#951 - Has the Real Estate Market Bottomed? With Ben Miller

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0:40How's the real estate market bottomed? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Ben Miller, co-founder and CEO of Fundrise. Hi, Ben. Welcome back. Hey, thanks for having me. And welcome to everyone who may be joining us, coming right in hot from RAL's live show with Hunter Horsley that just wrapped. They were talking about the Bitcoin ETF and all the implications. If you missed it because you were busy, don't worry. You can watch it back. If you had questions that didn't get answered, had a ton of stuff they had to get through, don't worry. Raul's going to be doing a drinks AMA tomorrow.

1:13So you can roll up there with your questions. And we're going to be having a ton of conversations and courses around this big development as it plays out. So we will keep you posted. Just head over to realvision.com and you can follow it all. But we had a lot of news in general this week, Ben, not just that ETF, but new inflation data out today, which was a little higher than expected. It seemed like I had people once again thinking about the direction of interest rates. What are you expecting? What's your outlook for rates? Yeah. So I expected there to be some volatility in CPI because the biggest driver of CPI now is real estate.

1:51It basically came in at 0.5%, right? So it was the largest contributor to the sort of the higher print that everybody expected. And the reason it was higher is because the structure of CPI is so esoteric and lagging. So real estate basically in real life has zero inflation, right? You're talking about rents 12 months to today are flat and rents are the best proxy for inflation. And because of the way that CPI is designed, it uses owner-occupied equivalent and that basically made up a lot of different factors. And so it's super lagging. So even though CPI is coming in hot because of real estate, it's actually the opposite.

2:43It should be way under. And that's basically, I think that will show up in the numbers over this year. We'll continue to see CPI moderate. And that will basically bring down rates like everyone originally expected. And that's really interesting because people have been kind of scratching their heads and thinking about. So if you believe that inflation numbers are exaggerated to the upside because they're not really reflecting what's going on in real estate and they're lagging, what is happening with the real estate market? Where are we in the cycle? I mean, I think we're at the bottom. I mean, I've been through multiple real estate cycles.

3:2208 was obviously a lot worse. But in every case, basically, the primary driver was interest rates. Interest rates is the biggest driver of real estate. And interest rates are essentially peaked in October 2023. Like, they got really high. And since then, we've seen enormous relief, right? Treasuries have come down 100 bps. And the Fed came out with a dot map forecasting three cuts. And I think, personally, I believe, just listen to the Fed, believe the Fed. Market is forecasting five to six. But I think even three is a material break from the past. It's an almost 15 % decline in rates. And the most important thing is to recognize that almost one for one, when rates fall, prices go up.

4:15And when rates rise, prices go down. So when rates were at zero, the market was just go-go. And the real estate market is a slow-moving industry. So even though the public markets have pulled that forward and rallied at the end of 2023, the real estate markets will probably take the next 12 months to really get back to momentum. That's so interesting. So we have a chart I hope we can pull up because when we think about things bottoming, I think it's important to talk about what that bottom looks like, right? So if we are at the bottom, is it sort of an agonizing bump along the bottom? Or could we see this swing back up?

4:57Does that recovery look more like, if not a V, at least an attractive U? Yeah. I mean, so I'm a private market investor, invest in real estate. We build companies, invest in companies. And everything in the private market is slow. It's a get rich, slow business. And so the public markets, people trade every second, right? And I'm talking about, you know, I think about investments over multiple years. So if you think about over a few years, you can look at this. So this chart basically shows interest rates, basically interest rates inverted. So basically on the left, you see how interest rates basically were high and that caused basically prices to fall.

5:45So this basically is the yield curve flipped. Easier to see it inverted. And basically, as rates went up, prices came down. And I think there's no question that we're at the bottom in terms of where the Fed's headed. And from here forward, it's loosening. If you think of it as tightening versus loosening, the left has been tightening. And on the right, in the future, it's loosening. And so rates, when they're at zero, they went to 5.25%. They're likely to end up halfway in between. So you're seeing on this chart, right, that the recovery probably puts you halfway between where we were and where we are today.

6:30So, you know, real estate fell about 50 % multiples. Another way to look at this is that a real estate asset prices on a multiple based on the interest rate. And so real estate multiples fell 50%. And I think they'll make back half their multiple compression over the next 24 to 36 months. And it could be faster. I'd be surprised if it's much faster than 24 months. But 24 months, that to me is like actually a really short timeframe in real estate. Yeah, exactly. When you're talking about a slower moving. So if the Fed is going to cut rates, even if it's just three, are we anticipating it's because we're moving into recession?

