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

Good afternoon, and welcome to another Walker webcast. It is my great pleasure to have my 3 colleagues, Ivy Zelman, Kris Mikkelsen and Aaron Appel join me today, once again to try and give our listeners some insight into what's going on in the commercial real estate markets. I have to say that we have typically not, if you will, brought W&Ders onto the webcast to try and look for a third-party insight to give our listeners sort of outside perspectives. And at the same time, I have the great privilege of working with these 3 professionals every single day. And I must say that they are as insightful and as understanding of where the markets are as any 3 people that I come in contact with. That is the only self-promotion and pitch I will give today, and I will then move to my 3 guests so they can actually live up to the expectations. Let me also, just as a quick intro, Ivy really needs no introduction. Over a decade ago, has been one of the leading research firms as it relates to the housing industry, most particularly in the single-family market, then moving into the multifamily market and then covering extensively the single-family rental and built-for-rent markets over the past several years. Kris Mikkelsen runs Investment Sales at Walker & Dunlop and has responsibility for our entire multifamily investment sales platform, which last year sold over $20 billion of properties across the country. And Aaron Appel runs our New York Capital Markets Group as well as our institutional capital markets efforts across the country, working with large institutions on the financing as well as the equity and sale of institutional-quality properties, commercial real estate in every asset class, office retail, hospitality and multifamily.

So let me start here. Ivy, your most recent publication did a survey of multifamily investor sentiment, and there were 2 headlines that really jumped out at me. The first one is the cost of capital, and uncertainty is hurting buyer demand in the multifamily market. And your survey came back with some pretty depressing numbers, quite honestly. And then the other one was, from an underwriting standpoint, the underwriting assumptions that many multifamily investors are making have gotten as negative as you've ever seen. Can you talk through those 2 surveys and what the general survey came back with?

Sure, and thanks for having me on the webcast with you. Overall, our transaction survey, the metrics were across 12 years of data, probably some of the worst metric results that we've seen. The overall underwriting has definitely significantly changed, as you indicated, in terms of much more stringent underwriting and using much more conservative rent assumptions. And obviously, the demand side being hurt by elevated cost of capital, that feels like the transaction market has come to a bit of a halt. But good news is that, with the 10-year rallying and the cost of debt coming down and the 10-year now in the 3.5% range, I think there might be some signs of price discovery and maybe an indication, there's a slight increase in interest, but we'll have more to say after we survey our November overall respondents, but the October numbers were, no question, pretty ugly.

Kris, you're seeing the transaction market every single day. Is that negative sentiment being seen pretty much across the board?

My hope is that the October numbers that came out in the sentiment survey might have a little bit of a trailing effect to them. It's been an exceedingly challenging 6 months, as I think everyone that's listening to this call knows. But I would agree with some of the findings from Ivy's report, particularly around a couple of things. One, the seller supply index is very, very low right now. We are transacting. We've awarded about 40 transactions over the course of the last 60 days. The average transaction size there is around $55 million. So we absolutely are getting things done. And I would say, Willy, if you asked me that question on October 15, with a 10-year in the 4.25% range, feeling like it was never going to stop until 5% to 5.5% versus what we see today, which just over the last 2 to 3 weeks, we've priced about a dozen assets, and we've started to see a little bit of a floor forming and pricing. I've looked at a number of bid lists that have 10 to 15 names on the bid sheet. We recognize very -- most of these groups, you'll see 60% to 70% of those groups crowded around a 2% to 3% kind of band. You see a couple of groups 10% off that, but you see a few that are willing to step out 2% to 3% ahead of that pack. And we've been successful at really making markets and getting some price discovery really within the last 2 to 3 weeks that we frankly weren't able to find 45 days ago. So to your question about growth and some of these assumptions, I think back to where we were in the middle of August where we had some green shoots with some CPI numbers rolling over and some positive job announcements -- or job reports, excuse me. And we had some optimism that really got removed in the middle part of September when the tenor from the Fed was such that they were going to remain focused on a hawkish stance until they saw the hikes show up in employment figures. And I think the biggest difference for us over the course of the last 60 to 90 days, when we look at our expectations of value and when we go make a market is the reining in of those growth assumptions has created some issues over the course of the last 60 to 90 days that have taken time to work through the system. And that's really caused probably another leg down in value. But that was really kind of a September-October situation, and we feel like we're -- as we sit here on December 6, we feel like we might be finding a little bit more consensus today.

