Walker & Dunlop, Inc. (WD) Earnings Call Transcript & Summary

Good afternoon. I'm Susan Weber, and joining Walker & Dunlop's CEO, Willy Walker, today are 3 [indiscernible] dears: Ivy Zelman, Chris Nicholson and Aaron Appel, who will do a deep dive on the state of commercial real estate. Thank you for joining us today, and now over to Willy.

Thank you, Susan, for that quick intro. I don't think my 3 colleagues really need any introduction to people who are followers of the Walker webcast, but really quickly Ivy Zelman, who runs Zelman Inc., which is part of Walker & Dunlop and is renowned as one of the most insightful analysts and researchers on both the single family as well as the multifamily housing markets. Aaron Appel, who runs our New York City Capital Markets Group and is renowned as one of the very best finance professionals in the commercial real estate industry. And Chris Nicholson, who runs Walker & Dunlop's Investment sales group, which has grown dramatically over the past several years and has really taken a market leadership role in the multifamily investment sales space. It is a true pleasure to have the 3 of you back with me. I thought no more appropriate time than the day that there is an FOMC meeting, which I think most pundits are predicting a 50 basis point increase in the Fed funds rate. But given all the moving parts in the market, getting all 3 of your perspectives on what we are seeing, how people are making sense of it and how people are making money in the midst of all of it is, obviously, why so many people have signed up to listen to us today. Let me back up a little bit to our last discussion. Aaron, you were -- I asked if you had $100 million, where will you put it, and Aaron said he would be buying Bitcoin. I think Bitcoin is down 50% since you said that, Aaron. So good call there. Ivy, you are rehabbing older single-family properties, which I think continues to be a really attractive space given where the single-family market is. And Chris, you were looking for age-targeted multifamily and focusing on the build-for-rent market.

So let's get to today. And given those predictions get a sense of where all of your heads are on where to be investing today and what has changed since those comments 5 or 6 months ago. Aaron, let me start with you as it relates to your outlook on the market and what you're seeing right now.

Yes. Look, there's been a bit of a disruption in the marketplace based on the fact that treasury indexes, it's basically doubled in the last 6 to 8 weeks, the lowest cost of fixed rate 10-year money, which is sort of down the fairway of capital that long-term investors look to borrow is somewhere in the low to mid-4% range, where the majority of it is sitting in around the 5% range. That's up from 2.5%, 2.75%, even the low 2% range in the -- call it, in the summer of 2020. So there's been basically a doubling of the borrowing cost for the 2 hottest asset classes being still multifamily and industrial. The pricing on office assets also in the public markets was down in that upper 2% range. And we've seen that move as high as the mid-5% range in the securitized markets, if not even 6% for certain assets. And then we've seen disruptions in the floating rate markets, primarily driven by the disruptions in the bond markets. where we've seen bond buyers push back on buying floating rate bonds at certain credit spreads, and they're looking for more yield based on where the forward SOFR curve is and just also what they view to be a higher risk investment today. So the capital markets, the cost of funds has increased substantially. There's a lot of talk of illiquidity. I don't think there's a lack of liquidity. I just think that it's a tough pill for a lot of sponsors to swallow to see the cost of their funding come close to doubling in such a short period of time. And we've seen a pause on certain types of transactions or larger scale transactions that were out in the market for fixed rate financing have been pulled back and people are sort of waiting to see how this plays out. But I do think that the days of seeing 3% fixed rate money are gone. I think that we're not going to see those again for a very, very long time. If we do, there have been some other black swan event that took place and inflation would be at 40% at that point. So I don't think we're going to see that. I do think we'll hopefully find some stability in the marketplace as people adjust to where rates are, and hopefully, we've seen some stability in where treasury rates are. On the floating rate side, there's a lot of pressure on the forward SOFR curves. Cap costs have doubled, if not tripled., We've seen cap costs on transactions, which used to cost 10 or 15 basis points of the loan amount now cost anywhere from we've seen as high as 2%, that's come in a bit. We're seeing it somewhere between 1% and 2% today to purchase a SOFR cap. And we've seen some credit spreads widen out certainly in the marketplace from lenders that rely on leverage, so either accessing the CLO market or using warehouse or repurchase agreements to fund their loans. Those lines have also been priced out to coincide with the widening out in the CLO market. So borrowing costs are up. On the asset side, I would say that there's still strength we're seeing in the multifamily market. We're still seeing the same rent growth story. We're still seeing capital flow into that market, same in the industrial space. We've seen a little bit of a step back in the office space, I think. The country is fully open at this point, and there's still a lot of companies that aren't back in the office or have moved to permanent hybrid work-from-home and work-in-the-office models. So we've seen continued slowness in that segment. If you asked me what I thought the best opportunity was to invest in right now on a risk-adjusted return spend point. If you want to make a big bet. I do think that in the right cities, urban infill hotels, there's been a huge reduction in supply. And I think there's a big play in that space where someone can really outperform the market and get into assets at a very, very low basis with, in my opinion, tremendous upside.

Aaron, before I move to Ivy, I'm going to come to you in a second, Ivy, on the rate move that he just underscored and its impact on the commercial space and get you to give us your view on housing. But Aaron, you mentioned things have settled down a little bit as it relates to cap costs. When I had Peter Linneman on a couple of weeks ago, I said -- I asked Peter, isn't it the transition? Isn't it getting through these moves that's so difficult? And Linneman kind of shrug his shoulders and said, "Markets adapt." Are you seeing things settle down a little bit with the change from everyone thinking that the Fed was going to raise by 25 basis points to then basically everyone saying today, they're going to do 50 basis points that's allowed people to price forward a little bit better and make it that those cap costs have come in a little bit?

