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December 7, 2020

Valuation - How Do You Value in Times Like This?


John W. Loper
John W. Loper | Associate Professor, USC Sol Price School of Public Policy
George Koiso
George Koiso, MAI | Director, Los Angeles Multifamily Practice Leader, CBRE Valuation & Advisory Services
Jaime Lee
Jaime Lee | Chief Executive Officer, Jamison Realty, Inc
John Pawlowski
John Pawlowski | Senior Analyst, Residential, Green Street Advisors

An excerpt panel from the Casden 2020 State of the Market conference. John W. Loper  hosts a discussion with industry practitioners George Koiso, MAI, Jaime Lee, and John Pawlowski on how valuation works today as COVID continues to influence the market in unexpected ways. The panel dives into their perspectives and observations on current trends in Net Operating Income, occupancy, and collections as well as how underwriting and financing is changing with Federal stimulus dollars available. 

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- Good morning, I'm John Loper, and I'll be leading this next panel, which is the valuation, how do you value in times like this? I'm Associate Professor, teaching Real Estate at USC, and a USC alumni from the MRED Program. And I want to introduce our panelists, and I'm gonna ask them to introduce themselves real quickly. So, let's start with Jaime Lee.

- Hi everyone, my name is Jaime Lee. I'm the CEO of Jamison Realty, we're a local office and multi-family landlord and developer here in Southern California. We currently have about 3,000 units under construction today. We're expecting to deliver about 800 of them in the next six weeks, and, we have a total pipeline of about 7,500 units. So we've opened, a little over 2,500 so far.

- Great, and George.

- Hi everybody, first and foremost, I wanna thank everyone on behalf of CBRE and the Valuation and Advisory Services Department. Thank you to John, thank you to your Dr. Richard Green and the University of Southern California Lusk Center for Real Estate. A little bit about me. I head the multifamily residential valuation team for the Los Angeles office at CBRE. Our team consists about 12 people. Its CBRE's largest valuation team nationwide. We complete about 70 plus apartment appraisals every single month, mostly focused on multifamily in Los Angeles County. What we emphasize or specialize in is really anything from five-unit assets, private client assets, all the way up to the highest profile assets in the market and most of that again, is in LA County. We do properties outside of LA County, however. I think a lot of the panelists have a big, wide, and broad perspective, what I hope to bring to the panel is sort of have boots on the ground perspective that we get on a day-to-day basis doing business. So anyways, thank you again for having me.

- And John.

- Hello everyone, my name's John Pawlowski. Its good to be with you guys virtually today. Hopefully soon we'll be able to be in person eventually. I lead Greenstreet Advisors, residential research team. So, covering the apartment, single family rentals, even the manufacturing housing sectors. Greenstreet is a research shop. We don't own any real estate, we don't sell it, we're not an investment bank, our goal is to arm investors with the best information to deploy capital in Real Estate, either through the stock market, with Public REIT securities or through Direct Private Market Real Estate buying, physical buildings, across 50 markets across the country. So we are, George mentioned this, the local sharp shooter, the LA expert. We cover 50 markets across the country, about seven big apartment rates, which we can get into what we're seeing the REIT space. But, our clients are typically large money managers and large private investors in real estate whether it's private equity firms, endowment insurance companies, some of them are funds, so we're the arm chaired quarterbacks of the industry as I explained.

- Great. Thank you all for joining the panel and let's get started. So I'd like to have each of you take 30 seconds to a minute to tell us what are you seeing in current trends, with NOI and occupancy and collections? What are you seeing in your markets and the markets you're studying? Jaime, let's start with you.