Aaron, both Ivy and Kris talked about capital availability as far as being one of the key drivers of why there's been both, conservative underwriting as well as sluggish demand for the acquisitions market. We adjust rate locks today at $47.3 million floating rate loan with Freddie Mac at a 5.83% coupon rate. So the GSEs are still lending. Is the market in any way transacting or is finding financing just like pulling teeth?

No. I mean I think it depends on what you're doing. So for core, core plus, value-add multifamily assets, there is plenty of liquidity. It just -- it costs more. So I think it's a costs-funds issue relative to what value is or what people are willing to pay. People have a certain expected return, and they want to achieve that return. And if the cost of -- if their borrowing costs have increased substantially, then they need to pay less for the asset ultimately, unless the revenues are going up. And clearly, revenues seem to have frozen in most markets.

Yes. So for instance, you just did a $204 million bridge loan on a property in Brooklyn. I think it was 70% LTV. Cap rate was 4.5%, but the coupon was, I think, 8.40%. Am I correct on that?

Yes. So it's a $200 million loan, it's a property that's 50% leased. There's a small commercial component to it. When it stabilizes, maybe it has $13.5 million in net operating income. And it's a $200 million loan, so it's about a 7-ish-percent debt yields. The asset today in New York is probably worth about 5.25% cap. So there's a good spread for the lender there in terms of value versus their loan amount. And that priced at in the low 4s over SOFR. So SOFR is 3.80%, and it's got a low 4% handle spread on it. That's a deal that at the beginning of this year would have priced at 2.50% to 2.75% over SOFR and SOFR was 0. So you're talking about 500-plus basis point increase in cost of capital.

And how many lenders showed up for that? In other words, is that -- was that a group of one? Or there were 4 of 5 different lenders who showed up to be able to raise that loan?

So at the proceed level on that particular transaction, there were 3 groups that showed up, and then there were another 7 or 8 that were maybe 5% to 10% of the market in terms of the amount of leverage they were wanting to provide.

So Ivy, the negative leverage we've been seeing in the market has been something that has obviously been of concern to many buyers, and your survey has been looking at rent growth. And you all have been -- a lot of people have been saying, "Well, I can buy with negative [indiscernible] I have this outsized rent growth that many people were profiling back in the summertime of 6% to 8% rent growth on an annualized basis." Are we seeing rent growth hold up at that level? Or have we seen that collapse with everything else?

I think that overall rent growth is actually holding up at those levels on a renewal basis. I think that new move-ins is definitely moderating at a faster rate, but they're capturing loss to lease today. And so there's no question renewals are stickier, and I think we're in the kind of 7-plus-percent range. And our forecast right now, although we're updating our forecast for '23, '24 and do it -- we do that quarterly, is that we just see a moderation in blended rent growth more into like the historic range and actually a little bit above 4.5% and then continued moderation in '24 to more like a 2-ish percent growth rate. Now that's subject to change as we update our forecast, but I don't think we're as bearish as some with respect to their assumptions. I don't know. Kris is kind of excited about it, and there are some that are looking for sort of flat line. Now if we have a hard landing, I think it could be -- obviously, we could be too optimistic, but I think that overall, the renewals are stickier and holding up better than new move-in rates.

Ivy, how does the supply of single-family and sort of the distress we're seeing in the single-family market play into those assumptions? In other words, I think there are a lot of people sitting there going, there hasn't been an overhang of single-family impacting rents on the multifamily side of things. But if prices get cut and single-family inventory starts to move again, does that pull away from the rent rolls and therefore put downward pressure on those rents?

I think from the multifamily versus single family, we do think that shelter is shelter. And yet there's a lot of people within a Class A multifamily asset that might not be interested in living out in the tertiary and looking at a single-family rental for a 3-bedroom home. But I do think that more competition, whether it'd be supply coming on from the build-for-rent operators or investors selling so far in the existing market and overall, more supply in multifamily that's going to be delivered with completions, our expectation will continue to rise in '23. I think that competitive environment could put pressure more, and that's what we're reflecting in our expectation for rents to decelerate, and we're seeing that right now. But I think it's also really clear that affordability is stretched in the for-sale market and builders are actually turning to the rental market as an outlet to sell units on a scattered basis or whole communities. And I think that they're continuing to move forward on their overall plans and strategy to develop more lots for the rental market. So I would anticipate there's going to be a lot more competition in the single-family rental market. And overall, that could have some impact on multifamily, but not as much as crossover depending on its suburban Class A. That might be more of the area where you start to see people reconsider if they were in the market and they wanted to own and they've been renting, and now the builders are offering them much more attractive pricing. It might compel them to buy today because the pricing in some markets have come down pretty sharply and incentives are pretty compelling. And they're offering substantial mortgage rate buydowns and base cut rate reductions as cancellation rates are also surging. So they're sitting on inventory that they need to move.