7:19No. Yeah, because that's important, right? Because if we're in a recession, I would think then you have to worry about occupancy and things like that. So how? No, actually, a recession would be a gift to the real estate industry. It's counterintuitive, but essentially, if I look at multifamily, which is our primary focus, apartments are by far the biggest, residential, the biggest part of the real estate industry. As rates, basically, as rates come down, the price goes up. That's just, it's a simple correlation generally, right? In 2008, when there was this terrible recession, right? Millions of foreclosures, millions of unemployed.

8:00It was really a terrible recession. rents fell through that downturn four percent four percent okay the so the gains in from interest rates moving were much greater and so most of the real estate industry is praying for a recession because it would pull interest rates down pull inflation down and it would have a you know a muted effect on occupancy because mostly when people are trying to choose between uh you know going to movies or spending money on Netflix, they're going to spend money on a house. They're going to live somewhere they're going to rent, not buy. And that basically is like a consumer staple.

8:40Food, grocery stores, and housing usually does well or much better in a recession. And so the three, you know, a soft landing has been actually really hard on real estate because it's kept rates higher for longer. That's really important to know that it is that rate story that's dominant. as opposed to other situations. You know, we're going into earnings season and you're always thinking about, depending on the company, right? You know, lower borrowing costs are good, but if the economy's falling apart, it could hurt their earnings and profits. And so you've got to, you know, that's why everyone's looking for Goldilocks.

9:15Very interesting to know that in real estate, it's really the rate side of the equation. That's super, super important. Yeah. That's a big change. So Ralph asking, and it's on my mind as well, what sectors, So for bottoming, are there certain areas that will look more attractive or provide more opportunity here in the real estate sector? Yeah. Well, so I actually have some charts on this, but let me describe it. Basically, all markets are priced based on supply and demand. Right? So simple. And so in 2021, there was an oversupply of money. Here it is. Too much money. I'll go back up to that. There was oversupply of money and prices got really high.

10:04And since then, because of the tight monetary policy, there's an undersupply of money, right? It's way lower than it was. Here you see, it looks like about half of 2018. So that's basically an undersupply of money which means there's less transactions happening. So basically, you think of the two sides of a market. You have supply and demand. And there's always demand for money, but the amount of money can really vary depending on Fed policy and the speed of the economy. So that's basically half of the equation. If you go to the next half, it's assets. So you have the amount of money and the amount of assets, and that sets the price.

10:46so basically what's happened is all of that um stimulus and cheap money during during the pandemic drove up the supply of assets they built more multifamily they built more everything and so right now there's an oversupply of assets and an undersupply of money so you basically have two different uh disequilibria right because you have too little money and too many assets So the price is basically totally out of whack. You see abnormalities. Over time, money will normalize and assets will normalize. But the interesting thing is because money is so tight, people stop building. Yeah, I was going to say because what we hear all the time is there's a shortage of homes.

11:33There's sort of a demographically a shortage of homes. Right. So basically with the tightening of money, construction lending basically went away. And so what you're seeing is that the amount of things under construction is diminished and it's falling. And that basically means that two years from now, there'll be an undersupply of new homes, new construction. And so the amount of assets in market will actually go from being oversupplied to undersupplied. So you basically have like three ways to make money in this environment. You basically can bet that the tightness in money will normalize. And that will basically cause prices to go up.

12:10You have an oversupply of assets and eventually that will normalize. And actually, you may be in an environment where you have an undersupply of assets. So you have sort of a triple, triple supply and demand mismatch. That is why real estate has gotten really attractive, especially multifamily. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet.

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13:38so uh it's interesting you mentioned before you know it does well in a recession people in in in the industry are praying there's a recession because it's gonna i would think that that would be interesting for people from a portfolio point of view how underweight real estate do you feel people are i feel like it was so there was so much concern it was such a terrible situation so much concern about office space. Commercial real estate was a ticking time bomb that was going to kill the whole system. I mean, there's a lot of negative sentiment. And we got a lot of worried questions about commercial real estate throughout the last two years, year and a half.

14:20Where do you think from a sentiment point of view versus positioning the market is? Is that an opportunity? Yeah, exactly. It's wonderful. Negative sentiment is a tremendous signal to buy. I mean, like in the beginning of 2023, when everybody was so negative, that was a signal. And so the negativity in real estate is a sign that it's actually attractive. And then also when things get really hot or really cold, people stop making distinctions. So good stocks and bad stocks all go up when things are really hot and when things are really bad. They both go down. But in normal times, you start seeing you have a quality dispersion.

