Learn what to look for when underwriting in acquisitions and development and the importance of software in the underwriting process and management. Get a high-level overview on market trends, where the market is going, where people are moving to geographically, and demographic insights. Discover key ways to navigate the challenges of rising interest rates and inflation in today’s economic climate.
Learn what to look for when underwriting in acquisitions and development and the importance of software in the underwriting process and management. Get a high-level overview on market trends, where the market is going, where people are moving to geographically, and demographic insights. Discover key ways to navigate the challenges of rising interest rates and inflation in today’s economic climate.
Speaker 1:
What's up everybody and welcome back to another episode of Loop It In, The DoorLoop Podcast where we pick the brains of experts in property management, real estate and investing. Tech, we cover it. Marketing, that too. So whether you want actionable tips or the insider scoop from top performers in their industries, this is one show you won't want to miss. Be sure to subscribe so you won't miss out on any future episode.
Adam Mait:
Well, hello everyone, this is Adam Mait. I am co-founder and COO over at DoorLoop Property Management software and today I'm going to be hosting this podcast and as the guest extraordinaire, also a friend of mine who I am fortunate to have in my life, Scott Knauer. Scott, want to begin by saying thank you very, very much for taking the time out of your very busy day to join us. We'll get into what we're going to discuss shortly, but certainly dealing with real estate market trends, software and the like, which Scott has lots of experience with. But before we jump in, I want to give a little bit of insights into really who Scott is. I could frankly go on about Scott for hours.
Scott Knauer:
Let's not do that.
Adam Mait:
Let's just give a little summary here. Yeah, let's do a little summary here. Scott has over 30 years of real estate development, acquisition, investment management and advisory experience. Has participated as a principal and advisor in the acquisition and ownership, development, management, renovation, divested chair of over three and a half billion plus dollars of real estate assets. He was a founding partner of Orion and plays a key role in the development and management of investment protocols, financial modeling and market selection programs. He was also one of the first operating partners over at Starwood Capital and I believe he played an instrumental role in helping Starwood's First Opportunity Fund achieve industry leading returns for his investors.
He's also not only a real estate guru, but is also really involved in extracurricular activities, was a founding board member of Social Venture Partners, served on the board of directors for the National Multi-Housing Council, the International Cancer Advocacy Network, the JDRF Research Foundation and Habitat for Humanity. In addition to all of that, and if that wasn't sufficient, he also consults regularly with national, state and local governmental and political leaders on real estate related issues. I could keep going as I said earlier, but I think we've probably covered just about enough to make Scott a little bit embarrassed. Scott, how's it going?
Scott Knauer:
Hey. It's going well and it's a pleasure and privilege to be here. Just an honor, so thank you.
Adam Mait:
Well, thank you. If there's anything I haven't covered, I would certainly love the audience to hear a little bit about you from you and what makes you special in the real estate industry and obviously your experience. But tell us a little bit about how you got started, what your journey was to get to where you are today.
Scott Knauer:
Well, I'll give you the very short version. Out of undergrad, I couldn't get a real job, so I went into real estate. That's not quite true. So I wanted to go into commercial brokerage and I couldn't get hired, so they told me to get some professional sales experience and I went and I sold pharmaceuticals. I went back, I interviewed and I got hired at Marcus Millichap in investment sales and I worked well hired. My first year I did one deal, made $4,212, which was just enough to almost get me fired and I continued working and one of my focuses really was I wanted to know what I was selling. I wanted to be an advisor more than just a salesperson. So I worked very, very hard in understanding what made real estate work and I was lucky enough to become a top producer. From there I went to development and from there I was lucky enough to do some private syndications. I caught the attention of Barry Sternlicht and I was honored to be given the opportunity to work directly with them back in 1990 and the rest was history. We worked very hard and we've done some great things and most of it's really due to the remarkable people I've had the pure leadership working with.
Adam Mait:
Well, I appreciate the summary and I guess before we really jump into the specifics, you have a lot of experience and you've gone through a lot of different market cycles. Are there any, we'll call it advice or tricks of the trade that you would give to real estate investors who are looking for those deals, those returns, et cetera?
Scott Knauer:
Yeah, that's a great question and market cycles drive everything. And the most important driver of market cycles really are demographics, there's a great demographer from Harvard Business School, Harry Deck, who writes about this, but following the population trends, understanding what the baby boomers, which is second-largest cohort in our population, need demand and at the other end what the echo boomers need. And that's really driving our household formation. Most importantly, trying to pick the very bottom is almost impossible. Trying to pick the very top is almost impossible, but you can tell when we are in an upper quadrant or low quadrant and that's when you start buying when prices are reduced. Most importantly, if you can buy a quality asset in a dynamic market, at less than replacement cost, it's really hard to lose money. And if you buy it well less than replacement cost, you're going to make money. That's a given.