- Sure, so I'll just preface by saying that we are local to the city of Los Angeles. All of our holdings are pretty much in Los Angeles. We've got one project downtown, one opening in Hollywood, a couple on the West side, but primarily my perspective and view will be on the mid city LA and particularly Koreatown marketplace. Rent collections have still been holding pretty steady for us, despite some of the news that we're seeing around the country. We're at our 80 to 85% collection throughout the pandemic. It's been interesting because it has sort of modulated through over the last few months where some people immediately, maybe pulled back on their rent collections and then have started to resume paying. Whereas others, paid pretty consistently throughout the early months of the pandemic, I hope we're not still in the early months of the pandemic, and are now starting to see a little bit more strain or hardship coming in as additional funding and government related support begins to dwindle and whether or not we get a new infusion of that kind of support, we will see. But that seems to play a significant impact on whether or not someone who has lost some sort of income is able to continue, to pay rent. NOIs are certainly impacted. What we have seen, is a shift of residents out of California and out of Los Angeles. I firmly believe that this is temporary. Many people who work in large companies, in tall office buildings, in media and production, and the entertainment industry especially in the post-production space, they've been told that they don't need to come back to the office until January or until June, or until March at the very earliest. And a lot of young people have taken that opportunity to save money, to move home. The move-out trucks that I see, are to places like South Dakota, Indiana, St. Louis, Nebraska, and most people have said, I will be back and we'll check out newer buildings when I come back, when I have to be in the office. But for the time being, my mom's gonna do my laundry. And so that's a lot of the base of what our tenancy is, it's the 20s, 30s, people out of school, usually in second job out of school. So occupancy rates have gone down a little bit, which impacts concessions and this competitive market that we're seeing for tenants. However, LA is still in a significant housing crisis. And we really believe that there will be a flood of occupants coming back to the Southern California marketplace, when it is time and safe to go back to work.

- Great, John, how about your markets you're studying? What are you seeing?

- Every market by market, sub-market by sub-market, I would say, if we went back to my fears in March, and fast forward to today, I would characterize it as, the worst fears were avoided and it's not as bad as we thought back in the early innings of this pandemic, and hopefully it is the later innings. So I agree with Jaime. So worst fear is avoided, but very bifurcated by outcomes. And so, there's seven big apartment rates we cover. There are a lot of, those seven rates are heavily focused in coastal markets. There's a few Sunbelt focused companies, but, we're seeing more forecast right now is about, on average, between those seven companies, mid 4%, NOIs stabilized, same sort of NOI decline as this year, improving a little bit next year, 3%, but the range is pretty massive. So your typical stone-belt operator, is seeing maybe 0% annual growth which is pretty darn good this year, given how elevated unemployment is, and some acceleration next year, but your big coastal operators are probably gonna see, six, 7% underlying clients this year and next year as some of these hard-hit cities, they just have a tougher time ahead of it, rents are resetting pretty precipitously right now, in the new York's, the downtown Sanford area, maybe pockets of downtown LA. Not every city is New York city right now. A lot of the less dense metros are doing better. And some of the markets are definitely holding up better in terms of concessions, pressure and occupancy and rate, but, you realize they're coming down, which is to be expected a little bit just given how elevated unemployment is. But again, we were predicting a much bigger fallout across most markets, earlier in the year.

- Great. George, what are you seeing with your clients in the Southern California area?

- Well, as it relates to apartment buildings, it's very difficult to pinpoint any one particular trend because, it really depends on, on where the asset is located, the size of the asset. There's a lot of factors involved, and I think, in today's market, to value property, I think that's what makes it really challenging. As the market was going up, I think whether it was large apartments or private clients as income went up, the values went up, but, and it really didn't matter where, where it was located. It could be a great West side location, or sort of a beach sea location. And that time was pretty much holding steady, with the market. Not really factoring in as much, differentiation between the risks that an asset might have, because of the neighborhood, or the tenants or the demographics. So it really depends. I think, as it relates to these particular topics on rent collections, I will say this and not to contradict the data that was put together by Pabol earlier or Pablo earlier in the post data. But what I see in the market when I'm meeting the people, a lot of the BC products that, where the tenants are blue collar or lower income, I tend to see that those properties are performing better in terms of rent collections. The properties that we see that stand out to me, I mean, of course this is anecdotal but, that's the large assets, the ones in Hollywood, or the ones that tend to be class A assets. We see some of those buildings that tend to perform very poorly in terms of collections. And, although the owners believe that there'll be able to collect those rents eventually, and maybe, some of those tenants might be taking advantage of what's effectively an interest free loan. Those are the properties that I see collections that are only getting 70 or 60% or something like that. Whereas my wider data that I have is showing 85 to 90% collections, kind of like Jaime was saying earlier. So, other than that on those topics, I would say in terms of occupancy, for sure, I think the latest and greatest information especially as it applies to class A properties, is that occupancies are definitely down and rents are definitely declining. So, we would expect that NOIs would also decline sort of heading into what's the toughest season in terms of renting, which is the 4th quarter, 1st quarter of next year. So, it'll be interesting to see what the impact on values are. One other point I'd like to make as far as the small apartments too. And when I say small apartments, I mean $10 million or lower in terms of value, this is a space that traditionally has had very high occupancy. I mean, I would say over 97%, quite easily because most of our inventory is rent controlled. So, in those assets, it's very rare to see any vacant units, but especially of late, in the last couple of months, we've definitely seen certain buildings, maybe certain brick style buildings, 40 unit buildings, where it's not uncommon for me to see four or five, six vacant units. So definitely a little bit of something of note, so...

