not good for them to just foreclose. It's not good. They might do better by modifying the loan with you. We'll be right back. After the break, we're going to look at the growing pressure on fix and flip investors as higher mortgage rates slow sales and challenge project returns. A lot of insurance companies compete on one thing, speed. But if you're protecting an investment property worth hundreds of thousands of dollars, should speed really be the priority? NREG believes strong coverage starts with understanding the property, the risks, and the realities of ownership.

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21:16Welcome back to On the Market. We'll finish with my article. Let's talk about fix and flip. The article I brought in is fix and flip market shows signs of strains as mortgage rates climb. And what this talks about is a survey of 270 home flippers revealed that 59 % of them reported an increased days on market compared to the first quarter, including 83 % of flippers in the Northwest and 75 % of Texas all say they've had longer market times. 17 % of those flippers said they sold it below their ARV. And honestly, I know it was more than 17%, but the market is shifting around. And, you know, this article is from Housing Wire.

22:00And the thing that I'm seeing is, you know, just like you were talking about, Kathy, with the commercial, it's the same thing. We saw a little jump in the market in the first quarter. Like, Henry, didn't you feel this little jump in the first quarter of the year? Yeah, everything was selling fairly reasonably. And now it just feels different. Things are still selling. It's just, A, it's got to be the right product for the right buyer. It's got to be done extremely well. And you better have some margin. I think a lot of investors that are flipping houses across the country, I would be willing to bet that over half of them are probably new to the business in the last one to three years.

22:45And unless you're doing volume, like 20, 30, 40, 50 a year, like it's hard to gather up that experience. And I think people are losing money because they're buying very thin deals. I am not making as much profit as I used to before, but that's because I underwrite so, so conservatively. I was averaging at one point during the time you were mentioning, James, I was averaging about$50 ,000 net profit per flip. Now, that's probably gone down by 10 to 15 grand, the average, because you're right. We're not if the article is correct. We're not selling at our underwritten ARVs. We're selling. We're taking lower offers and we're giving concessions and all that's cutting into profits.

23:27But we are maintaining profitability because we're so conservative in the underwriting. I know some pretty experienced flippers who are getting it handed to them right now. They are losing a lot of money. And I would guess that they know how to do their due diligence. I don't know. Maybe it's your market is more stable and other markets are less stable. That's fair. But it also comes down to price points, too. Like Henry's average flip is what, like$350 to$400 on the dismo? It's lower, yeah. You know, when you're flipping a house, it's typically you're four to seven months in that project. And so for a housing market to slide 5 % to 10 % in that is usually aggressive underwriting.

24:10or you bought something off peak. But when you're dealing with something, and let's say Henry's selling it for 300 grand, and it sells for two and a half percent off, that's going to be about his margin on the deal. Whereas on more expensive markets, the two and a half to 5%, it you know, the more expensive stuff swings a little bit more. Oh, it fluctuates dramatically. I mean, you saw it even San Francisco or Malibu, right? It jumps and goes through these cycles. And that's where flippers get in trouble is because we're short term operators, right? We're in and out of a deal. We're hitting a market cycle and timing is everything in this business.

24:44And the seasonal slowdown is a real thing. Yeah. People forgot about the seasonal slowdown after COVID because there was none. But before it was always this slow, steady market. And you had to kind of adjust your comps when you're buying something in the beginning of the year, you would know that you're going to sell it for a little bit less in the middle of the summer. And now it's a little bit more than a little bit less. Like it, the swings like 5 % when you're dispoing And now you have to pay attention to when you're buying and when you're dispoing. Those are like two of the most important things right now.