15:01So good things get priced better than bad things. So today, real estate office, I think, is very negative. Yeah, I wanted to ask you about that. And I think that grabs the headlines a lot talking about commercial real estate, which is interesting. So you think that's still a dumb question? No question. Office is a lot like malls where it took 20 years. They're still going through transition. And retail used to be a huge part of the industry and is basically now kind of a stepchild. People don't talk about it as much. That's going to happen to office. It's going to go through a decade, maybe two decades long struggle.

15:43And sure, there's opportunities if you're a sharpshooter. But I believe that what's different between office and residential or industrial is residential and industrial have innate long-term GDP drivers, right? As the GDP grows, there's more demand for industrial and residential. As work from home drives, technology drives work from home, there's more demand for residential. As e-commerce drives retail spending, more demand for industrial. So there's a lot of drivers on the positive side for a lot of the commercial real estate sector, much less so and off exactly what the innate long-term, you know, sort of equilibrium is for office is, I think, I mean, I know it's unknown.

16:38And I think it's worse, it's much worse than people expect, because essentially, there's been a lot of delaying actions to prevent the downturn, prevent it really from mispricing down. The Fed doesn't want to see the office sector collapse while they're in the process of trying to bring down inflation. They want to let the air out of the balloon slowly. And so that means basically it'll take a long time to get to bottom. Yeah. So for folks who have exposure, sort of people in the market, first of all, is there office exposure that you're sitting on that you're just figuring out what to do with?

17:14Or are you more situated toward that multifamily industrial space? Yeah. I've bought office buildings and I've run office buildings and I've always disliked them. So our$7 billion of real estate is made up of almost all residential and a little bit of industrial. So you're spared that albatross. What about the players that are not. It doesn't sound like that's a story that's going to improve anytime soon. We really haven't seen that distress, the defaults, the bankruptcies. But it sounds like you're saying that they're still coming, just not yet. Yeah, I mean, they're inevitable. If you look at the transactions that have happened, they've been rare.

18:04Typically, they're pricing at 60 to 80 % discount to where the price was in 2019. And so you're talking about all the equities wiped out and half the loan is wiped out. And that matters for two reasons. Obviously, it means lenders and owners are going to lose a lot of equity. But also, and lenders are levered, right? So for them to lose 50 % of value means they've lost much greater than just their, because a typical lender is levered 10 times. But the other point is that when that office trades, and I now own it at$100 a square foot when it was$400 a square foot in 2019, I'm going to charge a rent a quarter of what everybody else is charging.

18:52So it's going to drive down rents. And that's going to drive more office buildings into foreclosure. Ooh, that is a – who is traditionally – is this a problem for those small and medium-sized banks, or are these lenders elsewhere in the private market? It's widespread. I mean, it's basically – the biggest banks – That's not good for small and medium banks. We were worried about deposit walks and all that kind of stuff. That just sounds awful if that's what's on their portfolios. Yeah. I mean, if you go back, this happened before. There's nothing new under the sun. Savings and loan, right? Wasn't that a - Savings and loan crisis, yes.

19:32Basically, the reason it was the savings and loan crisis, which caused the biggest real estate crisis, actually worsened in 2008, the Resolution Trust Corporation, RTC. The reason that happened is because inflation in the 70s caused all the banks that had all this paper to go underwater. They were basically that paper, all their loans that had been done at 5 % were now had negative, basically had lost half their value. So thousands of banks basically ended up with all these bad loans and those ended up being foreclosed on and ended up being owned by the government ultimately. And that was how Sam Zell got wealthy.

20:14That crisis started in 1981 and the Resolution Trust Corporation didn't get formed until 1991. So it was – and then the saying in real estate was stay alive until 95. And so it wasn't until 1995 that they started to come out of it. So it was like a really long period of denial. About 15 years. Now you've got to think that things are going to work faster this time because, A, we have that history book, but maybe not. Yeah. Yeah, I mean, it was clearly a mistake. And anybody who knows the history, the mistake the government made was they ignored it from 1981, 1987. And then Black Monday on 1987 was the trigger.

20:57So I could easily imagine that we ignore it till the next downturn. I mean, that's probably, you know, five to seven years from now. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:15So anybody dabbling in the banking sector, because that's one of the things like, oh, it's coming back. The banking index is coming back. Worth having a deep listen to those earnings calls and diving into some of those filings to see how much commercial real estate is on anyone's balance sheet, because it sounds like there's a reckoning to come. It's such an important sector, Ben. So I really appreciate you taking the time to walk us through, because it has implications for the broader economy. And I think it's something people talk about as a big monolithic asset and don't really sort of understand it in the way that you do.