- Are we seeing any products going up for sale or are people holding their product back in order to do, figure out what the comparable sales are, where you have to have sales, what are we seeing? Are you seeing anything George that's a robust market or a slow market?

- Sure. As it relates, I mean, I think, as Jeff was saying earlier everything is changing so fast. It's changing month by month. And really, when the stay at home order started, if anyone had deals that were in the pipeline or, under contract or whatever, I mean, a lot of those I'd say, the majority of those fell out of contract. And for a couple of months, we had a very quiet period with very little transactions. I would say that starting in June, July, closer to July, we started to see, buyers and sellers sort of meet in the middle. And we started to see deals start to come through, some portfolio transactions. But, as it relates to the larger apartment again, I'm gonna differentiate between small apartments and large apartments. The large apartments still are difficult to sell, particularly the ones that are in urban, assets that are in lease up, that have concessions of four to 12 weeks, markets that have a lot of supply coming behind it. These are assets that are very difficult to sell because they're very difficult to value at this point. I mean, I've been in a lot of panels with a lot of experts, and we talk and we talk and talk and really nobody knows how to really get to the bottom of what these assets are worth. And that's what makes it extremely challenging. And for those reasons, they're very difficult to sell. As it relates to the current market, I would say over the last 60 days, the top brokers in the market have reported to me, almost across the board that they have more listings than they typically have on average. So, some of them have like twice the amount of listings that they would typically have. And one broker reported, he has 15 assets under contract and he's listed 20 in the last 60 days. So, a lot of the data that we've all been sort of hoping for and wanting, I believe is about to come out in the next, two to four months.

- John, are you seeing trading going on, sell buying and selling the REIT market, in terms of assets?

- Yeah. And George and Jaime will know it better. What's going on on the ground today, with individual deals and buyers and sellers. The REIT mark, the REIT portfolios and the REIT share prices have gotten hit hard and more than, more companies than not are becoming net sellers. And they're starting to ramp dispositions and using those proceeds to buy back shares and pay back their own debt. We got a one large California JV disposition from [indistinct]. Announced about a month ago, maybe it was underwritten three or four months ago. The value of that portfolio is, large proportions in the Bay area and Southern California, pretty good mix between urban and suburban product. That valuation that JV portfolio, was only, a couple percentage points below where we would have marked it, pre-COVID. So, right now, lower interest rates are offsetting some evils on the rent roll. So the deals that have traded, we haven't seen eye-popping discounts, but there is a bid ask spread in some of these markets, where we just don't have price discovery. So we are all, getting into the pocket a little bit. We do think there's more discounts coming, but [indistinct] equal apartments are holding up pretty well from our lens, from afar. Apartment values seem to be holding up on the deals that aren't ready.

- Jaime you've been active in the segment. What's going, what are you seeing on the ground?

