Motley Fool Hidden Gems Investing - Real Estate Trends: Residential & Commercial

Episode Date: May 22, 2022

We’ve got two CEO interviews and several real estate trends for investors to watch. (1:10) Deidre Woollard interviews Nick Bailey, President and CEO of RE/MAX, one of the largest residential real estate brokerages in the world. They discuss the long-term forces driving single-family home buying and what may cool the surge in multi-family properties. (18:25) Motley Fool contributor Marc Rappaport speaks with Joel Marcus, CEO and founder of Alexandria Real Estate Equities. They break down why life sciences buildings have proven to be a bright spot in commercial real estate and how Marcus’ company built long-term relationships with Eli Lilly and Merck. Stocks discussed: RMAX, ARE, LLY, MRK Hosts: Deidre Woollard, Marc Rappaport Guests: Nick Bailey, Joel Marcus Producer: Ricky Mulvey Engineers: Dan Boyd, Brandon Gentry Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. I was just talking with someone earlier this week that converting some of these commercial properties is actually more expensive than knocking down a 12-story building and rebuilding something residential, with the exception of right now. And I think this is an 18-month type of scenario with supply and labor constraints that actually it is less expensive to do some conversions. I'm Chris Hill, and that was Nick Bailey, President and CEO of RE-MAX, one of the largest residential real estate brokerages in the world. Today, we've got some real estate trends for investors to watch on both the residential and the commercial side. We'll start with homes. Deidre Woollard talked with Bailey about the long-term forces that drive home

the trend toward more multifamily housing, and what it takes to motivate a team of real estate agents when there are more realtors than actual homes for sale. Hello, Fools. I'm here today with Nick Bailey, who is the CEO of Remax. He leads all aspects of Remax brand and business globally, sets the vision for the brand. He leads the assignment of resources throughout the Remax universe. He's also been a real estate broker for over two decades. So he's pretty much the perfect person to talk to about the housing market. It's really great to see you again, Nick. We last talked in 2021, early in the year, the forecast for residential real estate was very, very bright. It seems a little different now. So what are you

seeing? Well, let's start with, it's still bright. And I know there are a lot of headlines out there, but here's the reality of what's happening. Granted, there's inflation, there's change of interest rates, there's all these micro type of things that are happening that are levers in the industry that are important. But I think the reality of what people need to know, we are still in a over 10-year catch-up period of a shortage of homes in the U.S. We are short 4.5 million homes. And it's what's driving demand. It's why inventory has been so low. Granted, there's been a pull through because of the pandemic of people saying lifestyle. I want a bigger house. I want a backyard. I want a home office. And that pull through did add a little bit.

But the reality is when you look at millennials, Gen Z directly behind them, we have the largest household formation happening in the country ever in history. And we're short four and a half million homes. And we still have, even though interest rates are ticking up and people are saying, oh my gosh, what's going on? We sold houses when interest rates were 18%. These are still record low interest rates. And so the market, we may not sell 6.112 million homes. It may be 5.7 or 5.6, but it'll still go down in 2022 as probably the third or fourth best year in history for real estate. That's a really good way to frame things because I think sometimes it gets over-reported. Right now, the headlines seem to be inflation, interest rates, and

inventory as well. You've gone through these market cycles. How do you advise agents who are maybe just in the business for the last few years, as well as how do you help them message to consumers about interest rates? Because as you said, they have been really, really high in the past, but they haven't been for the last decade or so. You know, for the most part, a couple of questions in there. For the most part, I was asked yesterday, when is the right time to buy? That's what investors think. For the vast majority of homeowners, over 90%, the time to buy is when you're ready. It's when you have a job, it's when you have a down payment. And interest rates, whether they're 3% or 5%, it's all about, do I have the right down payment

and can I afford the monthly payment if I'm getting a mortgage? And the time to buy is generally, if someone's getting married, having children, I mean, household formation and those things are the number one driver of buying a home. And so for the vast majority of people, you buy a home when it's right for agents. However, I just did a video on this last week. I do think there are going to be a lot of agents, you know, we're up to 1.6 million, 87% of agents fail. That is statistically correct that 87% of agents that get a real estate license don't have it five years later. And it's because they don't sell enough houses. Um, in any type of seller's market, it's easy to be an order taker, which is just lead flow