Kris, you were going to jump in with something.

Well, Ivy mentioned their base case rent growth forecast that I think is really pretty spot on. And I think we've observed a similar phenomenon where renewals seem to be holding up very well. There's been a moderation of rent growth on new move-in rates. But still, when you're taking a look at those rental rates relative to what's in the rent roll, it is still positive. I was sharing with Ivy as we were catching up before this call, my frustrations with some of the other third-party providers. We took a look at an asset and a growth market in the Southeast just yesterday. We're one of the third-party providers that a lot of institutional acquisition officers really need to take their assumptions and put them in their underwriting model because that's what research groups rely on. Took this asset in the market from a 4-year rent growth CAGR, so not cumulative growth, but per year annual rent growth of 7.5% in March, and they've revised that assumption down to a sub-1% 4-year growth CAGR. So just do nothing else other than follow this third-party data provider, solve for the same returns, use the same residual cap rates at the end of your hold. That's a 30% correction to value. So I would say, kind of shame on you if you were taking lock, stock and barrel that 7.5% revenue CAGR assumption over the course of the next 4 years back in March. But it's hard to look at these in-migration markets and say, rents today are going to be the same in the end of 2025 and early 2026, where they seem to have really kind of overcorrected to.

So Aaron, you've been funding a bunch of construction loans, I think, surprisingly, over the past month or two. You just did a multi-construction loan in Brooklyn -- no, in Salt Lake City, excuse me. And then you also did a very large mixed-use construction loan in Brooklyn with what I saw as a very reasonable coupon. Who is still writing construction loans? And what are some of the assumptions that you're seeing in those types of deals?

Yes. I mean, look, commercial banks for their best clients will still go out and write a loan on a one-off basis. There's not an abundance of liquidity in the development space whatsoever. And there's a lot of construction loans that are in the market right now and developers looking for construction financing, and there's -- we would take on a lot more than we're currently working on right now. I would tell you that if a sponsor doesn't have a substantial enough balance sheet to be able to guarantee completion of the project and have the liquidity and financial wherewithal or partners within their transaction, we're going to go on a guarantee to provide liquidity for the construction line of those loans. We just don't think those loans are possible to get capitalized right now. So we're not interested in working on those. But for good developers with well-located real estate, there is some financing available. It's not particularly attractive. I'll give you a couple of examples or anecdotes. Beginning of the year for a loan that was just required to have a completion guarantee and a carry guarantee but no principal recourse, you could borrow at 65% of cost at roughly 275 basis points to 300 basis points over SOFR. Today, that loan is somewhere in the, call it, 50% to 55% of cost range and is in the mid-3s to upper 3s over SOFR. And you're looking at a SOFR that's now 400 basis points roughly. So you're talking about a decrease in leverage of 10% to 15% and an increase in the cost of funds of, call it, 500 basis points. That makes a lot of these deals not work. So it's challenging, but products that have a low enough land basis or some sort of creative mechanism to make the deal work can still get financed. So on that deal in Utah, we sold the feed to below the proposed building to Safehold, which is iStar's fee purchasing vehicle, and rolled that capital back, those sale proceeds back in to the deal's additional equity and then did a leasehold construction loan. And our metrics worked well for the leasehold construction lender, and the return metrics worked well for the sponsor. And the deal in Brooklyn, that deal had a component of condominium in it that the deal on its own wouldn't work from a return perspective. It's just a multifamily development will justify the investment. So you're using some condominium sale proceeds to sort of recoup some of the equity in the transaction and wind up at a more appropriate or a more attractive yield on cost for rental development. So that's why that happened. But we have some stuff going on in South Florida. We have some transactions in Nashville, other markets that do work. And then we have deals in other markets where development just doesn't work right now, where you can't make the math work based on inflation costs and cost of increased funds and return requirements.

On that deal you did in Brooklyn, the $300-plus million construction loan, you also brought in almost $90 million of equity. What kind of return was that $90 million of JV equity looking for?