- It's interesting to hear what George was saying between that difference, between larger assets and smaller ones. We've actually sold four properties in the pandemic. We did have an office building that fell out right at the beginning when everyone was kind of panicking and freaking out. But since then I've really seen that valuations have continued to hold. These are smaller buildings, 75 units or less, definitely value-add opportunities that there are buyers for. And if you have the right buyer and the right relationship with financing, we've been able to see these come through and still at a four cap or sub four cap. And so we've been really pleased with that, that there are buyers there, whether they're meeting a particular deadline, for instance, one had an exchange that needed to be completed by July 15th, others who are just very active because they know that, for the work that they want to put into the asset, to be prepared for this turnaround when people are starting to come back to Southern California. So it's been interesting to see that. And back to what John was saying before when I was panicking in May about, all the new supply that was coming online. We're bringing to market 1600 units in 2020, and it was panic at first, but we've really seen a slow and steady march towards, newer product which has been interesting. But we started leasing on a 336 unit building that we opened at the beginning of September. We're a third leased there right now, the first three weeks we did with, 30 leases with no concessions at all. And now we're starting to see more competition coming into the market. And sometimes, some moments in some weeks, we keep very flexible and nimble on this, but in some weeks it almost seems like a race to the bottom where we see other landlords piling on concessions and then the next week everyone kind of relaxes and pulls them back. But I think that if you can remain nimble and follow the trends and really keep an ear to the ground as to what tenants are doing, and a lot of it really does seem to track the state of the local case counts. So as cases started to rise, we start to see people less willing to come out and take a physical tour. But as cases start to go back and people start to ease restrictions a little bit more, we have a flurry of leasing activity. And so there are tenants in the market, they are willing to pay for product. And, in general, the story here in Koreatown has been, studios will go first. The lowest price units will go first and that's certainly still the case, but now we're seeing people it's at the high end and the low end that we're really seeing the most activity. People are willing to come in and say, what's the best unit that you have? And I wanna to see that, I want the best views. I want a two story penthouse unit. And we're seeing this flow also towards buildings that have outdoor space, large amenity decks, and in particular balconies.

- So are you finding that people are wanting more space and moving up to accomplish their home office?

- An interesting trend that we have seen is actually people mid-term who want to upgrade from a studio to a two bedroom or a one plus den some get a stipend from their work because maybe their lease ended and they canceled their office lease for the time being, they're providing stipends to their workers to be able to get a little bit more space in their rental. And other people just have families and everyone's home and they just need to upgrade.

- How about the roommate situation? Did you have a lot of roommates in your portfolio?

- A lot of people split up. Yeah.

- So they're going from a two bedroom to two studios or one bedrooms and then the studio people are going up to have more space.

- Yeah. If you're a couple or if you live alone and you just need more, you don't want to work in your studio and you want a separate area for work. We've seen that upgrade. And for a lot of the roommates we're seeing, we're hearing this all throughout our co-living operators that we speak with, that people just don't want to be tied to the responsibility of their roommates. So you really just sort of see how much, people are trusting each other which has been fascinating. But yeah, we're seeing a lot of those kind of split-ups happen as people try to manage their level of risk tolerance during the pandemic.

- Great. George, can you touch on underwriting criteria? What are you seeing people? What are they changing? Are they including higher vacancies? What are you seeing changing the way people are underwriting properties?

- Yeah. I mean, I guess that depends, again on the perspective. So for underwriting, I think, when I speak to lenders and we do, assets appraisals for all different kinds of lenders, I think what they don't want to see right now is any kind of inflated rents. I mean, they really want to get down to a net rent and we kind of talked about that fore cap and just sorta it, what are the real numbers? Not what's going to be down the line. And then as far as other other changes to the underwriting I would say the rental rate growth assumptions. I think it's pretty most people are underwriting pretty flat rent growth through 2021 probably going back probably six months or even since the pandemic started really, that's what we really seen. And then interestingly, some people are sort of spiking the rent growth in 2022 or 2023 and maybe 5%, I've heard even up upwards of 8%. I don't know if that's gonna happen, but that's interesting, as opposed to a more flat underwriting assumption, as far as other types of assumptions, I would say in terms of the nonpayment for the tenants that have stopped payment or something like that, that has been underwritten, sort of a below the line deduction. So, you just kind of take a lump sum of for however many months, maybe it's a six month period or maybe a little bit longer if you're conservative and you make a deduction. And really that's a very small adjustment. I mean, often times it's less than 1%. So with all of the stay-at-home order stuff and the non payments, I think operationally it can be somewhat of an issue, but on the deals that we've seen actually close, really hasn't had, I mean, 1% can still be hundreds of thousands of dollars. So...

- Great. In terms of REITs, there's a big valuation changes in the value of REITs. John you wanna talk about that real quick and how you're seeing, are you seeing any people looking at how they can take advantage of that?

