Animal Spirits Podcast - Talk Your Book: Why We Don't Build Enough Houses

Episode Date: July 6, 2024

On today's show, Ben Carlson and Michael Batnick are joined by Coby Lefkowitz, Partner at Backyard to discuss why homebuilding has slowed, why building houses has become such a complex process, thoughts on start-up cities, Private Equity is not buying up all single family units, solutions to the housing crisis, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. We're joined today by Kobe Lefkowitz. Kobe is a partner at Backyard, a real estate development from Basin, California.

Kobe, welcome to the show. Thanks so much for having me, Michael, and Ben, great to see you as well. So housing affordability, major, major issue. And every time we hear the same answer, they're not building enough houses. I don't know what that means, but I know that you do. So for our audience, we're going to talk all about the housing shortage today and why you can't just build more houses, which seems to be the sensible solution here. Before we get to that, give us a bit of your background.

How did you get into the real estate industry? What do you know? Just give us your credibility before we start asking all these sort of questions. Sure. Yeah. So my background is an urban planner. I went to architecture school, wanted to draw a little bit, wasn't technically gifted enough, shifted into planning, but always knew I wanted to get back into real estate.

real estate development. And so urban planning is really the meat of what's behind our housing shortage. We're trying to understand that because if without planning departments, you know, there's no zoning codes or building codes. And so that really is the operating entity that drives through a lot of these questions that we're going to answer today. After school, I went and worked for an institutional rate based in Washington, D.C., doing some asset management, in portfolio management, a little bit of acquisitions work before moving up to New York to do development, a little bit more asset management for a smaller boutique firm doing multifamily, a little bit of hospitality before striking out on my own with a couple of

partners where we build infill apartment buildings in Southern California and now trying to bring some work back in New York. So what is your general feeling of the housing market? It's kind of a squishy question, but how does your, experience with the housing market shape what you're trying to do now? Yeah. So there's a couple of different ways that someone in real estate investments can interact with the housing market. There are real estate investors who just buy homes, buy small duplexes, quadplex, and maybe they do some value add investment. That's

predominantly what most people who say they're in real estate or real estate investment do. I'm in development specifically. So we'll go look for land in most cases. Sometimes, There might be a house or duplex or something on a large lot and we'll look to build in some cases 10 units, 20, 40, 50. We try to stay under 50 units to be more in a neighborhood scale. But because we're looking to build things, we need to forge relationships with the cities that we work in. It's a little bit different than if we were just buying a duplex.

We don't need to talk to anybody in the city if that's the case. And so as a developer, it's really important that you work in a market that allows you to build. It sounds simple, but you're facing so much friction in this process. Entitlements, you know, the process of getting permits to build any new housing could be as little as a couple of weeks in a smaller Texan city, and it could stretch on to four or five, even 10 years in a place like San Francisco, which is crazy. We'll talk all about the frictions. That's where we're going to spend most of this episode. Like, why? Who is causing the frictions and why can't we just eliminate them. Before we get there, one of the things that you hear most frequently cited on the

internet is, well, there's no houses because Blackstone is buying all of them. Can you talk about the institutionalization of single family homes and just some of the nonsense that we see repeated over and over? Yeah, I'll start by saying that's not true. We don't have a housing crisis because of Blackstone or BlackRock or any other color and natural mineral that someone wants to, you know, pair together. Start of institutionalization and housing goes back to the early late 80s, early 90s. There was some tax reform changes and changes in how REITs were structured. Long story short, it opened up the doors for more institutional investors to get comfortable in the asset class.

There was increased transparency requirements, disclosure requirements, and liquidity parameters that allowed pensions and high networks to feel more comfortable. But before the 80s and 90s, you really didn't see Laura. investors in this space. They tended to stick to commercial assets, but the allocations weren't that high. Over the next couple of decades, as this appetite grew, it obviously culminated at local peak in 2007, there became this comfort where firms who thought it was a little messy previously to own somebody's home, developed a process, and essentially system that made sense. There's a lot of third-party managers. They don't have to be interacting