So we actually brought -- it was over $200 million, but the first tranche was funded as a land acquisition, and we had a second tranche that funded the closing. But I mean, look, they're looking for, call it, close to a 20 IRR and a 2-0 multiple ultimately in that deal. What I will say that I find to be very interesting, call it, the 100 meetings we've had in the last 2 months, is I'll point out 2 things. Number one, I had lunch with the lender yesterday and -- that runs a -- he's in charge of a big mortgage REIT, and he said their cost to borrow, so they would write loans, they would write transitional loans on assets, and they used to borrow on -- just take multifamily, for example, they would go and they borrow at LIBOR, SOFR plus 150, and they put out money at LIBOR SOFR plus 275. And today, their cost to borrow is SOFR plus 300, and they're putting out money at 350 to 375. So while on an all-in relative return, they're getting a better return on their money because SOFR's gone from 0 to 400, on a spread basis, they're making a lot less than they were. That gap is only 50 or 75 basis points. So I thought that was interesting. The other thing I find would be very, very interesting marketplace, I'm curious, Kris, I know you have to say about this is the -- call it, the senior capital that's in the marketplace on anything sort of not fully stabilized wants to make roughly 7.5% to 8% on their money right now with where SOFR is and in the subordinate capital marketplace with everybody we talked to, pretty much wants to be rescuing capital or some sort of distressed angle or coming in and filling a capital stack that's maybe short or someone paying down a loan that doesn't have all the capital. And they want 15%, and they want to attach somewhere in the 60%, 65%, 70% range. And they want to go to anywhere from 75% to 85%. So if those guys want 15% or 16%, the equity, theoretically speaking, should want 25%, right? And therein lies the problem in the marketplace right now.

It makes it hard to figure out how to sell 4 caps.

Yes, it does, it does. But look, what I would say...

So what I would say to that, Aaron, is first off, very few of those deals are getting done right now.

Agreed.

And I would say, when you look at what is clearing in the market, and this is a multifamily-specific comment, but what is clearing in the market is largely clearing with what I would just refer to as able-to sellers. And those able-to sellers largely have derisked assets, and they're selling to very well-capitalized private groups and closed-end funds that can operate with lower leverage. So they're not gearing up those capital stacks with the type of capital that you just outlined. We were on this call 6 months ago and when we were incredibly active still in the forward transaction market. That space is completing you. You went from merchant developers basically, finding buyers and committing to deals 6 months before they were complete to now recognizing that they have to deliver those assets, they have to execute on the business plan, they have to derisk the rent roll, and then it's ready to go take to market. And there might be 1 or 2 exceptions to that rule that are very situational and specific, but that is the general rule today. And really, that's what you need to be able to go find more reasonably priced senior and equity that is able to get to a price that works for the seller.

Kris, I've looked through that list of the 40 transactions that have taken place in the last 60 days, and it seemed like a pretty even break between private capital and institutional capital. But it also feels, from having looked at the list, that private capital is transacting more than institutional of late. Is that a fair read of where the capital is coming from and who is actually getting stuff done?

I think that's right. I think, within the institutional capital description, Willy, I think you -- we should be very specific there. The institutions that we're transacting with are operating almost exclusively in closed-end vehicles that are not subject to quarterly mark-to-markets or they're operating with separate account capital. Since June 1 of this year, we've awarded over -- well over 100 transactions. Not a single transaction has been awarded to an open-ended fund or perpetualized vehicle of any kind, and I would include the nontraded REITs in that observation.

So let's just -- I do want to come to you on a couple of things, but let me just -- this is a perfect time for us to just dive into the V REIT and S REIT of halting redemptions or limiting redemptions in both of those vehicles. That's the news of the last week. Does that -- what's your read on that, Kris, to the extent that the gates were put in place on purpose? Both these vehicles have been great in an upmarket. Everyone sort of new in a down market, it wouldn't be great. My general read of it has been, if you look at the publicly traded REITs, they're all off between 20% and 40% in value. If you can go and redeem at par at NAV right now in one of these private vehicles, you can basically get an arb on where you think the value is going to go on those. And therefore, there are a lot of people redeeming on them right now. Is that a fair read? Or is that an incorrect read?