- Yeah, definitely. I apologize for my technical difficulties here and hope. Hopefully you all can hear me well, start signaling if you lose me. But yes, the REITs have gotten hit hard this year. So since the peak of the REIT market and mid to late February, REIT share prices are down low 20 percentage points. If we jumped on this call on Friday, it was much bigger but then Monday was, the whole REIT market really rallied on the vaccine news. So, it's all over the board right now, but all that to say the scoreboard is still showing the REITs down pretty significantly, low 20 percentage points, total returns. That's kinda leveraged to overturn on an unlevered basis. They were down 15 to 17 percentage points, much bigger for the coastal REITs and much smaller, more modest declines for the Sunbelt REITS. And why that's important, even if you don't buy or sell REIT securities, REIT values can often be, not always, but can sometimes be a leading indicator of where private market values are going to shake out. And so right now, the REIT market is sending a pretty powerful signal since March that, private market apartment values, again, mostly in a coastal setting, are down, well into the double right now. So that's what we're seeing right now. So we believe that the REIT market has overreacted a little bit. We believe the REIT apartments are cheap, relative to other commercial real estate alternatives. And so, some of that pricing will close, but I think that's part of the reason why there's a big bid ask spread. We don't have great clarity on private market values. It's just gonna take time for, to play out. Who's more right. The public market or private market, but retail prices are kind of in the gutter right now.

- Do you think that it will...

- You think that will... do you mind if I ask?

- Yeah.

- Do you think that'll hold, through 4th quarter reporting? I mean, I feel like part of that was, as rent collections are starting to become a little destabilized and vacancies start to creep up. Do you think that'll hold through 4th quarter reporting?

- Yeah, assume that, you're right. The 2nd quarter and 3rd quarter numbers were pretty ugly in terms of leading indicators, new moving rents, collection rates were fine but the denominators shrinking in terms of occupancy and new movements. 4th quarter numbers are going to be bad too. Q1 is probably gonna be tough but every now and then the market will stare out 12 months and say, okay, there's a vaccine coming. We don't see the rent's rebounding today but we're going to see them. So Monday, these share prices were up 15 percentage points and office REITs were up like 35 percentage points, not with anything on the ground today, but staring out to a month so they can underwrite. You can more easily underwrite the return to offices, the work from home, getting pulled back. So if you give me a health forecast, I can give you a better rent forecast. And that's the tough part. It's literally, I've been using the term chasing it, chasing a kind of hurricane in terms of forecasting. So you're right, Jaime, that the rents are coming down. The 4th quarter numbers are going to be tough Q1 is probably gonna be tough, seasonally slow period, and not a lot of demands 'cause I don't think our day-to-day lives are gonna change much in terms of going back into the cities between now and the spring. So again, we think there's a good margin of safety and REIT share prices, I mean, they will recover. I just don't know when the rebound is gonna be, two months from now or eight months from now.

- Do you think any REITs are going to go private? Someone's going to take advantage of these low prices.

- It's possible. I don't think it's likely. I think for a REIT, there's you know, if you're sitting in a board and you're thinking about how do we, what do we do? Do we need to go private? There's plenty of capital to underwrite these readings right now, with the Blackstones and Starwinds of the world. But you could say, you could easily come to a conclusion, We'd be selling at the bottom. And there's vaccines now, months away and cities are gonna come back and why cash out now? So there's some social issues, and some other smaller REITs as well. CEO's wanting to stay CEOs and not wanting to, not wanting their jobs to go away. So I don't think... the discounts are there, the capital's there, but I don't think there's a willing seller right now.

- [Jaime] Okay.

- Jaime, you're active in development. How are you underwriting development and figuring out, how to project what things are going to be when a project opens that you have... gonna start construction in the next year?