directly with tenants, and they were able to see that cash flows in some markets could lead to 7, 8, 9, 10 percent annual yield, which is really strong for some of these firms to say nothing of appreciation upside. So all of that is the backdrop before 2010 and 2011 in the recovery from the Great Recession, where these firms started a foray into the acquisition of single-family homes. They didn't really touch the asset class before then. So this phenomenon is really in the 2010s. And now we're seeing it obviously continue into the 2020s. But it is relatively new. And there's a large flood of capital entering the space based off of 20 or 30 years of comfort. So we're going to drill down to some local municipalities and how they differ by cities and

areas. But I want to talk about like the national housing market because it fascinates me to know on how it's how it's evolved. So you had the 50s after everyone came back from the war and there was a GI Bill. And I love those stories about like Levittown and stuff where they just, the government literally like back to these loans and said, get out there and build a bunch of houses. Yeah. And they went from building like 100,000 houses in the Great Depression to like a million houses in the 1950s. And it's still kind of boggles my mind. They were able to do that. They basically built the suburbs, right? And that seems like that building kind of kept going through the 60s, 70s, 80s. And even in the early part of this century,

I guess part of it was the loans they were going on to people, but they built enough houses in the early 2000s, right, during that bubble. And then when the bubble burst, it seems like all the homebuilders said, never again. We're not going to get caught in this situation. And it's almost like the last housing boom and bust has screwed us over now. Like how much is just that sense of the homebuilders saying, we got taken to the woodshed last time, and we're not going to let that happen.

Again, how much does that have to do with the fact? that we're not building enough houses this time around where they've seen this before and they said it's not going to happen to us again. Yeah, builder sentiment is a really key indicator here and there was a lot of reticence post-2008 and into the early 2010s. We've seen that recover somewhat.

This ties back into planning and zoning where a lot of places that saw homes in the 50s, 60s, and 70s, and then in the 80s, 90s and early 2000s, these ex-urban communities, just don't have any more land. So how far can you drive before you qualify? In the 60s and 70s, you could build outside of New York with pretty great ease. In the 90s and early 2000s, you could build an hour outside of Orlando or Tampa or Miami. And now you're pushing up against those barriers where people feel comfortable going. So it's partially a land story. It's partially

a sentiment story. There's obviously a rate story to be told in there as well. But the genesis for this modern version of the crisis is 30 and 40 years in the making. And now as we're trying to, or by necessity, we're going to have to infill cities because there's not much land to go build on. We're facing these frictions. So talk more about the frictions. Who's creating them? And all right, if you wanted to, or if a developer wanted to build land or build a project outside the city or in the city, who says no? And why does it take five to ten years? Yeah. So we can click in on, I work in California.

I can talk specifically to San Diego or Los Angeles. But five or ten years is more of a San Francisco story. So at very high level, the way building any apartment building works for a single asset is you acquire land and it has an underlying zone. So it might be an RS1, an RS2, an RM1, 3, 4, super complicated. If you look in the zoning code in any city, there could be dozens and dozens of classifications and then hundreds of subclassifications. So from the outset, there's not always an ease in knowing what you can build. It's not as simple as saying you have a 5,000 square foot lot. You can build whatever you want.

It's very prescriptive. Where do these classifications come from? They come from planning departments. And so in the- Sorry to keep interrupting, but is that a city-by-city, state-by-state federal thing? Like, where do those classifications get handed down from? So it's city by city, town by town. In the 1920s, there were national planning acts that allowed municipalities to adopt zoning.

We can talk about this maybe later, why everywhere sort of looks the same. A lot of planning departments in small towns, you know, if there is a plan department, it's one person who's doing everything. And they can't write the code. These things are thousands of pages long. So they just copy and paste of what the town or sitting next door did. And so when you drive through the sunbelt and you see every community looks exactly the same, even though they're different cities, it's oftentimes because the underlying DNA is the same. It was just copy and pasted. So those codes are then administered by a local planning department that they're hired, they're not elected. And to go back to this example of this 5,000 square foot lot, you have to figure out what you can do on it. And these codes lay out things from. The height, the bulk, the mass, how many units?