No. I would just say that we saw this in 2008 and 2009 with the large open-ended core funds with big redemption queues. Those gates are there to serve a purpose, and I think this gates largely protect shareholders of nontraded REITs and LPs of these open-ended vehicles. Forced liquidations and resetting of values don't help anyone, and so keeping that sale activity to create liquidity to fund those redemptions at an orderly pace, so as to not overwhelm the market with product, I think, is the responsible thing to do. I think there was an understanding going into some of those nontraded REIT vehicles that there's a reason why they were nontraded REITs and not public REITs and daily liquidity. And so I think what you're seeing right now is a little bit of the result of that. But in the meantime, while those gates are up, the investors of those REITs should feel very good about the neighborhoods that those groups have been investing in and the cash flow that those assets are generating and their ability to cover those dividends. But whether it's a nontraded REIT or an open-ended fund, Willy, for those groups to come back off the sidelines and start to play offense again, they will have to recognize write-downs, they will have to meet the market. They need trades to have the clarity of where the market actually is to accurately reflect today's NAV. But they will have to make some of those realizations and make it attractive for new capital to come in, and it will take some time. But overall, those are still great vehicles with a lot of longevity to them.

I would just -- I would also point out that commercial real estate has been a fantastic hedge against inflation historically. Unfortunately, right now, with the swiftness of rate increases, we're going through a bit of a revaluation period of real estate assets. I think we're going through that reevaluation period across the board against all asset classes.

No question.

It doesn't -- it's all one trade, and it doesn't really matter what it is. It's all getting reevaluated based on just cost of funds. Once that reevaluation takes place and stabilizes, and we have a base set on where rates are going to be and maybe they do come down, maybe they sort of stay where they are, so long as you can hold on, the beauty of real estate is it will protect your guest, inflation. And the rents historically will always go up because the Fed is always going to print more money. And so long as you buy quality assets in good markets that don't have -- that the city that you're investing in is not collapsing and losing massive amounts of population. Theoretically speaking, those assets should always increase the value. So the time that you have, you can grow your way out of those problems.

And Aaron, I would just say to that...

If I can, can I just jump over to Ivy Zelman here? So both -- Aaron was just talking about inflation and inflationary pressures. The big question now is when does the Fed stop raising and when do these inflationary pressures kind of get out of the market. You all track the building products market very closely. Are you seeing any relief on the inflationary pressures that have been seen throughout the building products market start to kind of ripple their way through to the point where, a, construction costs are starting to come down, and b, those inflationary pressures as it relates to goods are seeing some relief?

The trades right now are seeing less work in many of the MSAs that were hot and are recognizing that activity is slowing so that they are being more willing to work with builders and reduce price in some of the front-end part of the cycle. On the back end where there is a lot of inventory that needs to be completed, I think that there's less willingness yet. So it's much more category-specific. But I think if you just look at overall expense growth, we've seen moderation in expense growth and overall costs that have moderated, but they're still elevated. So I think that we're definitely seeing a benefit to the slowing, and we continue to expect that those costs are going to come down. I think that Toll Brothers just reported earnings after the close, and they indicated that they are seeing some cost relief. And I would expect that, that will continue. I think the backlogs for single-family right now are still very elevated, and a significant portion of that is spec inventory. So as we see that spec inventory get delivered -- get completed and delivered in the first half of '23, I think once we start to see less of that benefit from the backlog, you're going to see that all points of the construction cycle from the trades are going to have to be willing to give up price. And we're not seeing as much really price increases from manufacturers and distributors. They're not pushing for incremental price. They're kind of holding and getting a little more stickier as they think about the growth that they know is coming from the backlog. But I do think the front end of the cycle, you're seeing some benefits.

So I want to -- just quickly, I want to -- I'll read a text that I received this morning because I'm building a house, and I do the foundation now. And I asked a friend of mine who builds houses in Long Island, and I said to him -- he's got a lot of houses under construction. I said to him, "Hey, what are you seeing on the cost side? Because I'm currently in the process of buying out the job with the contractor and signing all the subs?" And he said, "Materials are down somewhat, but labor is all the same. Subs are especially busy in the high end of the market still. So we haven't seen any sort of reset in prices due to the labor shortages that are still out there." So I think that we will see substantial decreases, but I think that you're going to see them. I think you're going to have to wait another 6 months to see them personally.

Yes. I think the one thing I'd add, though, Aaron, is that where you have very large-scale builders that benefit from scale, there -- they have more negotiation power. So the smaller the builder, the less likely that they're going to see some relief, but the largest guys are definitely talking with their trades and working together to come up with what would be more attractive pricing knowing how much leverage they have.

Yes, I was going to make the comment. If anyone's listening, put a big asterisk next to what Appel just said. The labor market in South Hampton, New York and Aspen, Colorado, is very different from Nashville, Tennessee and Austin, Texas.

The only one I care about.

I just want to be clear that Ivy's data is a far better benchmark to where the labor markets are than Aaron's anecdote from his builder this morning. Last call, we got is color from this guy that bought 1 million eggs, and now we're getting the foundation guy in South Hampton.