- Yeah, well the buildings that are opening this week have been under construction for 24 to 30 months. They were under development for at least a year before that. So, by the time my building is opening, it's been well underway for a number of years. And so for us, we continue to look at the overall pipeline in Los Angeles. There have not been the deliveries to meet the demand, that we've been talking about this housing crisis for the last several years. Before that pre pandemic, we were looking at rent growth anywhere from three to 5% annually. The only thing that was going to stem that as Richard has said many times is an immediate infusion of a hundred thousand units and a commitment pace of about 30,000. After that, I think LA has been in the 20 to 25,000 unit deliveries, annual deliveries without that initial infusion. So that's sort of our guiding principle as we're looking at the development pipeline and at the occupancy rates pre pandemic, we sincerely believe that occupancy is coming back to LA, as we recover and as it's safe to do so, people want to be near their jobs. They want to be near opportunity, even if some of those jobs can partially be done outside of an office, they can't be done from across the country for the vast majority of the companies that we're dealing with here in Southern California particularly in the entertainment and media space. And there's a little bit of uptake in activity in the suburbs, for sure. I think that's much more of the case in the tri-state area versus here in Southern California, LA is very much more of a collection of suburbs as opposed to a super dense urban metropolis. But I was thinking back, as Richard was saying earlier, I remember after 911, people were saying, no one will ever go into a high-rise building ever again. And it was a very short period of time after that. Soon after that, office buildings were once again filled to their occupancy. So it's not next year, it's probably not in the next several months that we're seeing but we are an LA company. We're a family business, we're a private company. We're very much tied to the land here. And so our commitment based on our construction is holding firm. We were hoping to see a little bit more decline in construction pricing, 'cause those had really hit unprecedented levels pre pandemic, much more so than the rise in the rental costs. So we were holding off a little bit on a couple of buyouts to see if we could get any more favorable pricing. I think lumber came down a little bit and steel and maybe a little bit, labor on an absolute basis, never really seems to come down at all, but we've broken ground on two new projects, during the pandemic already. And if we've acquired the land and we've taken the time and spent the money to entitle it, we're continuing to push on, because we believe in this overarching story of the need for additional housing here in LA.

- Right. A question from the audience, one of them was about financing. George, you want a touch? Is financing available? Is that affecting valuations and ability to buy and sell property?

- Yeah, I mean, I think as we talk about like stimulus and all of that stuff, I mean, what's really interesting is the fundamentals of apartments. All the things that really matter the most, occupancy, the collections, those things are all kind of going in the wrong direction. They're sort of all degrading but valuations are really not degrading at the same rate. And a lot of that has to do with low interest rates. So that's to me, like the big bail out right now. And probably in, not just affecting apartments but a lot of markets, but yeah, there's a lot of available financing in the market. And I think if we compare this sort of cycle through the last downturn, that's the big difference is in the last downturn, where we would have saw valuations or we did see valuations declined 20 to 30%, in this cycle, maybe we see it 10% at most. And a lot of that just has to do directly with the diminishment of rent. And it's not even, even though on the upturn it goes up proportionally to the rent, on the downturn it doesn't go down proportionally to the rent because sellers just aren't willing to sell at the point. And the reason they're not willing to sell is because they have a lot of options for financing right now. And so the conditions are very different than the last downturn. And, in my opinion the financing is having actually a major impact on valuations.

- Anyone else wanna chime in on the financing?

- I think just one note is that's where relationship seem to come in, here on these smaller deals that we're seeing and the local deals here in LA, if you have a good relationship with a lender, but we're seeing, there's just so much dry powder on the sidelines and whether it's patient equity that's really looking for a careful investment or whether it's anywhere from debt funds to more conventional or even there's also the option upon stabilization of going to agencies. So there's just a lot of options where people don't have to transact if they don't absolutely need to, for some reason.

- Great. There's a question about rent control and how that's affecting valuations. And we just got through an election and had several real estate items on the ballot. One of them being the rent control, which went down, another one being property tax increases which was a very narrow margin, but was defeated. How are we taking the future threat? I mean, we've had two rents... we've had a rent control law that was passed and signed by the governor. We've had two initiatives that have gone to an electorate in the last couple of years. How are we looking at rent control? And is that affecting valuations in the areas, where we have our control and in other areas where if the initiative gets passed, at some point we do it, are people looking at rent controls leveler evaluations, or reducing valuations? Is anyone seeing any of that?