Well, I think, the weakening in the stock market and what we've seen in public equity markets and so many names down 50% to as high as 95% in the NASDAQ and then in the S&P. And then the Dow, we've seen companies down anywhere from 15% to as much as 40%, 50%, including some of the real estate service firms whose income has been on fire the last 12 to 18 months and strong earnings reports, I think that has brought about a theology that the Fed is not going to be able to push rates as aggressively to combat inflation because it's just going to break too many things in the market, and we'll wind up in a recession, even though employment is at an all-time high and continues to outperform anything we've ever seen or the tightness in the labor markets, there's a thought that at some point, we're going to wind back up in a recession and therefore, they're not be able to accelerate rates. I am a little bit skittish on that because I think that the market is used to and certainly in my lifetime, and certainly career that I've been following, the capital markets, the financial markets, they have been able to put in this Fed put, so to speak, into the marketplace where at some point when there's enough distress, they come in, they cut rates, they start quantitative easing, they flood the market with capital, they buy securities, they buy bonds and a way we go again. But we've never been in an inflationary environment before, and we have extraordinarily high inflation. And the only way to really to slow the inflation is to aggressively pump rates, and they sort of have a choice to make, do they protect the assets and the capital markets and the wealth or do they fight the inflation, which, candidly, half the country doesn't have assets to protect. So they don't care, they only care about the inflationary factor. And I am of the mindset that they're going to do whatever they can to fight the inflation because it's going to -- it will cripple the country otherwise. So if that's the case, you could see rates far in excess on the federal funds rate than what people are even projecting. The only thing that gives me a question on that is we have such a huge amount of debt, really, the only way for the country to get out of that debt is to continue to inflate. So it's a real problem. I'm happy I don't work for the Fed, and I'm happy that I don't have to make those tough decisions.

Well, Tudor Jones yesterday said he would not want to be in your own palace shoes. Ivy, let's talk about whether this rate move has put any kind of downward pressure on the single-family housing market as it relates to value appreciation and activity.

Well, overall, I'd say that with this being the spring selling season, what we've seen in the last few months is seasonally slower than what you'd expect on a seasonally adjusted basis, pending home sales have been down for the last several months seasonally adjusted in the existing market, the new home market, which is a little bit more complex, Willy, because you have about half of the communities that are open for sale. Builders have been forced to limit sales, and they're doing so because of their backlogs that are so extended. The backlog of single-family homes right now is back to November 2006 highs. And you've got about 1/3 of that, that's speculative. So there's significant cost inflation. There's labor constraints. There's municipality delays. So it's very hard to read whether or not demand is, again, moderating or is it a function of the sales being limited. But I would say in the last 30 days, things have changed dramatically. I do think that we're seeing moderation. It's gone from what had been a frenzy and waiting list that the first person on the waiting list would be ready to buy to something now that's a little bit -- I've got to go a little deeper in that waiting list. There are buyers that are having difficulty qualifying. So we're seeing an inflection point. And it's going to be interesting to see how the market digests the inventory when it comes to fruition. With all of these delays, the builders are very frustrated rightfully so in getting these homes completed. But we know that the monthly payment for the consumer with rates where they are today and home prices continuing to increase, builders are still raising prices, not across the board, but we are seeing sequentially prices increasing anywhere from 1% to 5%. And right now, annualized home prices are running up in the mid- to high teens. And you see cities where on a 2-year stack basis, home price appreciation is up more than 30%, but the monthly payment for the entry-level buyer is up more than 40% to 50% or in the 40% to 50% range. So affordability is definitely stretched. And I think that, that's going to challenge that first-time buyer to continue to enter the market.

And as a result of that, that gap between homeownership and the cost of renting, does that keep you bullish on either the single-family rental market or the rental market at large?

Well, I think that we've got from both the rent inflation in the multifamily market is very excessive. And we see that whether we look nationally on a blended basis according to our proprietary surveys, we're running on a [indiscernible] adjusted basis, about 8%. That's blended. If you look at new move-in, we're hearing double-digit increases, it feels not sustainable. On the build-for-rent side, you still have a lot of capital chasing that asset class announcements that are continuing even as of this week, more capital flowing into that space. And I think that, that becomes a competitor to the multifamily backlog that we could debate when that backlog will get delivered. But the backlog delays are real, and it's problematic. The best incentive for these developers, economically, is to get these projects developed and completed. And as those projects get developed and completed with it at a multi-decade high, I think, you're going to see some pressure on lease rates. I don't think they're sustainable. Historically, if a multifamily operator was to get 4% rent growth, he was doing court wheels. And we're historically in the 2% to 4% range. And right now, Chris and I are talking, you're talking upward 17-plus percent and north of that in certain markets on what would be market rent today. So I'm concerned that, that's just not sustainable. And I know that the single-family rental market is not yet plentiful enough in terms of new construction, to really see whether or not how that performs competitively with the for-sale product, but I do think that we've got that supply that will potentially be a competitor to the multifamily supply that's in the Sunbelt markets and in the more suburban areas because of the whole phenomenon of remote work and people wanting that space and distance.

So before I move to Chris, just one follow-up on that, Ivy, which is just, this the timing we're clearly seeing in the multifamily space today, exactly what you just said, which is rent growth that is at historic highs and no real competitive, if you will, threat to downward pressure on those rent increases because of the lack of supply on the single-family side, lack of supply on BFR, SFR. And then also a lagging new inventory of multifamily development that was slowed down through the pandemic that isn't delivering today. And yet with that as the backdrop, in the past 2 weeks, most of the large multifamily publicly traded REITs have sold off dramatically. Do you think it's just that forward look that you just outlined as it relates to these aren't sustainable? Or is there something else going on in the market today that has had that downward pressure on the multifamily REITs?