Aaron might be right. The luxury market, super luxury, which I put you in there, in that category, is definitely still pretty active. And I think that the lower price points where the production builders -- and just for the audience, the public homebuilders account for almost 50% of the market and very much a production builder segment. The lowest end of that price point is actually holding up in some markets despite affordability being so stretched. If you can build in the 3s and you're selling townhouses in certain parts of the countries are actually seeing -- the country you're actually seeing pretty decent absorption, meeting incentives, mortgage rate, buy downs. But the middle of the market is where it's most challenged. But even framers are willing to negotiate and dry wallers and just knowing that they need the work. And so you are seeing some of those subs willing to offer better pricing to their large-scale builders.

I would -- I'd just add to the cost conversation, Ivy's got great insight onto the for-sale side. A number of developers who were able to capitalize their projects get equity on board, keep the construction lender at the table, closing those projects over the last 60 days. We've really heard for the first time that the numbers that they started to carry in the first or second quarter of the year for that development project have held all the way through GMP. And in some of those instances, marginal savings. This is not significant numbers but getting to the end of the $70 million total capitalization and having an extra $1.5 million left in the hard cost number once they finally get that GMP from their contractors. So I think we've seen a little bit of good news there. It's really just a reprieve from what was 150 basis points per month worth of cost inflation that they've been running with since the middle part of 2020.

And I don't think we're going to go back substantially the other way. I think we could go back a bit, though, because I just look at all the projects that we see, and we're just a small segment of the market. So many of them, we don't think are going to get capitalized that are planned out there. So it's just a matter of time, we think, before depending on the market share and figure it out.

So Aaron, on that, do banks come back into the market? So banks are basically, particularly the money center banks, have basically been out of the market since mid-August. And what that's done is, a, slowed down construction dollars, but more importantly, it slowed down the liquidity of the secondary market, which has made it so that there's really no buyer in the secondary market of paper, which has made it so the spreads have gapped out. And so until money center banks get back in there and provide that kind of liquidity, it's very hard to think about the general capital markets for commercial real estate getting back up and getting back to where they need to be. Do you think that we get to January 1 and the money center banks step back into the market?

So look, they're not all completely out of the market. We're still able to get things done. But I would tell you, normally, in a normalized market, 60% to 70% of capital allocations are contributed, whether it's from investment banks or insurance companies or commercial banks or on the equity side, a variety of different equity investors, they're typically made in the first and second quarter of the year. That's where the plethora of liquidity is. And then it slows in the summer. And then people sit there in September, and they try to cherry pick what they're wanting to do. And if they're able to win deals with wider pricing or paying less for it, great. And if they're not, they sort of will dump that money into the market right around now, right around November as the last cash to meet their quotas. I am very suspect about seeing new capital coming on January '23. I think we're going to see more of this. My personal take is I'm talking to people, the financial system is having an issue right now. The biggest issue in the financial system is the public markets are not working properly. There's no buyers for bonds right now, and specifically commercial real estate bonds. There's a lot of talk that bonds are the best place to be going forward in the next 12 to 18 months, and I think they're a good place to be, but there doesn't seem to be a big demand at all for securitized commercial mortgage bonds right now. And I think that's a big problem. And until the public markets open up and you see some stability and part of the issue is there's a lot of instability, so you really don't know what a deal is going to price until the day the bond sell, and it makes it hard for the banks to write loans also. You need the public markets to be open to absorb the large loans and then some of the stuff that's on bank balance sheets can get off their balance sheets into the public markets where it was meant to be and then you have capital allocations that free up the loans. So I think that's a big problem. And also, I think that the marks on the treasury is that a lot of these banks hold with customer deposits is also having failed the stress tests and has created downward pressure as well.

Yes, I would think that you get some clearing of that in the new year and particularly with budgets for 2023, the ability to kind of move some of that paper that is now under water. But Ivy, on the -- I mean, given how depressed the single-family mortgage market is and all these money center banks have massive single-family mortgage origination platforms, they're not getting that, they're not writing C&I loans today. Isn't there a sense that they've got to earn NIM somewhere and that they're going to have to come back into the markets to some degree starting in 2023? Or is that just wishful thinking on my part?