Can it have a coffee shop on the ground floor? You know, how far does it have to be set back from the street? And where the rubber meets the road with this friction is that even though these communities have laid out all these rules through thousands of pages, they still go through some level of discretionary review. So a city might have reviewers to say, okay, we think that this is an RM4 lot and you can build 10 homes here. But we're not sure. So we're going to go back and review this for a couple of weeks. And, you know, those weeks can mothball and take a little bit longer. Who are those people? Are they elected officials or are they? Who are they? They're not elected officials. They're just called planners. In some places, they're reviewers

as well. But they're hired from planning departments around the country and they administer any new permit, whether it's a single family home, up to a 200 unit department building. And are they incentivized one way or the other to say yes or to say no? This is where it gets tricky. In some communities, they're incentivized to prolong the process if they really like the character of their community, right? I moved into Middletown, Tennessee, or wherever it might be, because I like the character. And now it's sort of changing. I don't like there's apartment builtness. And I don't like that, you know, the quaint bungalow neighborhood I was in is sort of shifting. So I can't legally deny these projects. But, you know, it's a long weekend coming up and, you know, I've got other projects I can look at. I'll set this permit to the side. And when that happens across three, four, five different levels of review, you get to a point where now you're a year later from when a developer submitted their initial application to build what they reasonably thought they could. It's not

like building a 25-story building in a single-family neighborhood. These are neighborhoods that the city is laid out that you should legally be able to build here. They have, have their hands in their pockets and they can't really do anything because it's it's purely at the discretion of planners within the city. I'm planning this with a broad brush here, but it doesn't seem like many politicians have taken this up as like this is their thing. Like we need to build more housing. I want to make it easier. Where are the places where there actually is some good going? Because we can get into the bad stuff. That's probably more fun. But I've seen places like Minneapolis or Austin thrown out as good examples of, listen, they're building more houses or apartment complexes

in these places and rents are going down or housing prices are going down, this is a good thing. What did some of those places do right? They got into the nitty-gritty that a lot of politicians, frankly, not because of any motivation one way or the other, but they're just not able to dive deep into the intricacies of a planning department, right? And so there can be grand proclamations made one way or the other. We want more housing. We don't want more housing. But that doesn't. doesn't mean anything unless you go in and you change the codes that govern a city, right? And so what Austin and Minneapolis have done over the last couple of decades, they've sort

of taken a fine-tooth comb through all of their existing laws, and they've said, all right, you know, in 80% of Austin, it was illegal to build anything other than a single family home. That doesn't really make sense. Maybe someone wants to have a cottage in their backyard for their mother-in-law to stay in or their kids, or they might want to build the triplex, live in one unit, rent out the other two. That doesn't really change the character of the neighborhood. They had to go through and revise their zoning codes and their land use regulations to say in these areas of the city, we're going to allow these uses to be built.

And Minneapolis famously became the first city nationwide to allow up to a quadplex built on any lot in the city, which was pretty, it's novel. in the 21st century in the second half of the 20th century, but this is how cities used to be built. You didn't used to have to go get a permit that adhered to a certain zoning code. There's some upsides and downsides to that, but that's why a lot of times in some of our most favorite places, say in New York or Detroit, these neighborhoods built pre-war, a lot of them in the 19th century, people just built sort of whatever. And it led to some tough outcomes where some of them could have been fire traps and building

codes were implemented to make sure that people were building safely. But then post-war, when we had that great boom after the GI bill, it was predominantly laid out in single-family zones. And that sort of ossified for the last 70 years. What you're describing, does the same dynamic exist outside of cities and suburbs? Or is it, are there different challenges and obstacles? Yeah. The tricky thing with housing policy and Ben, to your point earlier, wanted to zoom at a national level is that it's different in every city, in every city suburbs. And, you know, as we talk about solutions afterwards, we can get into to maybe how we would rectify this. But let's say you live in, you know, outside of New York, in Long Island, and you're in Comac. And, you know, the town council

says, we're going to allow, you know, for apartment buildings to be built on 50% of land here, right? previously you couldn't build and 10% of land we're going to you know increase the amount where you can build you might say hey i don't like that i'm going to move to glen cove or to you know cold spring harbor because i don't want to live near apartments and communities can basically craft their let their their laws to prohibit other forms of housing from being there so it's It's sort of this ability to shirk one's responsibilities. And so it's very difficult because there's no regional cooperation amongst towns and cities and suburbs to have a broader response to the housing crisis