I think Chris can speak more to it from his vintage point, but I think you've got a disconnect between what sellers are expecting and what buyers are willing to pay on a risk-adjusted basis now. And valuations are definitely at very high levels, record generational levels. And so I think you're seeing that spread widening between buyers' willingness to pay what the sellers are looking for. And so that could be anticipating value corrections that the market is anticipating despite the fact that the fundamentals today are so strong. We had a lot of liquidity pumped into the market. There's a lot of capital that's been chasing the resi asset class, whether we're talking for sale or for rent. This has been, as I like to say, the prettiest girl at the dance and everybody wants to be in what has been hard assets in the resi space. So I think there's this expectation that the valuations are going to be under pressure without even yet seeing the supply come to market, just seeing what's going on right now real time, and I think that's a good segue to Chris.

Yes. Chris, is the market getting it wrong? Or are you actually -- that delta between the bid ask that Ivy just said is out there? Are you seeing that?

Well, first, I'll address your REIT commentary. And yes, they corrected, and they sold off 10% to 12%, and that was after a 35% to 40-plus percent run in the 11 months and 2 weeks that preceded the correction. So let's all just take a bit of a deep breath and acknowledge what we've experienced over the course of the last 6 to 9 months in terms of valuation runoffs. I would go back to answer your original question with what you would be buying, Ivy, putting capital in assets where you can reset rates as quickly as possible when you're in a 7% to 9% inflationary environment. And on top of that, I would continue to put capital in markets that have strong growth fundamentals and low regulatory risk. And I think that's really kind of what we're seeing play out real time in the assets that we're working on all across the country. Returns in large part were pretty much homogenized over the course of the last 12 to 18 months. We talked 6 months ago about where we saw weakness and where we saw a concern. And Aaron and I both pointed to deeper value-add, deeper workforce, older vintage housing that was pricing on the margins of replacement cost, that was potentially stressing affordability of that resident base. 6 months ago, those assets were being acquired at total returns that look pretty similar to lever core and core-plus opportunities. We are decoupling away from that. And frankly, I think that's healthy, and I think the market is getting that correct. But in the same vein that you see some of that decoupling, you have to acknowledge the amount of liquidity that's in the space, number one, and the growth that we're seeing, number two, those 2 factors inform cap rates much more so than the third factor, which is the cost of debt. So when we look at high-growth markets that are high on the growth and resiliency scale, high on the asset quality scale, we've seen little to no impact on valuation. If you start to sacrifice a little bit on the growth and resiliency story in the market that you're in, if you sacrifice a little bit in the asset quality, then you might be relegated into kind of what I call the bottom right-hand and top left-hand quadrant of that scale. And we have seen some pricing correction there and that's largely a math exercise with buyers that are stuck trying to deliver the same levered return today with slightly lower leverage levels and an increased cost of capital. And so if we've seen 4% to 6% or 5% to 7% correction there, that's a fair comment I would point to, just like your multifamily REIT selloff, what are we correcting from. And I would position that in the beginning of November when we were on this call last, we saw another 7% to 8% run in values, particularly in the first 60 to 75 days of 2022. And I think that was largely related to 2 factors. I think the first is we had a real scarcity effect in the market because so much was pulled out of 2022 into the fourth quarter of 2021. There wasn't a lot of inventory on the market at a time where there was still a tremendous amount of liquidity. And then number two, and I think you saw some revisions from public REITs, in particular, Sunbelt-oriented RIETs, where they were revising up expectations because the normal seasonality that I think we all expected to see in November, December, January and February, really did materialize. The strength in fundamentals continue to win, to remain at the sales. And I think those 2 things really kind of put another leg up on pricing through the middle of March that we'd probably get in up a little bit since we've seen rates run. And it's like I made a lot of comments in the fourth quarter of the year last year, I said that the power is in the hands of the person with the product. And I think we should revise that today and say that the power is in the hands of the person with the cash because we are finally seeing a differentiation in our bidding pools and as a strong preference towards those lower levered, unlevered IRR kind of higher quality buyers where they are getting some preferential treatment and they're able to take advantage of the positioning the market.

Aaron, to Chris' point, as it relates to lower leverage or cash buyers, when people are coming to you and your group these days to finance properties, are they basically underwriting rent growth that grows faster than interest rates are going to move and therefore, going floating rate? Or are they basically saying, if I can grab a 4.75% coupon today and fix it for the next 10 years, I'm fixing?

Yes. So I think, look, it depends on who the buyer is. I mean we have a client that's managing an account for a top 2 state pension fund, and we're in the market to go out and find them 5 or 7 or fixed rate loan at 40% leverage. So it's one type of buyer. But a lot of buyers are looking to put in 35% to 30% or 25% equity into transaction and borrow it moderate to relatively high leverage. To us, that's not high leverage, but to some that may be. That buyer in the multifamily and in the industrial space because the cap rates are so low, really hasn't been doing any fixed rate borrowing at all because the debt coverage ratios are not there. They weren't there when rates were at 3.25%, and they're certainly not there when rates are in the mid-4% range. So that's been truly a floating rate buyer. And that buyer, we were originally, I would tell you, last time we talked, we were in the market, we would go out and we'd find liquidity at 75% or 80% loan-to-purchase price, and that would price somewhere in the mid-2s over SOFR or LIBOR at the time to upper 2s. And that bid is now 70% leverage, maximum leverage. And that pricing is in the high 2s to the low 300s over SOFR. So there's been a shift and there's been a difference in the leverage one can get on these lower cap rate deals and the cost of the financing is a little bit more expensive.