Adam Mait:
So buy low, sell high?
Scott Knauer:
The best you can. And the great thing about real estate as compared to most of the markets is you can time the market, you can look forward and see how much supply is coming in live in 24 months because you know how much we started today and you can project it. Man, I can tell you how many people will turn 21 next year because I know how many people are 20 today. I can tell you how many people will be 100, 100 years from now because I know how many people were born today. And you can project the life expectancies and net migration and things like that and really make some good determinations of what the future looks like and trade on data and good information and that emotion.
Adam Mait:
Interesting. So I just want to segment that a little bit further. Any particular market sectors you're liking these days?
Scott Knauer:
That's another great question. We've always liked apartments and the demand for housing is somewhat inelastic. People really have to live somewhere. The demand for office or retail, even industrial, hospitality, little more elastic. At a recessionary period, you'll travel less, but you still need to live somewhere. So we really have always preferred multifamily. We've done a little bit of everything, office and industrial and retail, mixed use, but Orion focuses entirely on multifamily and historically that's been the best performing asset class over a long period of time and we expect that will continue.
Adam Mait:
You also, if I recall correctly, deal not only with the acquisition side, but you have had experience in the management side as well, correct?
Scott Knauer:
Certainly.
Adam Mait:
And we also over at DoorLoop, we have customers not only that are landlords, but also property managers and was wondering if you'd be willing to share some words of wisdom for those property managers that are looking to expand their portfolio of owners, clients, as you would call them, to get out there, any tools, tips, tricks of the trade that they should be concentrating on?
Scott Knauer:
Owners like good, accurate, timely information. And if you tell me you're going to have my monthly report on the fifth of every month, I want it on the fifth, not around the fifth, not the eighth or ninth. I want it on the fifth. I want it to be concise, I want it to be well organized and I want it to be informative because we use current and past performance to make our future projections, and that's critical. We want good baseline budgets that are accurate so we can project and tell our investors what they can expect and we'll help with that. But we need our management people to give us good information in a timely manner that's accurate, concise, with good graphics and reports and trends and comparisons and all the good things we look for.
Adam Mait:
And since you have the experience here, are there certain tools that you're using to, is software becoming much more of a key to managing those properties and working with those investments? And if you can talk a little bit about that and maybe some of the tools that you're using to help rent sets and those types of activities.
Scott Knauer:
It's critical. Without that we couldn't do our job and without firms like yours that are really out there improving what has been used for decades, we haven't really seen dramatic improvements in how we report, account, project and budget. And that's important and we need all of those tools in order to do our job for our investors.
Adam Mait:
So when you look at a deal, let's just talk about a specific, you're looking at demographics, certainly timing, right?
Scott Knauer:
Yeah.
Adam Mait:
Looking at the product itself, how much underwriting really goes into this? And I'm really curious from a perspective of a landlord now, right? Property managers are not acquiring the properties, but those landlords are. Walk us through a little bit of your underwriting process and the entry cap rate, the exit cap rate and really what you're looking at.
Scott Knauer:
Well first if there's data available for something, we want that data. Now we may deviate from it, but if we do, we'll footnote, we'll have a good reason why we deviated. We'll have a footnote that said REIS projected rent growth of 2.8% on average over the next nine years. And if we know a Walmart's opening up next door, and that may not appear in the REIS data and that will drive some down to us, we might make some modifications, but wherever we can rely on data, whether it's cap rate, reversionary cap rates, rent growth trends, we'll refer to it and use it. But a tremendous amount of work goes in. We look at over 700 submarkets, over 220 secondary markets, and over 65 primary markets once a quarter. And we look at-
Adam Mait:
When do you sleep?
Scott Knauer:
We have people help us at are very smart.
It's a lot.
And we take a look at maybe 15 different inputs on those and we weigh them and adjust. And then we evaluate those markets 1 through 700 and we then choose the best markets to focus our efforts in. And then we try to find the best locations within those submarkets. And that's where we acquire the asset itself. Of course the physical, that's important, but we do 5 and 10-year projections with different scenarios and make a lot of very, very good projections. And we rely on our property management team to tell us what they think of the property and what they believe it'll cost to operate and what they believe it will rent for. And those things are critical to it.
Adam Mait:
Appreciate that. So let's talk about where things, you think are trending? And I understand it's location based and demographic based and the like, but if you could pick some major markets out there and just give us some insights. I mean, multifamily rents historically are sort of at that upper limit right now. Where do you think see things trending? Where are we going from here?