I think right now the mortgage market is probably the most challenged part of our ecosystem with refis basically nonexistent and purchases basically. Originations are down 40-plus percent. We've seen some modest improvement as rates have come down. Sequentially, we've seen it pick up a little bit, but really just getting less worse, I guess, from a very depressed level. It's tough to say where -- you're right, where are they going to get NIM from? And recognizing that today, our view is that it's somewhat dependent on what rates do going forward. And I think it's a very challenging environment. And they're not really not lending as much. They're much more stringent in underwriting as it relates to any development in the single-family market as they are in the new -- in the multifamily market. So they pulled back substantially.

I would make the case that the cost of capital right now that's available in the marketplace is more expensive than it's ever been. Maybe -- look, I'm 41 years old, so maybe since the early '80s. Because even though the coupon is not as high as some of those eye-popping mid-teen coupons, the leverage is just so low relative to historical standards, historical norms. It's just so conservative. There's such an ungodly fear factor out there that like 2008 is going to happen all over again. And the marketplace is completely different. The dynamics are completely different. And it just -- it's skewed so far, the other way. When you're talking about 50% leverage at 7.5% coupons and 8% coupons for development, that's -- you were borrowing at that price at 85% leverage, 90% leverage back in 2007 and 2008. That's titanic difference.

Yes. Kris, you've been -- your team has been selling your bunch on the build-for-rent front. I just saw a number of prints on some inventory that you've sold there. Has that market corrected as much as the multi-market has, less, more? And Ivy want to come to you on your outlook on SOFR, BFR, because that sort of -- without a doubt, that was the hottest space in housing kind of across the spectrum for the last year or 2. Has the -- has some of the air come out of that? Or is it still holding up pretty well?

The capital formation and the capital deployment continues. It's largely centered in the build-the-core strategy, Willy. You've seen large institutional investors continue to deploy capital, but it's really to build and own this durable income stream for the next 8 to 10 years. The transaction space and build-for-rent in particular was almost exclusively in the forward takeout structure because a lot of this inventory just hadn't been delivered. So we went from forward takeout structures in the low to mid-4 stabilized cap rate range in the fourth quarter of 2021 and the first quarter of 2022 to now those stabilized yields need to comfortably have 6 handles on them, if not into the mid-6s. And there's very, very little transaction activity. I made the comment to Ivy earlier, I said, "I feel like you've got transactions on stabilized cash flowing existing communities at market prices." And then you've got distressed homebuilders selling to opportunistic builders in the forward space on the other end of the spectrum and very little transaction activity, acquisition activity in between the middle of those 2 pools right now.

But we're seeing build and hold continue to move forward.

For sure.

And I think that there's a lot of optimism, Willy, that there's a shortage of shelter. And therefore, if the builders -- the developers develop and looking forward to the expectation that we have, the need with a stretched affordability, there is more of a directional play to go to build-for-rent by many developers that might have been otherwise considering for-sale. So I think that there's a lot more optimism towards that asset class than the for-sale market right now, just to put it into perspective. But I think the build-and-hold side is still pretty positive.

And Ivy, I remember about a year ago you were talking about the fact that both, single-family developers and then also BFR developers, were getting a little over their skis as it relates to land. That's some of the bidding that was going on to buy land was kind of getting super frothy. That was obviously one of the precursors to the 2008 Great Financial Crisis. Are you seeing any issues as it relates to people having overpaid for land and then some kind of distressed sales going on to the market now people saying, "I'm not going to develop this?"

Well, no question, a lot inflation, just sort at the peak, we were seeing lots in some markets doubling in value. Developers were the winners here. And overall, nationally, we do a land development survey quarterly. And we had a lot inflation approaching 35%, 40% nationally, with, as I said, many markets seeing more doubling of that. And the land developers in our survey indicated that a good 40% of that inflation was due to the build-for-rent capital chasing the asset class. That has since moderated to lot inflation more in the low, let's say, 10-plus percent. And I think it will continue to moderate given the weakness in the market. But I do think that comparing it to the GFC, I would just say that, at least on the for-sale side, builders have been much more prudent, tying up lots via option in smaller bites than they did with GFC and just order of magnitude, there's a lot of their balance sheets that are a lot that's not on the balance sheet, but they're retrading now. And so they're going back and dealing with the developer that they're auctioning lots from. And they're either walking away and taking impairments on those deposits, those options that they have locked right now, and they're deciding they don't want them or they're retrading them at better values. So it's really not the GFC, in our opinion, today. If you told me we're going to have a hard landing and the economy is going to sink into a recession, I think that we're going to see more significant impairments, but right now, they've been fairly modest.