I think Aaron's point on the cost of caps is a very good one. I would say, just based on the bidding activity that we've seen and the -- what types of financing buyers are pursuing. I've actually seen a little bit of a shift back towards fixed rate in the last 2 to 3 weeks because of those cost to caps and the acknowledgment of how long it will take to get out of that negative leverage situation, when you've got 20-plus percent growth on trade-outs, you heard from, again, a lot of those multifamily REITs that reported last week consistent renewal increases in the mid- to upper teens. And so I feel like there's been actually a little bit of a shift back towards accepting, hey, it's going to be at a lower leverage point that I'm going to be able to fix for the next 5, 7, 10 years. And if I [indiscernible] 7% or 8% inflationary environment, of 4.5% of cost of capital that's the same market metric.

So we've talked -- a lot of buyers have come to us. We had a client acquiring 2 multifamily assets in Manhattan, operator with an institutional partner. And we went out to look for floating rate financing for them and they came to us at the last minute and said, "Hey, we want to do a fixed rate loan. We're terrified that rates are going to continue to rise and run up." And ultimately, we're doing a floating rate loan because the leverage that they were looking to borrow at wasn't available on the market on a fixed rate basis. The loan sized on a floating rate basis, which is predicated on where your cash flow will be 3 or 4 years from closing versus a fixed rate loan who's amount is predicated on where the cash flow is today. So that fixed rate loan was 47% or 48% leverage. And the floating rate loan, you were able to get to 65% or 70%. But Chris and I were talking yesterday about this and even this morning with you Willy. Buyers of real estate in the industrial and multifamily space for the last 2 years have seen outsized returns for core type purchases, core-plus type purchases, value-add purchases and even development purchases. They've seen equity multiples that are substantially higher than historical norms, and they've seen IRRs that are in the triple digits potentially sometimes. And they've seen that because the cost of debt has been incredibly inexpensive, and they've been selling into low 3 cap markets or even sub 3 cap in certain situations. So the increase in rents and rates today are high and they're tough for people to swallow. But at the same time, Chris made a good point. He said, "Look, you're now -- ", the cap rates can stay the same potentially because the rent growth has been so substantial, and the forward projected rent growth is high enough that one can still afford to pay that same cap rate. The cap rate shouldn't move just your returns that you're now going to get or normalized to where historically they've been for that risk you're taking in the marketplace.

[indiscernible] because the consumer right now who is a buyer, the mortgage market is seeing a tremendous rush for people to lock in, and we're also seeing a shift to arms. And arms are -- applications for arms have more than doubled, although they're still below historic levels, significantly below historic levels. But on the flip side, you're mentioning people are looking for more fix the consumers adjusting to the higher rates by looking for an arm, and they're still below, call it, 10%, but it's definitely a shift that we're seeing in the market for the consumer. And builders because they tend to release the product, you've got later in the construction cycle. So you typically get locks are anywhere 45 to 60 days on the resell side, it's probably 45 days or even less, but I think that there's a lot of people that are being re-underwritten to see if they can afford. And there are debt levels and especially affordable buyers that have debt-to-capital ratios are in excess of 50%, and it's getting very difficult. But the offset for those buyers, those primary buyers, is there still a tremendous amount of investors in the market, both private and institutional that continue to be incremental buyers. We did see a few markets where some private investors are starting to show some concern and might be canceling in some of the Mountain states, even some pricing pressure. But that's maybe right now the beginnings of what might be on the horizon where markets like have been up more than 50% on a 2-year stack basis. But there's so much cash buying in the market, too. 2-year stack cash is up over 60%. And the wealth creation, we've seen tremendous wealth creation. But then again, what's going on in the stock market is eroding well. So we've got a yin yang, and I think that people are starting to reconsider the investors of what kind of returns they're going to get, whether they're Airbnb-ing and/or looking for renters, but there's a lot of angst in the market right now and mortgage markets are in quite a bit of disarray. We're seeing spreads that have really blown out and there's concern about the Fed has got, obviously, $9 trillion on balance sheet in their portfolio and whether they're not selling MBS or they're just not going to continue to buy on new origination. I think we're definitely concerned about how much of that investor activity will sustain the level of demand that has been definitely influential on overall market activity.

But Ivy, even in a world where the Fed over titans and the investor buyer views from the market. We're in an environment where the cost of the ownership is up 50%, even more than that in certain markets across the country over the course of the last 12 to 18 months. And a lot of that increase has occurred at least on the financing side over the course of the last 60 to 90 days.

How -- low price inflation don't forget.

Right, right. So how does that -- my point is even if we see a correction in home [indiscernible], you still got this exponential growth that's occurred over the last 12 to 18 months. How does that now correspond to a conversation with that renter 12 months from now after multifamily rent rolls have been mark-to-market, where that alternative of leaving that a part of the unit and buying that single-family home, that math equation is still extraordinarily difficult. And as a result of that continues to sustain the demand that we see today, albeit not at the rates that we're seeing, but is there an argument we have that the growth that we see after this mark-to-market of the historic growth that we've seen, we should be running models out at numbers that are beyond that 2% to 3.5%, 2% to 4% growth staff that you referenced earlier in the call. Because I think some of the sell-off in the public REIT is an arm wrestling match about what growth looks like after the comps from 2021 dissipate and the growth normalizes is a question about where do we normalize to.