Scott Knauer:
What we saw over the last 24 months, we'll never see again in our lifetime. We saw rent growth in major metros of over 20% combined with cap rates dropping into the threes in some cases below three. And interest rates were at historical lows. Rent growth was at historical highs. That was a great convergence caused by a number of unique characteristics. And I don't think we'll see that again, but going forward we'll see more of a normal market. Certainly we have some recessionary pressures. Most importantly interest rates have gone up dramatically. The ten-yeah treasury has more than doubled and financing is now much, much more expensive. And with that cap rates do have to increase to allow for a reasonable return. But we'll see good rent growth continue. Not 20%, that's not sustainable. But we'll see 3 to 4 to 5% rent growth in better markets and the migration patterns that really drive these rent growths have really been cast in stone for a long time.
People are moving from cold to warm. It's been a bit cold right now in the northeast. And when those things happen, by the way, migration to warm, to Florida, Arizona and Texas, picks up a little bit. You can only tolerate so many 25 below winters before you say, I've had enough and you move. And I don't want to be offensive, but I don't think anybody today woke up and said, you know what? Let's move to Fargo. That looks like a great place to live, might be, but the trends tell us differently. So north to south, and cold to warm, those migration patterns are going to continue. And we're also saying some new migration patterns emerge. We're seeing people leave overly taxed, overly regulated states and metros to move to markets with lower taxation, lower regulations, more bus business friendly environments. And that trend is driving a lot of the demographics we're seeing. And that's why you have Texas and Arizona and Nevada growing so quickly, and Florida.
Adam Mait:
Well, we love Florida. I mean we're a global company, but we obviously are based out of our headquarters in Miami Beach, Florida. You don't have to tell me, come on by.
Scott Knauer:
Why wouldn't you?
Adam Mait:
We love it here.
Scott Knauer:
Right.
Adam Mait:
Yeah, it's wonderful. One thing you said was really interesting and I want to just go back on it a second, but I'm curious, in your deal pipeline, what affect are the rising interest rates and inflation that we've seen trending having both on terms of acquisitions and what you're seeing on the development side?
Scott Knauer:
It's all but cataclysmic, right? Building to a six cap or an overall rate of return, and selling at four is a great business. It's a 30% gag. Building to a five and a half cap because of increasing building costs and selling at a six doesn't really work too well. So it's really difficult to build today in almost any metro and create much of a game. And on acquisition, we're seeing the gap between buyer and seller expectations at really historical highs as well because valuations were impacted so quickly. Those interest rates moved so fast, they got people off guard. We knew they'd go up, but not quite as quickly as they did.
Adam Mait:
But let's go back to what you said earlier. There are certain demographic like certain locations, certain geographical regions where people are flowing into.
Scott Knauer:
Yeah, absolutely.
Adam Mait:
Whether those are the Arizonas, the Texas, the Floridas and the like, and there are only so much available space for them to move into. So are we saying these are pockets of, regardless of the inflation interest rates, where we'll just see cap rates continue to trend down or are we seeing, you think you'll see a slowdown in those markets even still, despite the shift of populations into those areas?
Scott Knauer:
So that's the point. Demand will continue to grow, household formation, population gains, and more and more people will move into renting because they can't afford to buy homes with mortgage rates at 6.5%. And that will dramatically increase the demand for housing, that will continue. But you can't build today. The new supply coming online, it's not going to stop immediately, it won't stop overnight, that's not how things happen. But the number of apartments we deliver in almost every major metro, 2, 3, 4, 5 years out, will be a lot less than we delivered in 2022. And a lot less than we'll deliver in 2023. You're going to have declining supply. Demand will continue to increase. Cap rates will stabilize and there'll be some great opportunities. We're already seeing the ability for the first time in two or three years, the ability to buy a quality apartment building in a great dynamic market like Miami at below replacement cost.
Adam Mait:
Thank you for the very good summary on that. All right, so let's switch gears a quick second. You've worked on a lot of deals. I'd love to learn a little bit more about some of the more innovative projects you've worked on. Just give us some insights into the Scott Knauer history and maybe some deals that you're currently working on that you're excited about.
Scott Knauer:
One of our more innovative deals was we talked about our market selection. And one of the markets that came up time and time and time again as one of the best markets in the country was Midland, Texas. And that market was unique in that it had enjoyed 1% rent growth per month for over a decade, 12% a year. 120% over a 10-year period. And if we went back even further, we'd see that, I think, I didn't have the data, but we'd see that I think go back even further. At the same time, that market was trading at roughly at 200 basis points spread to Dallas. So you had better rent growth and higher cap rates. And generally, right, they're inverse. You have high cap rates, low growth, low growth, high cap rates. Here we had that unicorn of high growth, high cap rates, pretty fun, but trying to get capital to go to Midland.