because someone can always opt out. So even if someone, if a president came in and said, my only objective is to build more housing, I'm going to do like they did in the 50s and we're going to guarantee all these builder loans. It might not even help that much because some of these municipalities just wouldn't let enough people build. Is that correct? Like, there's no magic wand, right? So there's something that urbanists say and people online that people poke fun out, which is fair enough. But they'll say like it's illegal to build this sort of thing in 80% of America and 70% of America. And so, you know, even if you had

zero percent interest rate loans and you were offering 90, 95% LTC, which would be a huge boon to developers, be great. What's LTC? loan to cost. So if a building costs a million dollars, you know, we're going to allow banks to loan $950,000, zero percentage rate, which would be amazing. You know, you'd have developers lining out the door to do that. In most of America, it wouldn't make a difference because it's illegal to build. Let's say you wanted to have more quadplexes. You couldn't build that. You know, in places that have had broader affordability, like the Sun Belt, like Minneapolis, they've changed those laws so that you can build more densely throughout the city.

What about a local politician? Could a local politician want on that, or is it so not popular that they would, that nobody would even consider doing that? Yeah, it's not popular at all. You know, there's, I think they'd find quite a bit of feedback and this would be across political spectrum. What is the feedback in Minneapolis spin? I have to be careful to say, like, oh, I'm viewing this through a charitable lens and that I see new housing permits going up. And I don't, I have friends of Minneapolis, but I can't tell you the exact sentiment. There's a lot of Midwest nice there.

I feel like Midwest people would secretly grumble about it, but, you know, they wouldn't complain that much. That's, that's soon. Yeah, go to Grand Rapids. Ben is a total pushover. I never said, never send a drink back like these guys in New York, yeah. That's right. That's right. So there might be a passive acceptance or some of mumbling under one's breath.

That's sort of the argument that I've made that, look, people are going to, they might say before bills pass or before buildings are constructed, that this is going to change the fabric neighborhood, everything's going to hell. And then after their belt, it's like, oh, okay, not a big deal. And, oh, there's a new, a burrito place on the ground floor of this building that my kids love, okay, that's great. I get all these benefits of new development. But it is, it's very difficult to put oneself in the shoes of what a positive change could look like because we sort of live in a Votocracy where it's very easy to say no. And this goes back into, you know,

why can it take five, 10 years in San Francisco to get a building approved? There's a lot of what's called, you know, discretionary reviews where for a number of reasons, whether or someone in the community, whether someone on the planning board can say, you know, I don't know if this is the right building for this neighborhood. And it's totally fabricated their complaints, but they can file a motion for an environmental review to be conducted, which, you know, in the heart of San Francisco, there's really no, there's no broad environmental impact that can be had by another new apartment building because it's all apartment buildings around you, right? But these sorts of challenges can be followed by individuals where they're empowered to do so.

Kobe, even if, not even if, who a big, wow, that's a great question. A huge aspect of all of this is capital. And who in their right mind is going to fund a project that might get past in five years? what sort of returns would you need to see for an invest to be like, sure, I'll give you my money. It's not going to happen. Yeah, so there's two answers. The first is that's why a lot of developers and homebuilders have moved to the Sunbelt.

It's a lot easier to build in Texas and Tennessee and Arizona than California and New York. And so we've seen more affordability there because there's more housing and there's just less friction overall. A lot of my friends in the development world, that's what they do. It's just go build in Florida, less of a headache. You could probably build two or three projects in Florida by the time it took you to build one in New York. The argument for people to build in New York or Los Angeles or Boston or San Francisco is, look, these are very expensive and very desirable cities. There is a very, very narrow funnel of products that will get approved.

So if we are one of the few projects that gets approved, we can capture the market. And that's pre-COVID why you saw somewhere like San Francisco have one-bedroom apartments deliver for an average of $4,000 a month because there was just no new supply. And so if you were one of the few buildings that could deliver that and grit your teeth, you would print money. So before we hopped on here and hit record, you were showing us some data from New York saying that, I don't know, it's like the 70th most building per capita, even though it's one of the biggest cities in the country.

Are we ever going to be able to figure it out in big cities like this? your point earlier about the land. I'm thinking of, remember the scene in Far and Away where Tom Cruise rides his horse and he just puts a stake in the land. And it's like, that's how he like... Dude, Kobe wasn't even born when that movie came out. That's true.

You're old. I'll go with it though. I get the, uh, yeah, I get the example. Put far and away on your list. I'm going to have to do a Tom Cruise quiz to all our guests and gone on. But to your point of there being normally, I'm like, where can people even build in San Francisco, New York anymore?