And I think if it wasn't for the significant inflation in all input costs and the cost of carry and many investors that own multiple properties, homeowners that have second homes, co-primary. We've got, obviously, wage growth, but the reality is that is there sustainability of these investors that are willing to take on all of the burden. And do we start to see like if you look at inventories, just in the March data, inventories rose sequentially 10%, although they were still down year-over-year in existing home market, 10%, which was the least decline that we've seen. But that doesn't tell the story because the velocity is really the story, the velocity of what's turning. So people don't see the new listing because of what's coming on the market, half of it's turning when historically maybe 1/4 of it turned. And so we're seeing tremendous velocity. And the question is if we start to see that velocity diminish and there's more investors that have been a big part of the market that just this inflationary pressure they're feeling and it's across every aspect of the market, that might start to reduce the return profile, and we might see more inventory in the market that needs to be digested and there might be pricing pressure. And I think there are going to be markets nationally, the picture doesn't look as bleak as there are some markets where there's been just a bigger prevalence of investors. And we did think about institutional investors that might have more staying power, but the private investors that I think are the ones that might not be able to handle the inflationary burden of all the input costs that are rising at double-digit paces and any repair work, it's very challenging. So those are things that 2% to 4%, whether that's sustainable or not, I think, in your scenario is so contingent on how much of the individual investor was expecting to rent out those homes and whether or not we now start to see them capitulating on being willing just to retain the tenants that they have or Airbnb units. But it goes back ultimately whether you have a soft landing or not. I think that's what we really need to say is like if you're in a soft landing scenario and people are comfortable, then you probably don't have the risk associated with some of the things that I just...

There is no soft landing here. It's an impossibility, all right?

Hang on, hang on, Aaron. I want -- specific question to that. It's all good, It's still good. I'm going to go right to that. I want to hear your thoughts on this. So there is no soft landing, okay? A pretty declaratory statement. Here's the thing. Between 2016 and 2018, the 10-year rose from 1.6% to 3.5%. And during that same 2-year period as the 10-year went from 1.6% to 3.5%, multifamily cap rates compressed from 5.6% to 5.5%, okay? Now in the backdrop of all that, the Fed was also unwinding its balance sheet, albeit over that 2-year period, only $800 billion. And the plan right now is to be doing about $1 trillion a year once they really start unwinding it. But given that backdrop of '16 to '18, we have, to some degree, been to this rodeo before. Now Pocos and what I just said.

Inflation. We didn't have inflation, the generational shift. I mean we've never seen inflation, and I don't think we're -- certainly, Chris, Mr. 42-year-old, it's been a few weeks. I mean, 40 years ago, we had inflation, which is not therefore the same thing as what we just described in '16 to '18. The Fed has got substantial challenge.

But Ivy, the issue with it -- they've got substantial issues, but they're raising rates to fight that inflationary pressure. We've also got wage growth behind all this, that is unprecedented wage growth from clearly where we were in '16 to '18. So -- Aaron, go ahead.

So wage growth is inflationary. Number two, inflation is at 8.3%, I think, the last CPI was, but I don't have anything that I do in my life, that doesn't cost 15% to 20% more than it did 2 years ago. So I can't name a thing. And most people I talk to can't, whether it's buying, exiting the grocery store or milk wherever. I was in an event 2 weeks ago, charity event, they bought 1 million eggs last April. And this food donor, and they said -- they paid $1.03 a dozen last April. And this year, they bought $1 million, and they paid $1.40 a dozen. So that's close to 40%.

I love the fact that the only way Aaron knows how much eggs costs are from a charity [indiscernible]

I don't know where they're getting the...

And I'm not going to put you on the spot and ask you how much a gallon of milk cost today or a loaf of bread, but here [indiscernible]

Aaron, keep going because what I'm trying to get at is this, you say declaratory there is no soft landing. And whether it's a hard landing or whether it's a soft landing, to some degree, we've been to this radio before, you and Ivy, both point out, not in an inflationary/hyperinflationary environment. But what I'm trying to get at a little bit is the capital markets. I'm trying to get at, we've watched the capital markets in the last month move in ways that we have not seen in a very long period of time. We, at Walker & Dunlop have continued to process a huge amount of business during that time. And I guess what I'm trying to get at is, if the Fed can be as transparent as possible about what it is going to do in unwinding its balance sheet and raising rates. Is that not a market that actually functions as we go through this transition?

So I mean, you have it 2 ways. You have a supply-side inflation in any environment with supply chain disruptions coming out of China which you have a food issue with Ukraine and all the grain they produce. You have no clarity whatsoever on what the Chinese government is going to do at all or when they will do it. Nobody would have thought that international travel this time last year would still be ban there. You have tremendous wage growth, okay? And then you have huge CPI increases. And we're bringing rates -- we're at a quarter point today that we may be at 75% at the end of the day on the federal funds [indiscernible]. We may be at 100% by the end of the day, they're going to go somewhere between 50% and 75%. But like people that -- very intelligent people that understand inflation would tell you that to control it today, the rates need to be 7% or 8%. So what you could wind up in a situation is yet rates kind of stabilize on the fixed rate side, they raise rates, wages stay hot, home affordability goes down. The cost to construct is -- I haven't seen a development budget. We have multiple $6 billion, $7 billion, $8 billion development projects ongoing in -- down in South Florida, in New York. We have one in California. Every one of those jobs, we've seen 15% to 20% budget busts on the hard costs. Labor, materials, you're talking about lack of immigration, so workers on the construction side are not available. So you're talking about a scenario where you have people buying less, not able to build, right, because the costs are so high. But then you have crazy wage growth, so people can still bid up rentals, right? And that's like the -- so you can deal with the rates where they are because you have this crazy rent growth that's going to stay in place. And you could see that across the gamut, and you could see that in any asset class, any hard asset class, which is really the bid, in my opinion, for hard assets. And that it's -- the difficulty to develop and build is going to get worse and worse, so it become more expensive. There may be less end users. But at the end of the day, that is end users go somewhere, and they're going to get let out through inflation and the Fed is not going to be able to raise rates or crack it hard enough unless they bury the market in which place you have a hard landing or you don't have a landing, which is still a really hard landing. So they fox themselves in. They totally messed this up 1.5 years ago. There's been a couple of really smart people that I watch on Bloomberg or CNBC in the morning, they've been talking about this for close to 2 years. I've made bet to my personal account on this that have worked out phenomenally. And I don't see any way around it.