21:49So that's sort of super helpful, I think, for us all to keep in mind when we're looking at this macro picture, certainly here in the U.S. But I want to switch gears because one of the really fascinating things is that you've got this really deep knowledge in commercial real estate and you're looking for opportunity there, it sounds like, and feeling like the bottom's in. And then you've got – you're in – last time we talked, we learned in innovation now. You have an innovation fund because you're really looking at and really into AI. So before we talk, I want to run a clip from a conversation David Madden had with Pradeep Ravakumar today, who's at Carnegie Mellon.

22:23Have a listen to this and we'll talk on the other side. If you think about a lot of the jobs we do, including personal computers and, you know, we have Microsoft Word, PowerPoint, a lot of it are tools, technology that help us do that. But it's basically a lot of steps, very laborious. And we can think of a lot of the new wave AI models as essentially simplifying those steps. And once we do that, that's such a huge unlock for humanity that I think it'll create more jobs rather than just destroy jobs. because there are many companies that just won't be feasible using basically our current set of technologies.

23:12And so, for instance, if I have a very, very enterprising entrepreneur in India, say, and they do not have enough funding to have a team of 10 people. So this is a company that's never going to exist. But with these tools, maybe it exists. Always mind-blowing, these discussions. That full interview is available on our platform. If you are not a member, just head to realvision.com and find out how to join so you can listen to this. Such an important aspect because we're all thinking about it personally, how it intersects with us. We're trying to think of it from an investment opportunity, from a business perspective.

23:54Ben, how do you see AI? What's your response when you hear them talking about that? so i'm fortunate because i've sat at this intersection of technology and real estate for more than a decade but fundrise has 100 almost 100 software engineers and i have 100 real estate professionals so i so i live this kind of challenge day to day and basically even though i appreciate what he's saying i basically disagree and that essentially like what is ai for the answer is replacing people yeah and that's exactly the opposite he was like it's to impact but you this is what you hear from technologists and i think that's the worry you know i built with it we built with it we we actually implemented it we were still working on more implementations but we have fundraisers 30 000 investor relations tickets a month and we built ai basically start handling that and it reduced it reduced the number of of um it successfully resolved 90 i think it was 92 if i remember right of the of the tickets that come in that they get that for ai so it's it and people like it better than the person because actually it's like faster to provide better documentation so like uh if you think about what's happening with ai because i think the hard part is they're not that many applications yet that everybody has in their hand is the way technology works is it starts in the hardware.

25:24This time it started with NVIDIA, moves up to the sort of middleware, which is in this case, open AI. But if you go back to like the internet, right? The internet started with like Cisco, networking technology, telecom, and went up to this middleware was like Netscape. When Netscape came out, people were like, well, what is internet for? And you never imagined it would be Google. Yeah, you remember this? I know people in our chat remember this. Do you remember this, everyone? I talk to my kids about this and their just mind explodes. It just can't even like, you know, like you turn into a dinosaur before their very eyes.

25:59It's amazing. Yeah, or the iPhone. Like the iPhone gets invented and people think it's the phone and it unlocks Uber and Instagram. The internet, the functionality of the internet. So we're on that arc right now. Right. Right. The applications or the things that people actually use it for lag. it takes it'll be another year or two but they're coming they'll be unintuitive they're like at first like this is what it's for but i can't work it yeah yeah the internet basically was about communication but ai is about intellect reasoning and so we can take that stuff away so as opposed to giving it to a junior person admin an intern maybe even a junior a business associate you can basically give to AI and it'll work its way up.

26:45So it's, I mean, it's definitely going to have huge effects on productivity. We are already seeing it in terms of our growth. We don't have to hire as many people as we thought we did. And so it's, it's going to have, you know, I think some large negative effects on, on, on the workforce. And then, and then it'll, I do think in the longterm we'll have a positive effect, but the disruption, you know, like what happened to manufacturing, that disruption, I mean, You lose a job as you gain them, and it may not be one for one in this instance. Or the nature of it is so different, and we're not having any intelligent conversations about what the future of work looks like or jobs look like.

27:28There have been some people toiling away at this for years. Every once in a while I get invited on a geeky panel where we talk about this, but for the most part, the people who need to be having these conversations are not having these conversations. And I know that is a concern that is sort of across everything. What do you, from a business, from an investing perspective, where do you see, how do you decide where you want to invest? Because you're investing in startups, correct? You're investing in AI startups. Yeah, I wouldn't describe them as startups. We went and invested in sort of mid to late stage tech companies.