Isn't it, isn't it just that they're going to have to continue to go further out? So even if, like, the regulations got better, isn't it just too much of a pain of the ass to find places to build in those kind of cities? So I think people would be surprised at how much land there actually is in cities and what level of density, you know, people in close proximity to each other is pleasurable. So if you go to Paris, one of the most beautiful cities in the world, the density there is about the same as New York City, or as Manhattan, rather. So the densest parts of Manhattan with all these towers is achieved in the heart of Paris with six-story buildings. The lot coverage is much higher there than it's usually allowed in the U.S. So this is one of those other land use regulations beyond simply zoning, you know, not just how many units you can build, but how much of the lot can you build on, you know, sort of stuff like that. I don't know if that's fully desirable because they're building out to 90% of the lot in some cases.

It means there's less light, there's less air. But in a lot of the U.S., there are minimum lot sizes. So you might be able to build 10 units on a lot. But that lot might have to be half an acre large, which pushes everybody out. And so you might only be building on 30% of the land there. Without going to densities of a Parisian level or an East Asian city, you can get to 60%, 70%, and still feel super comfortable. And a lot of, you know, our quaintest beach towns that you see in New England or certainly up in Michigan, like, you get densities that rise to these levels. And it's totally fine. This is sort of the thing that we've been advocating for in San Diego and in Los Angeles. Let's say you have a 5,000 square foot lot. You could very comfortably, and we've built this before, four or five homes on a plot of land that previously only had one. And in many respects, you improve the quality of life there because, you know, you're through landscaping

and through planting trees and fencing. If you do these in a really thoughtful way, it doesn't feel like a barren open space where you just let your dog out, your kids to run the yard. It becomes more cultivated. So if you were to just say in select neighborhoods of expensive cities, we're going to allow you to build four units like Minneapolis did, that increases the amount of people who can live there by four times. And it doesn't result in towers. So it just requires a reframing of how people think through cities can be built. Because for the last 70 years, we've thought it's only single family homes. And, you know, in the downtown cores, we'll build 25-story apartment buildings. It leads to what's called in urban planning circles, the missing middle. So you have the one and two family units

and you have the 100 family units, right? You don't have the 4, 10, 20 unit buildings that comprise a lot of our favorite neighborhoods because they've been rendered illegal, right, through these zoning codes. And so Michael and I, whenever we talk about the housing supply issue, and we always say we premise it with, like, we feel for young people

because it's just a no-win situation. I kind of always default to not saying it's never going to get fixed, but if it does, it's going to be a long, long time, or do you feel that way as well that like this is just a problem that is kind of, you know, here to stay for a while? Yeah, unfortunately, it's going to be later rather than sooner. And that's just the nature of the beast where we're in a supply crisis. It's not a demand crisis. You know, there are a lot of people out there who have enough money to buy homes if the homes were affordable enough, right? but they're renting because or they're living with their parents because there's just nowhere

for them to live. Even somewhere that had really quick approvals times, like you can get your permit in a month or two months, it's still going to take you a year to build and complete and move into those homes, right? Maybe there's some places where you can do it in six months. But in the most expensive cities, coastal cities on the northeast and the southwest, it could take you four years quickly, you know, to build new units from approvals all the way to move-ins. And that necessarily is going to make this a longer process. What do you think about

like these pop-up cities that I'm seeing crop up? Like cities literally, like startup cities, for lack of a better term. Yeah. So I've worked with a number of these, both in the U.S. and abroad. There's some that are really good ideas. There's some that are less good ideas. So I'll zoom in on one that I think is a really good idea. Outside of San Francisco, there's a group called California Forever that's acquired tens of thousands of acres in Salana County, just north of San Francisco, sort of in between San Francisco and Sacramento. The whole thesis there was, things aren't changing, Ben, to your point, in San Francisco. They're not changing in Oakland. You know, planning departments and politicians, they might acknowledge the

issue, but they, in many cases, they may be enumerate and they might not understand exactly the nature of the crisis, but things aren't changing. There's nowhere in the region that you could live reasonably affordably, that you could also walk to the grocery store or walk to the park or walk to the school or office. And so it would just be quicker in this circumstance to build a new city. And so right now, there's this group that is doing that in They're in California outside of San Francisco, and they are, will have to pass a ballot measure in Salon County, which comes up in October, I believe. It gets into the nitty gritty-gritties of, you know, governance and issues and how you would go about and starting this frontier