So Ivy, one of the things that Aaron just said was rent growth stays. So I hear that and I say the market has missed the opportunity in the multifamily REIT space because they've got extremely high occupancy numbers. And if all the factors that Aaron just talked about, about people not being able to build new inventory, and there's this huge gap between single-family and multifamily. That renter base stays, you continue to be able to push rents and being in multifamily is still a good place to be. What am I missing?

Well, I think that we've had a lot of government support for renters, whether we're talking Class B. Axiometrics does show delinquencies across 49 of 50 states are rising. They may not be at the elevated levels, let's say, in California, that EQR and Essex pointed out. But I think that we've had so much liquidity pumped into the system. I don't think wage growth can keep up with the rent inflation we're seeing. And there could be a lot of broken deals to Aaron's point, where there's just development, you have to monetize that development and it costs money to carry those projects. So they're going to get -- they're going to continue to move forward so they can pay back their costs -- their debt. So I don't know that you'll just see projects that get stalled. Those projects might not get delivered. Chris and I have a bet how much the completions will be in '22 versus if it gets pushed out to '23 and he might be right. But they're not just going to sit there. They're going to get delivered.

So let's talk about that. Sorry to interrupt.

Well, no, I don't want to take your bet now.

[indiscernible] to that. Let's come back to that.

I want to hear the over under on the delivery.

I don't it really matters, though, I don't think it matters because...

How does it not matter?

How does it not matter?

It doesn't matter because if you're a developer, you've started those projects. You've got costs already incurred from the economic incentive, you want to get your money back. So there's going to be pressure, whether they are feeling it as an operator, as a developer that, that's going to come from somewhere that will maybe affect the different projects that they have. So there's their portfolio. So if there's a backlog that doesn't get delivered, it doesn't mean that they're sitting there in good position if their development costs are -- they continue to have to keep moving forward. That's one thing about our builders just in general developers. They will monetize. They will go forward. They will go vertical. They will not just leave projects in the ground. And that's what we saw in the last cycle. And I'm not going to say that GFC is what we're expecting. I'm just saying that monetization is going to happen at what price and at what return is the question for you.

It will -- the monetization will occur, and it will occur with the deeply equitized projects when the LPs on that project decide that they want to monetize.

But they're just going to be happy...

The average level [indiscernible] are totally different than they were 14 years ago. It's not even working here. And so like when you talk about what the different products and what that's going to impact, my position is, so for end of the record, so Ivy thinks 415,000 deliveries this year. Is that right?

For completions, for [indiscernible] of them, yes.

So to put that in perspective, we absorbed 550,000 units in 2021, 350,000 of which were in non-gateway markets, 200,000 were in gateway markets. I think that her number could be 40,000 to 50,000 units high, and I justify that by conversations with our development partners and clients who entered January 1 saying, how do I go double my pipeline this year? And we're 5 -- or 4.5 months or 5 months end of the year, and the conversation has gone from how do I double my pipeline to how do I execute what I have in the ground right now. How do I help my contractor figure out how to procure material, how do I find off-site storage to warehouse inventory because the supply chains that were broken in November when we were on this call are only more broken today? So I think what that manifest itself in is a focus from the development community towards execution. And I think that actually slows starts in '23 and '24.

As it should. But you also keep in mind, we think of shelter holistically. And so recognizing that land values have just been surging. And a lot of the land values have been surging because you've got multiple types of developers, whether they're multifamily, you're looking at the build-for-rent capital, the for-sale builders. We have a lot of inflation that's been up more than 30%, 40%. Some markets, it's double. And so to pencil those returns, especially the newer capital that's not necessarily familiar with cycles, it may be very difficult for them to continue. And there might be broken deals where there'll be some pressure because they're going to try to exit. And that's one of the things that we have to just be thoughtful about, like how much of what's in the backlog starts to trade even in the midst of development.

Have you seen a shift, Ivy, between the homebuilders that you're covering optioning lots versus taking them on balance sheet and what [indiscernible]?

No, they absolutely have. I mean they actually -- this quarter was the first quarter that they slowed -- sequentially it's still increased, but they started to have a little bit more tempered pace of how many lots they're adding. So I think lots that are year-over-year are still growing 25%, 30%. But I think that the public builders that account for almost 50% of the market are definitely more prudent and there's definitely more optioning, but there's a lot of capital that within those options that could become where they walk away and abandon them. But I think the build-for-rent capital that has really been a predominant driver of the land inflation in these real growth markets. Those are the operators that are -- it's what's been fueling the inflation. And so I think there's builders that have chosen the for-sale builders to take advantage of what could be a very good countercyclical avenue for them to mitigate the risk of affordability on for sale. But it's all interconnected. That's what I want to make sure we understand. And if it wasn't for our contrarian view that we are currently not overbuilt right now, but that we don't have the deficit that many think we do, I think that we would be a different discussion. So what I concern myself with is that households today because of affordability being so challenged and whether it's the stock market and various asset classes that are now going to be pressured, do we start to see helpful consolidation. People of multigenerational living again. And that has already been a factor where we've had that 20- to 39-year-old that's been living at home, is puzzling longer. So because we can't afford to go buy or you can't afford a rent because the rents are too expensive and people are going to price out of the market. Those are things to be, I think, just thoughtful about all the -- if it wasn't for all this production in the backlog that we know is coming. Again, we've got several hundred thousand units that are started but not sold. And that doesn't incorporate the other 150,000 units that are authorized, but yet to be started. We've got 800,000 units in backlog. A lot of it is highly concentrated and a lot of it is in the tertiary markets way out there. So that's -- because that's where the land values were the most compelling.