So I want to finish with kind of, if you will, what's the smart money doing today? And I know that there's a lot of smart money out there that may not have the ability to move right now because of certain capitalization issues, redemptions, things of that nature. But as you sit there today and say, okay, that was a really smart move that someone did either harvest capital, hold on to capital, make a big bet right now that others it's somewhat contrarian. What are you seeing in the market that -- where the smart money is going beyond just sitting on the sidelines? So let me put that as one caveat on this. I want to hear if people are actually doing, not just standing on the sidelines. Kris, let me start with you.

There was an asset that closed at the end of the week, last week, full disclosure, we did not work on the project. But it was acquired by what I would generally consider probably one of the savvier opportunistic investors in the market. It was an asset that was put under agreement in the first quarter. Let's say, it got put under agreement for $1 in the first quarter, new construction, core, high-growth market. The basis was very attractive. Let's call the basis at $0.50. And this group actually went in and acquired the asset that closed last Friday, it's $0.65. So a 35% discount off of peak pricing in March of 2022. I don't think the story is really how much that value has fallen off. I think it's a reversion to the mean story and a story about how far that value ran from when that development project was capitalized to where the peak pricing was in the first quarter. I have no idea what rents are going to do in that market over the course of the next 3 to 5 years. And candidly, I don't think anyone else really does. It's a great neighborhood. It's a growth market, ton of in-migration, ton of employment growth. They just bought a phenomenal basis in the right location, and they got the ability to hold that asset for the next 5 to 10 years. They did a 10-year floating rate. This group has been doing 10-year floating rate debt and then hedging out or swapping the rate for the first 5 years to get them on the other side of the turbulence in the rate environment. So I think that's a pretty smart play, and they've been ahead of the pack more often than not. So that one caught my eye.

I would say...

Oh, sorry. Ivy, go ahead. You take it.

I would just say that the M&A activity, as we know, across the board, has been pretty much nonexistent. And I think that smart money right now is taking advantage of the weaker players in the market that are not well capitalized. D.R. Horton announced a small acquisition in Fayetteville today. And I imagine they probably got this builder at a pretty attractive price. So I think that there's no question to capitalize on those companies that are not well positioned. They have too much leverage and take advantage of what would be good locations. It would be what smart money is doing today, I think.

And Aaron?

Yes. I mean, look, you -- historically, multifamily has been somewhere around like 35-ish percent of the investment sales market, maybe 40%. I think going forward it's going to be 50% of the marketplace permanently. There's obviously a fundamental issue in a lot of the asset classes within the office sector. And people have been for years now turned off by retail to a big extent. So that leaves you with industrial, multifamily and a little bit of hospitality, which is not a huge market. And then some of the specialty uses like data centers or life science or self-storage. But I would say that the smart money should be looking to be able to buy multifamily at breakeven leverage based on right around where today's rates are and to lock in what I would deem to be 7-year financing with the ability to get out after 5. The Fed may increase rates and bring SOFR above 5% for a period of time or the federal funds rate, but 50% of the outstanding governmental debt has got an average duration of 7 years or less, 15% rolls every 12 months. We have $32 trillion of debt. We generate $4 trillion of tax revenue, and we spend a little bit over $6 trillion a year. We're printing 2 and change a year -- $2.2 trillion a year or so, regardless, and that's going to continue to increase. The Fed cannot hold rates at a high, high level for an extended period of time. So it's just a waiting game, really. If you can buy a breakeven leverage and good rental markets where there's going to be demand drivers and eventual employment drivers back on the horizon and some level of supply constraint, I think you're going to be a huge winner 5, 6 years from now. And that's what you really have to play for. But I think there's tremendous opportunity there.

Kris, last word.

I would just point out, I went back and listened to the archive. And 6 months ago, Appel made a prediction about the Fed's activity that when compared to the guests that you had the week after our call, and I'll say no more than that, other than the fact that he had more letters after his name than I think are in the alphabet, to say that Appel was more directionally accurate, I think, would be the understatement of this Zoom call. So congrats on getting that call correct, Aaron. And hopefully, you're correct about the prediction that you just made.

I thought you were going to take a shot at me with Bitcoins.

Jamie Dimon did that this morning talking about his pet rocks. So I'd just go back to what I said at the beginning. I am so blessed to work with the 3 of you on a daily basis. Thank you so much for sharing your thoughts and insights on the market. To everyone who joined us today, thank you for tuning in, and we will be back next week with another Walker webcast. And I hope everyone has a great day, and Ivy, Kris and Aaron, thank you 3 for joining me.

Thank you.

Thanks, everybody.