settlement. But I think the reason why you've seen stuff like California forever, there's a couple of other cities in Texas. There's one in Washington State that I'm working with. There's a, you know, a couple all over the country, is that people have gotten so fed up and said, instead of driving an hour further out from Orlando, what if we were to create our own place two or three hours outside? It's its own discrete entity because it's just so intractable to work with existing governments. So you wrote a piece recently talking about how, you know, you're putting your money where your mouth is here. You're going to try to create this more affordable housing place. And to your point, you said there's like the single family homes or the one and two,

and then there's like the place of the hundred. We need the 10 and 20 places because those little nice places of the courtyards, if you've got a rendering on here, that's the perfect setting for a rom-com. Because if we don't create these kinds of places, we're never going to have any more rom-coms where the people in the different apartments get together. But you've got this place and it's this nice rendering and it's the courtyard and it looks great. So like, what are you trying to do here? Because it sounds awesome. Yeah. So this gets back to the beginning of the conversation with institutions coming into single-family homes and investment broadly of multifamily buildings. So to close that loop, no Blackstone, BlackRock, whoever your firm is,

aren't buying up all the homes in America. They own around 1 or 2% of the single-family rental supply. It's actually surprising that finance isn't more involved in the real estate industry, right? It's such a smaller number than people would imagine. And it may grow because it's a great business model. There's a reason why, you know, thousands of people every year try to become real estate investors or developers. But it leads to a certain set of imperatives that take away that charm where you can just bump into somebody and next thing you know, you're going to grab drinks or, you know, this serendipity, right, that you feel in rom-coms and in the best cities because they're just financial products, basically. So we've all seen these, they're called

five over ones. I don't know what they're called in, you know, in the Midwest, they might be different. They're called Texas donuts in the south because basically you have this six-story apartment building wrapped around a parking structure, which is the hole in the donut. And they all look the same. They all have this like Ephis paneled garish colors and you have a Chipotle on the ground floor, you know, a bank, and then maybe you have a CVS or a Walgreens or wherever you are. And that's because they're funded by institutions like pension funds. or insurance companies or some foundations, some universities, who are risk-averse, but they're still need to search for some yield.

So they're moving out along the risk curve because you're not going to be able to return your retirement savings or payments to your pensioners with a four or five percent yield, right? You need eight, nine, ten percent. But you need to claw back as much risk as possible. So that means build with as much scale as you can. build with as much value engineering as possible. So we're not going to build, you know, structures in brick and stone or really nice wood.

We're going to build as cheaply as we can. And we're only going to work with firms who have done it before and places like, you know, Chipotle instead of Ben's Brito Bar to have some local effect, right? It is entirely rational. It totally makes sense for them to do that. But the issue is that these firms have squeezed out a lot of the smaller builders, the people who create those sort of charming communities. One stat for you guys. In 2022, the last year that we have data for this, 2023 hasn't come in yet. A quarter of all multifamily units in America

were built by just 25 builders. That's extraordinary concentration in industry where there's 60,000 developers, right? And so these are your Avalon Bayes of the world, your Crowholding, Shremel Crow. There's some large rates that are involved in this as well, and private firms. So that's for multifamily. And then on the single family side, you know, 43 percent. It was 30 percent in 2018. But 43 percent of all single family homes were developed by just 10 builders. So you've seen these concentrations of large capital come in on the build to rent side on both apartments and homes. And so this is a different story than what people are hearing about Black Rock and Blackstone who are acquiring homes. But the people who are building homes are increasingly just the same 10 and 25 firms, right? What we're trying to do with this project in New York is to say, we understand the imperatives. We're not going to go to a pension fund or an insurance company to try to raise money on this because that's going to create a very specific sort of project that won't work at the scale that we think make the best communities,

you know, these 20, 30 unit courtyard buildings. So you have to change the capital stack. And you say, instead of delivering a 18% IRA that we're going to revert in two years, can we bring our returns down a little bit, have a longer hold period, and change the incentives of how a building is done. And this is only possible to tie a bow on the whole conversation because the city that we're building in, Kingston, has been extraordinarily progressive in reforming their zoning codes

so that you can build this in a place that previously you might have only been able to build one home. Did you also have to find the right investors then that were say, listen, and we want to make something that's cooler, we know our IRR hurdle is going to be a little lower, we're willing to help fund this because it's also doing good. Exactly. It's a very particular type investor.