It's a segment of the market that has infused.

I got to think -- Aaron, I want to come to you on that one because Ivy just said a lot of it's in these tertiary outstanding markets. That gets to back to office. So you're doing a bunch of office financing in your -- in both Manhattan as well as across the country. What's the -- one of the things that we've been looking at, we've talked a bunch about the multifamily REITs, what quite honestly, gets me scratching my head a little bit. It's an incredible company and Owen Thomas does an incredible job of running it. But the fact that Boston Properties is up right now given what's going on in the office space, quite honestly, kind of makes me scratch my head. I realize that most people are signing and going for A-class properties, and therefore, that plays directly into Boston properties and their -- and the types of buildings that they operate. But what's your take on the office market, Aaron, and the fact that, I mean, I just saw a graph that was sent to me yesterday as it relates to back to office. The Austin market is kind of leading the pack at about 54%, 55%. But we have clearly not gotten to what Peter Linneman said would be a tipping point once you get over 60% back in the office. How hard is it to finance an office building right now, given where we are on back to office?

Yes. Listen, I think, it depends on the nature of the collateral. So look, new buildings, really well located or even slightly off the beaten path, but new. There is liquidity for them. And we are seeing those buildings lease. We're not necessarily seeing them lease on a pre-let basis right now, unless there are 1 million square foot plus tower where you really need an anchor tenant to drive the capital markets to capitalize that transaction, but we were seeing a flurry of activity in new buildings. We're seeing activity in older, what I would say, vintage Class A assets, which aren't really a buildings anymore, where there's just been a tremendous amount of capital bumped into those buildings to revitalize them, to amenitize them. And we've seen those buildings attract tenancy also. We have not seen like the value lease or go out there and say, I'm going to go rent in this building because the rent is really cheap. We've seen that company maybe leave the marketplace or just do a Band-Aid lease. There's lots and lots of these 1- and 2-year rollover leases and buildings that are just continuing to go on and on. But new product, there's demand for. There's leasing demand. I believe there's capital market activity demand for. Look, the truth -- look, I had lunch with a very, very large office landlord last week, we were talking about this. He said, look, companies have to have space. Like you can't -- if you have a 300-person company or a 200-person company, or a 100-person company that sit there and say that you don't have office space. It's not possible. So even if you only have 5 or 10 people in your office or you're in the office and what I think the new work week pretty much in the office is based on what I see in streets in Manhattan is a Tuesday to Thursday workweek. Where Monday is very, very empty here. Tuesday, Wednesday, Thursday, it's much more lively, not like it was prepandemic, but it's much more active. And then Fridays, there's nobody here. And I think that's the new work week. But if that's a work week in the office, you have to have office space. Now there's some companies that may downsize. Some companies go into some sort of hotel and concept. No employee likes that. So employers need to be mindful of what their employees like. If they want them in the office, they better be providing a space that, that person is comfortable going to every day, and it's going to be efficient and feels good about entering that building.

So you mentioned earlier, Aaron, that urban hospitality, urban infill hospitality some of that you're seeing. So are you seeing lenders or equity providers excited to go into that space right now, given the fact that, first of all, it's finding a seat on an airplane in the United States right now is pretty darn difficult?

It's touch and go. The resort properties around the U.S. have seen their EBITDA double, if not triple from 2019 to today, and there's been tremendous capital market activity for them. And the pricing of those loans has come down substantially from where they were 2 or 3 years ago. Their urban infill hotel story is a different story. It's about basis per key, price per foot type of asset, who the asset is trying to attract. We have a couple of select service, I would say, 3.5, 4 star-ish-type properties in New York that got killed during Omicron. But before that, were doing very well in the fall, and now their full and bookings are fantastic. So we're seeing those numbers on those assets, proving out our thesis and you can buy those hotels at 30% or 40% less than you could prepandemic potentially. So that's why we think there's such a great investment thesis, and we're seeing that with still a business traveler that's 30% of the way back at little to no international travel. So we were very bullish on those assets. But the capital markets are -- they're very, very selective. I'd say the price of money for urban infill hotel versus a resort property that's seeing tremendous NOI growth or EBITDA growth, that spread is probably a low mid 300-ish credit spread to 3.75 to -- in the urban infill areas that money got into the 4s. I think that's now out into the 5s again into the low 5s so it's capital market disruption that we've seen.

So Chris, as you look at capital flows into multi right now and given the underlying fundamentals of multi, which we've kind of both [indiscernible] in and also seen some real signs of optimism, if you will, as it relates to new supplies as it relates to rent growth, things of that nature. Two questions. One, are you seeing any new capital arrive. So for instance, in Q1, the BREIT, Blackstone's BREIT, I believe, raised $7.8 billion. Starwood's SREIT raised $2 billion. So we're still seeing inflows into those vehicles. I believe the number at the beginning of the year from Preqin was there was $288 billion of dry powder in U.S. private equity firms looking at commercial real estate. Has the bidder list changed, Chris? Are you seeing new foreign capital or domestic capital showing up going after multifamily assets?

We have seen -- it's somewhat anecdotal, but we did see in the fourth quarter some direct foreign investment not through domestic advisers from Germany and Korea and to large single assets that we were marketing in D.C. and South Florida. So that seems to be kind of in the early innings of the trend. I would say, Willy, that the cast of characters and the capital that's been formed for multi is largely known, but what we are seeing is we're just seeing a continuation of that kind of market rotation. And so we're seeing market participants that were typically on the West Coast, they're focused on kind of core gateway assets in the Northeast. That rotational trade that we have been observing for the last 6, 9, 12 months is very much still in process, and it has changed the complexion of the bid sheets that we've seen really kind of largely a kind of a Sunbelt-oriented conversation.