is coming in and you're chasing the business. And the video I did last week, um, I have agents saying, Oh, I'm burned out. I'm burned out. Well, I think there are a lot of agents that are going to go from burnout to broke very, very quickly. And it's not because the market, um, it's because they're not used to hunting for the business. You've got to utilize your database, your sphere of influence. You've got to go out and hunt for the business and find people that want to buy and sell. That is the basis of this business. But when we have like a red hot market, like we've had the last couple of years, it's easy to sit back and be an order taker. And so for the ones that expect that to continue, I think that they're going to struggle. Really good point there. So Remax is an

established brand in real estate. Agent retention is always part of the game. How are you positioning the brand both for consumers as well as for agents? Well, I mean, we're pretty fortunate. We turned 50 years old this coming January and our brand is built on productivity. The average REMAX agent outsells the next closest competitor two to one. And so we are really about the agent that's full-time in the business and dedicated. And I like to say we're similar to kind of healthcare. If you're going to have open heart surgery, do you want to work with someone that's done it once or someone that's done it a hundred times. Um, and, and we're about the a hundred times. Um, and, and, and so whether the market is like this on a seller's market or buyer's market,

the good news is we've been through eight recessions, how many presidencies interest rates going up, down. And at the end of the day, there are always going to be people that need or want to sell or need or want to buy. And people that are full-time in the business are going to be best suited to be there. And that's, that's what our brand is. But how do you position yourself against some of the flashier stuff out there? The iBuyers, uh, you know, just that, that sort of like, there's so much marketing out there. How do you kind of cut through some of that? Yeah. Well, first of all, you've got to know the foundation of the business. And I look at iBuyer as a fancy word for cash, by the way, we've always had cash buyers. Remember the,

we buy ugly houses, billboards, there have always been investment groups. There have always been, you know, a big formation of folks that are either buying to flip or buy to rent. And so we're, you're right on, on some of these marketing terms are getting headlines and getting agents attention. But when you really look at the foundation of the market, it is no different today than it was 30 years ago. And we ebb and flow on a few hundred thousand houses a year on what we sell as an industry. But I think we're pretty insulated. Food, clothing, shelter, the three necessities of what we need. And shelter is one of them. And so we will always have people that want to buy. Yeah, definitely. We saw that with the millennials and people thought that they

weren't going to buy. And now they're the biggest component of the housing market. They are 43% of homebuyers last year. And five years ago, I'm on stage and people said, Oh, these crazy millennials, they're, they're going to rent and ride an Uber the rest of their lives. Wrong. They're buying houses at a bigger rate than even the boomers. They're buying cars. They're having kids. They're getting married. Granted a little few, few years later in life, but they're doing the same thing as their parents did and their grandparents did. What are you thinking about the future of housing? We're seeing before the pandemic, we saw some changes in zoning to bring multifamily to certain cities. Certainly,

you mentioned at the start of this conversation, we're dealing with this chronic lack of inventory. We're not building enough. And what we are building tends to fall in a couple of categories, either single family communities or tends to be luxury apartments. So there's this real need for workforce housing. What are you thinking about that and what does it mean for your business going forward? Yeah, I'll tell you what, this is one that I don't have the perfect answer. I do know it's a chronic issue. And yes, there are in high density metropolitan areas, rezoning is happening. There are commercial spaces that because of this hybrid model and the desire for not as much office space that they're trying to figure out,

how do we convert some of these properties into residential, but just think of plumbing. I mean, is a big issue. And so, um, I, I was just talking with someone earlier this week that converting some of these, um, commercial properties is actually more expensive than knocking down a 12 story building and rebuilding something residential with the exception of right now. And I think this is a 18 month type of scenario, um, with supply and labor, uh, constraints that actually it is less expensive to do some conversions. And so we're going to see some of that, but I think that short-term not long-term and conversions of a commercial space into residential, but over 50% in the last three years of new construction have, um, builders have moved

from single family into multi-unit just to try to keep up with the demand. And so I don't personally, um, just a mile away from me, this whole area that was going to be developed a few years ago was all single family residences. There's not one single family. They are two and three story and, uh, this wide with a one car garage and four stories and, you know, a million and a half bucks. Um, and, and, and they're, the builders are just doing this. they're squeezing and going up instead of out and trying to figure out how do we, um, how do we take care of the, uh, demand problem? And, uh, we're seeing a lot of multifamily. I think two years from now, we're going to see a lot more single family, uh, start to come out of the ground.