It's closer to impact, but these returns are still pretty good because the land price on a relative unit basis is very, very low. So if you're buying land, and this is what we've done in California for the past number of years, it's principally an arbitrage opportunity. We're going and we buy land that previously was zoned for one unit and maybe it can support 10. You know, and for our larger projects, there's new bills that have been passed where you can go from five units to 60, 70, or 80. You know, we try to be on the lower end of that spectrum.

If you have some percentage to be affordable, it makes it easier to build those sorts of stuff. Applying this to the city, Kingston, the land that we bought was, you know, half a million dollars. And so if you can spread half a million dollars for one home is very expensive because then you're going to have to construct it and then it just becomes a luxury home. But if you can spread that half a million dollars across 30 or 40 units, all of a sudden you can get a little more creative. You can build those courtyards. You can have those clay tiles in the roofs. You can have some trees and plants and what have you. But it is a different model than people

are used to because we've just been trained to either build the single family home and a large subdivision in the Sun Belt or the 200 unit institutionally backed department building outside of Atlanta or Dallas or Philly, right? And so it is a more careful curation. But to me, at the end of the day, if you're still clipping 14, 15% IRA in a longer hold period and you can achieve, you know, mid to high single digits cash on cash yield, it's a pretty good deal, but it requires a different pitch. And how do you define affordable here for places like this that are very desirable and you could potentially get greedy with. Yeah. So this is sort of the big question in housing development today.

HUD's definition of affordable is not paying more than 30% of your gross income towards housing payments. So not net. So if you make $100,000 a year, you can't pay more than $30,000 in rent or mortgage payments towards housing costs. This is not achievable for most people. For renters, for example, half of all renters are rent burdened in America. So they pay more than 30%. In homeowners, I forget what the latest statistic is, but it's a very high percentage where their mortgage payments are higher than 30% of their gross income. Specific to affordable, there's a lot of different thresholds.

The one that is generally accepted is 80% of the median income of a city at that 30% threshold. Right. So if the 100% AMI is $100,000 for a family of four, 80% AMI, so a family making $80,000, can spend no more than 30% of 80,000. There's a lot of numbers going around there, but that's traditionally what is viewed as affordable housing. Kobe, anything else you want to leave our audience with? You know, a lot of places that we could go with that. But I would say that if we want to have more affordable cities, if we want to have cities that are, you know, can lead to more rom-coms or spontaneous, you know, situations. We're going to have to allow developers and everyday folks, you know, a lot more flexibility in taking part in their cities. My running joke is that whatever politics you espouse

prior to becoming a developer or even a community builder, you could just be someone who wants to plant a garden out front of their house or plant a tree on a public right-of-way. You could be conservative, you could be liberal, progressive, doesn't matter. You become a libertarian because all the laws that we have in the U.S., just they don't make sense. Why do I need to have a 20-foot setback on this one parcel? Why can I only build one home, you know, when I want my mom to be able to live in a small cottage in the backyard? And in order for us to transform a lot of these inane laws, we've got to get into the nitty-gritty. It can't be the grand proclamations from politicians who say, well, let's just make things more affordable.

Let's build housing. We have to get into the mechanics. And that because of the way the U.S. structures are housing system, it is highly, highly localized, as opposed to somewhere like Japan or Austria that has a more federated style. So if you want your communities to change, you've got to get involved. You've got to talk to people in the planning department. Got to talk to public officials. and that needs to be a national movement occurring at the local level. Good stuff, Kobe.

I know you do some stuff online. If people want to read more about what you're up to, where can they find you? Yeah, so I'm on Twitter at Kobe Lefco. And I also write a lot about these issues and more on Substack at Our Built Environment. And working on a book that should be out in the next two months, if I can finish these edits up, that synthesizes all these thoughts. Awesome. Thanks, man. Great work. Excited to see what you're up to and appreciate you coming on. Thanks so much for having me on. I really appreciate it.