So I'm tight on time here as we wind this up. I've got to go back to the 3 of you and get you for your -- where are you going to put your $100 million right now. And as you know, I'm going to hold you to it when we get back together 6 or 7 months from now. So Ivy, let me start with you. Last time, it was going after, if you will, the single-family fixer-upper market. Are you still in the fixture-upper market? Or have you shifted to another part of the landscape?

I think cash is king right now, even though that sounds counterintuitive given inflation, but concerned about right now, what we're seeing in the dislocation in the equity markets and the risk associated with pressure, there might be some select markets where the land is constrained that I still do repair and remodel and fixer uppers, where their supply is very, very tight and there's not a pipeline coming, but I'd probably say I'm with more shift to cash and still going with that strategy.

And waiting for what to happen to deploy that cash?

Or opportunities, being opportunistic with respect to valuation, things that become very compelling, whether it be equities or thinking about hard assets, whether it be in the single-family market. But right now, I'd say that a lot of the migration states where we've seen just a very excessive home price inflation, are areas that I would be more concerned about because that's where the supply -- that's where the capital has been chasing those markets. So you could be more bullish in areas where the consumer today is still President, alive and well in the Midwest and certain parts of, I guess, more affordable, less desirable. But I think for the supply prevalence and even it's interesting like California right now is seeing a strong activity in land Florida. I mean maybe the price appreciation is not as great or Austin or Phoenix, but it's really across the board, what we're seeing with so much of the liquidity that's been pumped into the market. So I think it would be a pause and let's just reevaluate.

Aaron, where are you putting your money?

First off, I agree with Ivy's assessment, I'm going to say, on the housing market. I do think that supply could come down, construction cost being so high, which would temper the downturn we're going to see, but I do think that the single-family housing market has real fundamental issues. We haven't seen that yet in multifamily. Source capital. I'll go with Bitcoin again. I think it [indiscernible]

Dollar cost average.

Dollar cost average back up to where you were [indiscernible].

I don't think the Fed is going to be able to fight inflation and have the will to fight it, ultimately, the way it's going to need to be get thought. And I do think that governmental currencies around the globe are under the rest. And I do think at some point, Bitcoin will disconnect from being a high [indiscernible] growth asset in the NASDAQ and continue to get adopted. I wasn't a believer in it originally, then I'm still somewhat skittish, but I'm definitely very much so invested in it because I just think that it's an inevitability. And I'd also invest heavily in the energy businesses right now, whether it's pipeline, it's drilling companies, wherever else we are drastically undersupplied in oil. So no CapEx spending in the last 8 years at all in the space, and there is just tremendous cash flow opportunities there. And I don't see that really in any other sector.

Nicholson?

So I got this for Ivy. I got some notes on how we kind of mixed it up on our last webcast. So I actually was going to put this on before we started debating the supply and demand for take on overbuilding. So maybe even the first thing I'm going to do is I'm going to get self-defense lessons for the next 6 to 7 months when we get together. So I'm prepared to take on some of Ivy's contrarian views. I think it's a time to derisk and it's a time to have a flight to quality. I think it's the time to focus on high growth and migration markets and the best quality assets within those markets. Those are proving to be the most resilient. We're consistently pricing those assets today, kind of at expectations, at guidance. And I think it's a reflection of, frankly, some of the smartest institutional capital in the market, really understanding the resiliency that those assets offer. I think that some of this decoupling of risk and the risk carry trade that we talked about a little bit is real. And I think it's hard to kind of figure out exactly where the bottom is for some of these assets that got overinflated because of everything that we've been talking about for the last 60 minutes. So I'm buying core multifamily in the Sunbelt and I guess the last thing that I would say on the support of that thesis, I think, the cost inflation pressures that we're seeing are not going to subside over the next 6 to 7 months. I think the lion's share of the developer sponsors that we work with, with tight costs have inflated 25% or 30% over the last 12 months. That's accelerated in the last 6 months. I think that acceleration is going to continue. I think that picture is going to continue to be really challenging. And not to put my geopolitical hat on, but what happens to inflation if Russia decides to cut off the natural gas pipelines to Germany. It's things like that, these kind of additional geopolitical kind of black swan events that I could -- that could put an additional pressure on inflation, I think, are real. And I think it's time to be risk [indiscernible]

[indiscernible]

Ivy, the last thing because I got to wind up.

What about you? We want to know what you're going to do.

What about me? I'm...

Yes. Where are you investing?

Share buybacks.

I'm continuing to invest in the 3 of you and the business [indiscernible]. And to be honest with you, Ivy, at these times, this is when investors need Walker & Dunlop more than ever. They got to be able to call up an Aaron Appel or a Chris Nicholson and have them guide through what they're going to do because at the end of the day, as much as there's lots of scary stuff out there, people are going to continue to invest in hard assets. And we happen to be 80% multi and 20% non-multi. And so we're in a really good asset class right now. And I think that the core market, albeit with lots of challenges around it is still a great place to be. So I got to call it a day. As always, the 3 of you, insightful. Love the banter. Thank you all to everyone who joined us today. Thanks very much. I've got Goldman Sachs' Chief Credit Strategist coming on next week to talk in more detail about a lot of the issues that we talked about today, take a look at what the FOMC does today and where the markets stand a week from today. So hope to see everyone back next week. Thanks for joining us. Ivy, Aaron, Chris, thanks very much. See you soon.

Take care. Bye, guys.

Thanks to everybody.

Thanks.