Well, you've got an interesting role as a CEO of a real estate brokerage because you're dealing, you have to motivate employees, but you also have this large pool of agents. And as you mentioned earlier, you know, 87% of agents fail. We have 1.6 million, uh, realtors. Now we have more realtors than we have the homes for sale. So how do you manage balancing how you speak to agents and employees? That's a really good question. Um, it's on my mind a lot, but I don't think anyone's ever asked me that. Yeah. Having over 142,000 people in 118 countries. Um, and then also having over 700 employees, it is a balance. Uh, and I think in our business, it comes down to its relationship driven. And so, uh, you know, from an employee standpoint, it's all about how

do we give the employees a wonderful environment to do what they're great at, continue to give them opportunity. But on the influence side, when you look at a network, this size, it's, I think the most powerful thing that is kind of a machine that runs itself, which is the best ideas have always come from our network for this business. And as competitive as the network is, you know, you and I can go on a listing presentation. We're trying to get the same listing and we'll slice each other's throat, right. To get the listing. But what I love about this business is it doesn't matter if you get the listing or if I get the listing, we put our arms around each other and say, do you have a buyer? And so this cooperative nature of this business is so good for buyers and

sellers. And regardless of 118 countries, it's the same. And the pandemic has proven that I don't care where you live in any corner of the globe, home has never been more important or on people's mind the most. So it's really brought people together and they share ideas and say, here's what I'm doing in this market. Um, right now I have people in, in, in Facebook groups sharing, here's what I'm doing to get new buyers and sellers. And they're sharing ideas with each other to help each other be more successful. Um, so I think that's really a cool part of our business. I love what you said there about the listing presentation. Uh, I used to do marketing at a brokerage in Los Angeles. And, and that was very much the case is that you you're in this

position where you're both competing and then you really will have to work together on either side of the transaction. You were going to repeat my slit your throat comment. I mean, a little dramatic. I know, I know, I know. I don't know. Los Angeles is pretty cutthroat. So leading to that, I like investing in brokerages, but one of the analysts on our team kind of challenged me as why invest in publicly traded brokerages. I want to know how you'd answer that question. Here's what I look at is if you're going to get into wall street, that's a personal decision, or you have a financial advisor, I don't care if it's crypto or real estate or tech. If you decide to be an investor in real estate, do your homework and invest in what you're passionate about and

what you think is going to give you a great return. Certainly Wall Street is looking at the entire vertical of real estate right now, and they're not very optimistic about it. Even though 2022 will still go down as the third or fourth best year in the history of real estate in this country. But the reality is when you look at how wall street measures things, um, they only love to give a thumbs up to anything that's going up. And so whether or not it's the third or fourth best year, it doesn't matter. It's gonna be a little bit less than last year. And so they kind of do this. I saw one of the coolest articles a couple of years ago from the retired CEO of, um, Panera, if you're familiar with Panera and talked about, um, 30 years ago that if,

if wall street was then what it is today, Panera wouldn't exist because they did two or three acquisitions and even acquired a competitor, $50 million, um, told investors we're not getting a return, like zero return on 50 million bucks, but it was just part of how we're going to long-term build a business. And so it's, you know, it kind of makes me shake my head, but I look at, I read this article and he speaks quite a bit about it on the road. And it's interesting that there's the long-term investor, and then there's the quarter over quarter investor, always been two different groups. But I think that those that are investing long-term, just like home owners and buyers and Wall Street, it'll pay off. Real estate has always paid off if you're thinking