- I haven't noticed that as far as RSO in particular, just because it was so decisively rejected last time and this time, and people didn't seem to be concerned about that coming through. I think that Prop 15 was incredibly significant. And even though that wasn't going to impact multifamily yet, I think that specter of, that it could eventually come towards residential, did shake some people that, half of our portfolio is on the office side. So that was a very significant thing that has kept me up for even as long as the presidential election took to count, Prop 15 I think was only yesterday, the day before, the night before was, was called. And so those are significant things. And I certainly hear from people, who don't reside and aren't tied here to LA, speaking to measures like that being significant detractors and barriers to being able to do any sort of investment in California.

- George, are you seeing all these rent control initiatives causing issues with people wanting to invest in something in California?

- I mean, it's really hard to tell. I mean, by the time the deal comes to me, it's because most of the times the buyer and seller have sorta, found a happy medium and are willing to move forward. And when I talk to those buyers, they don't have those regulatory concerns. With that being said, I think Prop 21 was a pretty substantial, potential regulatory piece that could have had a pretty big impact particularly for the value add investors in the market. And for those who aren't familiar, I mean, that would have cap rent increases to 15% over three years. And, now with that having failed, really investors are just having to deal with AB 1482, and that which allows CPI plus 5%, every single year. So that's not that restrictive, that gives a lot of breathing space for the investor in order to continue to sort of move through their business plan. Well, with that being said, I haven't really seen too much of an impact overall. So...

- And John, the REITs were very involved in the campaign against 21. Have you heard any buzz from, since we've got the electoral results of that.

- Is John frozen?

- I think John's frozen. So...

- John's frozen. Hey, George, could I just mention one thing actually?

- [George] Yes.

- It just sort of goes back to what Jeff was saying. Even though it hasn't necessarily, the regulatory environment hasn't impacted valuations per se. I think one thing is like what Jeff Bailey was saying on the, one of the previous panels, which is that it's very difficult to keep track of everything that's going on. So we're just constantly fighting to make sure that we understand all of the regulations that are coming out. And I think from an investor standpoint that makes, they're gonna have to be more sophisticated and staying on top of those regulations as well, in order to make sure they're staying in compliance. So, I think having an operator or doing business with an operator that is seasoned is probably advantageous from this point going forward. I don't know Jaime, your thoughts on that.

- Yeah, I would generally agree. Oh, it looks like John's back. Ask him your question.

- Yeah. So John...

- I apologize.

- The REITs spent a lot of money to fight Proposition 21. And what are you hearing from the REITs now about their views, about the future of other rent control initiatives coming back and are they making any investment decisions based on concerns about the regulator environment?

- Yeah, right now it's breathing a sigh of relief and, the past two times that repelled Costa-Hawkins has failed, it's been a huge margin. So, I don't think they're worried about Costa-Hawkins front right now, but they are worried about anti-business business practices and the signal that's sending to the employers. And so I do think it becomes impactful, not just rent control, but the push for taxation and more regulation. If it starts driving a meaningful amount of high paying jobs out of the state, they're concerned about that. None of them have really shifted capital allocation strategies or portfolio management strategies because of rent control. It's more of whack-a-mole, we'll deal with everything that comes up right now. There hasn't been that one polarizing moment to really drive capital out of California. I do think it has driven capital flows. You can't prove it, you can't [indistinct] easily, I do think it has driven capital flows in the Sunbelt markets where for the non-California focused investors, the headlines are pretty darn scary. And if there is a lot of brain damage in going to city by city and reading housing code and understanding of the landmines from a regulatory perspective. Very easy to pitch a Dallas apartment building to an investment committee. So, I think it has led to cap rate compression on a relative basis. Non-California markets versus California. I haven't got the sense that it has really disrupted values on an absolute basis in California.

- Great. We've got one more question then we'll do a quick little wrap up where I wanna ask each of you to give us your crystal ball, on what you think is going to happen to valuations over the next year, but has anyone done any opportunity zone and are we seeing any opportunity zone investment changes in values in the opportunity zones? We don't hear a lot about it right now. Everyone's talking about other things, but is anyone dealing with opportunity zone investments? And is that encouraging values in these zones?