about it in the long term. It is really true. You've had a strong quarter. Revenue was up. You're looking forward to the future. What do you want investors or potential investors to know about the company, about your vision? Maybe tell us a little bit about motto mortgage and, and that growth as well. Yeah. Um, thanks for asking about motto. I mean, it's, it's, um, the only brand in real estate startup for us just over five years ago of a franchise mortgage company, first of its kind and wildly successful. Uh, you know, we're adding 70, 80, uh, locations every year, but what's important about it. I, you know, we're all reading headlines about the mortgage business and layoffs with some of the big national companies because they chase

the shiny object. And that's, I think something in our business that happens, people run for the shiny object of whatever the market is today. And a couple of years ago it was refi. And a lot of these mortgage companies were 80% refi, 90% refi. Um, and they didn't have relationships with agents, consumers to be on the purchase side. And so when we look at a motto, not only is it, are we investing in entrepreneurship that we believe real estate happens at the local level? And I mean, hyper-local I'm in South Denver. It's different than North Denver, even though it's the same market. And so, um, when you see entrepreneurs, whether they're real estate agents or, or, or mortgage loan officers, um, that are involved in the hyper-local market with their

buyers and sellers, it's success. And the vast majority of Motto's business is purchase. And it always was, even during the refi, it was 60, 40. Now we're going to be 80, 20 on the purchase side, but it's because the relationship with the agent and some of these companies that are now scrambling and saying, Oh my gosh, what are we going to do with the mortgage business? All they did was refine applications online and they didn't have relationships with consumers or agents in the local market. And so we believe in the long-term play of relationships and purchase. Let's move to the commercial side. As many companies are dealing with questions about returning to offices, there's one industry that

hasn't really left, life sciences. Because among other things, it's difficult to test medications over Zoom. Motley Fool contributor Mark Rappaport recently caught up with Joel Marcus, CEO and founder of Alexandria Real Estate Equities, a real estate investment trust that focuses on science and technology campuses. They dig into what it takes to build laboratories for companies like Merck and Eli Lilly, and why competitors may have trouble copying Alexandria's strategy. What makes life sciences such a resilient sector in today's troubled marketplace for office properties. And why do you see that as a continuing strength? Yeah. So the reality is, as I said, the biology is the, I think the science together with the intersection of technology is really where

it's at in the 21st century. And if you think about humankind has about 10,000 known diseases and to date, there really have only been about 500 addressable therapies, very few cures. So if you think about that, that's about five percent of the diseases out there have only been addressed to date. So we're still in really the early innings of this effort to cure disease, to fight disease, to manage disease and ultimately to prevent disease. And obviously, the last two years have given us a bit of dose, a dose of, you know, what what serious kinds of things are out there, whether they be created by humankind or natural in the environment. And I think the life science industry has grown up and certainly over the last two years catapulted to become,

in a sense, almost like the savior of the planet with all the testing and the diagnostics and ultimately the therapies and the vaccines really done in record time. I think it's fair to say you can't do, you asked about real estate, you can't do laboratory work from your home. So, you know, we, we can't dial in, uh, biology labs. We can't dial in chemistry labs. We can't dial in testing labs and all those things. So I think that's why this, uh, this industry has been the life science, uh, industry has been very resilient. In fact, our own experience, during 2020 and 2021. Alexandria was up by a total return of more than 45 percent, while the office indices was down about 0.5 percent. So that's a pretty huge delta over two years. And the reason

is people realize that, you know, people couldn't work in office because of all the shutdowns and, you know, the virulence of the virus. But laboratory work was essential and had to go on, and it did 24-7. You have more than a thousand tenants, and it's really a who's who of the leading, you know, biopharma companies and vaccine makers in that group. Please describe your collaboration with these major players and how that benefits Alexandria and the shareholders going forward. I mean, it's not like, you know, you, it's not like you own warehouses or, you know, provide, uh, provide, uh, uh, a convenience store roof. Yeah. How do you invest in them beyond, beyond, uh, you know, what's typical for a, uh, for a property owner? Well, I think we have

a, uh, a particular view of people, passion, purpose, and that's why we get up every day. So, you know, great science is being done in our spaces. It isn't like a storage unit, or as you say, just a logistics unit or just an office that may or may not be occupied. These are places where science is being done and really being translated into critical therapies for human life and hopefully to save a lot of lives. Two recent examples of companies that we've had long-term relationships with, one, Bristol-Myers Squibb, our top tenant. We've had relationships with Bristol Myers for now several decades. They're in multiple jurisdictions, multiple clusters of ours. And we announced in the first quarter that we had signed a lease with them for

their new, very advanced technology research hub in San Diego, approximately 400 plus thousand square feet and just a beautiful, beautiful building on Torrey Pines. And we'll be delivering that to them over the coming year or two. Same thing with Eli Lilly. We've had a long history with Lilly over the last couple of decades. They're in multiple clusters of ours. And we also leased to them a major, which will be their genetics medicine institute in Boston. We leased about a 340,000 square foot building to them, again, ready within about a year or two. And so That's two good examples of companies that have done so much to help humankind and really address the maladies, these 10,000 diseases, where we've partnered with them for many, many years

and then recently did new leases with them on new research hubs in critical clusters that will allow them, most importantly, to retain talent, attract talent, and then discover new therapies. You know, to go back to the more basic, like logistics-type buildings, we're beginning to see, you know, spec buildings being built in that sector, you know, which we hadn't for a while

because they're so obviously so confident in leasing their space. The kind of properties you build are so specialized and so company-specific, aren't they? Do you build on spec? Well, they're not company-specific. They are industry-specific. In other words, the mechanical infrastructure that you put in are designed for, you know,

laboratories, whether they be biology laboratories or chemistry laboratories, a variety of other ancillary uses, but they're generic to many. So if Bristol-Myers moved out, Eli Lilly could move in and not have to gut the heart of it. We definitely don't build on spec. We haven't had to after the great recession in 08 and 09. We haven't really done spec building since then because we've had such a strong pipeline of demand. We haven't really needed to do that and haven't really felt comfortable. And certainly in today's world, where you have increasing costs, increasing interest rates, a macro environment that looks like it may dip

into recession potentially next year. And just a political disconnect with the reality of, you know, the lives of everybody on the ground. Washington seems just disconnected in so many ways. Most, you know, for anybody to build on spec with, you know, sophisticated laboratories would be kind of a foolish thing to be doing. There are a lot of large private equity investors and other reach for that matter, moving aggressively into, you know, your space. What do you see as your competitive advantage in this regard and now and moving forward or, uh, you know, how do you view that competition? Yeah, I think we always call competition kind of imposters because nobody can really, uh, claim that they identified this niche and brought it from niche to mainstream asset

class. But as an imposter, you know, those people who have, uh, chosen to go into main clusters, You could walk in today to Cambridge, for example, and have a billion dollars in your pocket. You can't buy anything, and you probably can't develop anything very quickly. So we're in high barrier-to-entry markets. We've been in these markets for now more than two decades. So we've solidified a very strong presence in each of these great cluster markets of biotech cluster markets. And it's really hard to get great locations when the incumbent, you know, we own, operate and have in our pipeline 75 million square feet in these clusters. So it's hard to do that. And so we feel very good about first mover advantage is huge.

We've also got just imagine, you know, the company is is a unique company doing this for more than two decades. we've developed these long, long-term trusted relationships. And this is an area that if you're just a developer and you want to, there are some people that have, they say, buy it, fix it, sell it. That's kind of a typical developer mentality. That's not what this industry wants. I'll give you a great example. We won an RFP against several other imitators of ours back about two years ago to build Merck's, or several years ago, to build Merck's West Coast Research Headquarters in South San Francisco. And the head of Merck's research personally oversaw this RFP process. And at the end of the day, they awarded it to us. We didn't even have the best

location. One other group had a better location. But our reliability, our consistency, our ability deliver on time and on budget was unparalleled. And they said, you know, we understood from the interactions and just the RFP process, none of the other people who were competing for this RFP, they could care less if we were a spent uranium pellet manufacturer or Merck. You guys cared about us, knew about us, and had a long-term relationship with us. So that's maybe a great example of imitation. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.