- We have a lot of property in the opportunity zone. Unfortunately, we already own it. So, we're looking at different mechanisms and different ways and we've also acquired a couple of parcels, nearby during the pandemic as well. But I will say that there has seemed to be, a bit of a chilling effect with Biden's win, on the opportunity zone regulations. Obviously investors can continue to rely on the current regs that are in place for the time being, but the sort of specter that something significant might change with that legislation is, it seems to have had a chilling effect in the market. We're hearing far less activity as far as, and also I think part of that could be the pandemic as well. Where as there might've been a healthy market for acquiring pre TCO, new deliveries, in order to take advantage of the opportunity zone benefits these days, I think the lease up risk, seems to be driving people a little bit more as well. And perhaps on the investment side, people would prefer to wait until after stabilization, to acquire.

- Okay, we've got just a few minutes. So if you all could each take a minute, I'll start with John but if you could just give, give us your crystal ball what you think is going to happen, in the next six months, year and 18 months, in terms of what we're going to see valuations for properties, I'll start with you, John.

- I don't know, but my gut says in a year from now, if we were on this call, class A, urban property and some of the hardest-hit markets values, think San Fran and San Jose and New York city, pockets of Boston, I would guess a year from now values are 10 to 15% lower, then you kind of end at 19 marks. Sunbelt values, your typical Sunbelt community, maybe outside of a Houston, which has some real structural employment issues coming, outside from hard-hit markets like Houston or Orlando right now, I think that I use could be up 5%, and maybe some other dense coastal markets, maybe slight diminution, but there's a lot of... If the credit markets hang in there, There are a lot of restricts that could point to cap rates going lower, across a lot of markets. It's just a matter of the hit that they will have, which I think is gonna be pretty big these next 12 months in some of these cities.

- Right, Jaime. What's your thoughts about the LA market and values? I feel like when the pandemic started I gave myself this marker of March 2021, is like, hopefully we'll be on the mend by March, 2021 and not necessarily in the real estate side, but just in all of doing this that we've been doing for the last several months. And with that marker, has helped me keep like a slow and steady regimented pace of this is the new normal, and this is what we're doing for the time being, if we're still doing this too far past March, I think it's gonna be really hard for a lot of people. The vaccine news is very promising. Of course there are other vaccines that are in the running as well. If we are able to deploy this on a very positive scale, that people are able to line up and actually get these vaccines or if we have better federal policies in place because we have a new president. Whether it's testing, whether it's masking, whether it's all of these other roles that help us get to more of an open society, day to day life that may be masked and tested, but still a little bit more open . If we get to that point, which I think we will, 12 months from today, I would expect that occupancies would be up significantly, that the ability to pay rent would be up significantly. We'll still probably be dealing with background issues and working out deals with tenants on that side. But with, with those metrics and people being back to work, I would say that would imply that valuations would be better. So I mean, John scared me, so I'll just say, but as George and I were talking about too like I think valuations have still held up, but there just haven't been the transactions that have been in place to comp that. And so I think it'll be a pretty stable, and it will be on the mend. Great George, you get to take the last minute and a half.

- Yeah, as an appraiser, oftentimes we're looking behind and at the data that's already transacted. It's a tough question when you ask, what does my crystal ball say? I don't think it's any better than anybody else's. With that being said, I think that there's a lot of challenges moving forward, particularly in a short timeline, like one year. Largely because, a lot of the decline in rents and the concessions we're really seeing them start to pop up very overtly in the last couple of months, in the last 60 days, really hard to get away from the fact that, occupancies are, so many buildings are struggling with that. I think in the end there's also the possibility of another stay-at-home order as the COVID numbers continue to rise. So there's, there's that possibility of downside. Ultimately I think values are gonna go where interest rates do. So I'm not an economist or an expert on interest rates, but pretty much wherever that goes, I think is where the apartment market value is going to go as well.

- Great. Well, I want to thank the three of you. You've done a wonderful job. Thank you for taking time out of your day and sharing your insights and sharing your thoughts. So thank you so much.

- And John, thank you very much for doing an outstanding job moderating that panel. We have come to 11:15 and George, I can't help but say so, interest rates, aren't going up very much in the next year. And we will welcome you back at 11:20. We're gonna take a five minute break, but please be back on time for the Lieutenant governor of the state of California at 11:20. See you soon.

- Thank you guys.

- Thank you. Take care of everyone.