Adam Mait:
Midland, Texas what is it? Is it not even a tertiary market? I'm not even familiar with Midland.
Scott Knauer:
West Texas, oil market and an incredible market for us, and we were able to convince a capital partner, one of the major capital partners in the world, and I should probably leave their name out of it, but they were wonderful to work with. And after being turned down by all of our typical capital partners, they said, "We'll back you." And they did. And we put in a few million, they put in many more. And we bought a portfolio for $160 million. We put 20 into it and we sold it two years later to the day for 300 million. That was a lot of fun.
Adam Mait:
Well done. Next time you have one of those deals please, please let us know.
Scott Knauer:
I'll call you. Absolutely.
Adam Mait:
Absolutely. Please do.
All right. Again, given your, you've worked in the hotels, you've worked in hospitality, right? You've worked in multifamily. Let's talk about technology. Real estate is that box, right? No matter what you're dealing with, it's an office, it's a retail store, it's a box, generally speaking. Are there any new cool technologies that you're implementing or seeing implemented in your apartment communities or other projects that you think are going to, that you're ahead of that trend that you can talk about?
Scott Knauer:
Well, Adam, you and your company are better at this than anyone I know. And identifying a new technology is a critical aspect of what we do. But I will tell you the only thing worse than no technology is technology that doesn't work. If we give somebody the ability to open their door with their facial recognition or a thumbprint, that's wonderful. And they never even knew they wanted that until they have it. Now they can't live without it. And if they can't open their door at two in the morning because that technology failed, they're really unhappy. And so is our manager who gets a phone call and so is our maintenance man. And so am I when I get yelled at and so, technology first and foremost has to be stable. It has to work. And that's really, really critical. The world that we grew up in, Adam wasn't much different, really, than the world our parents grew up in, but the world our kids are growing up in, doesn't even resemble the one that we grew up in?
The expectations of technology. If you can't run your apartment from your phone, you've got a problem. You need to be able to run your apartment from your phone. I want to answer my door and see who's there, see my package, open my door, pay my rent, put in a maintenance request, through my phone. And that will become more and more the norm. So we have really different levels of technology. The one is technology that allows us to gather data effectively and utilize it. The second technology is to report on our performance, what's happening and project what we expect to happen and give us good concise reports with graphics and trends that make sense. Being able to effectively determine what our rents should be. And there's great data for that. Some of it's under a little pressure as you know, but that was a remarkable application of software that the airlines really worked on first, then hotels and finally apartments. Real estate tends to lag other industries. But technology is critical, whether it's the technology of being able to adjust my thermostat in my apartment from my phone or the technology to be able to pay my rent or pick my market or underwrite my building. And it's changing now so quickly that it's hard to keep up with it.
Adam Mait:
It's interesting. And one of the things I've noticed is the, I'll call it impatience of the user. And that could be the tenant user, that could be the property management user, that could be the CFO user, right? It's the, "I want my data five minutes ago." I remember when we first started this back in the day, the softwares were just slower. It could take a while, we'll call that politely, to generate a report. Now if it takes more than five seconds, it's like, what is going on here? What's wrong?
Scott Knauer:
That's right.
Adam Mait:
What's wrong with this application?
I want to shift gears. One thing that I have noticed trending or that's changed in the trends I should say, but you, you'd have a much better pulse on it, is I'll call it the post-COVID era. Now I understand COVID's still around and I don't want to minimize that, but a couple years ago when COVID first hit, there was this question of what is really happening in these multifamily buildings? It's sort of a big building with a lot of people living in it. What's going to happen? And I recall a level of questions that arose, and I'm curious, are you seeing technologies that were implemented during that COVID, whether those were disinfectants on the elevators still in place? Or are people now more cognizant of it and less concerned? Just wanted to hear your input on that just given the breadth of experience and the reach you guys have in your projects.
Scott Knauer:
Well we really want to provide the best and safest environment we can for our residents. We deeply care about our residents. We want them to enjoy where they live, be safe, where they live, and not catch a cold if they can avoid it, or the flu, or COVID. And certainly we did things we probably should have been doing all along and we've maintained those standards of disinfection. We're looking at different and ever-evolving ways to keep our air a little bit air quality. And we're doing a lot of these things. And will continue to do that. I think on all of our new developments and renovations, we're trying to find a place to put a work from home space that's effective. I'm working from home right now. And to include that in our apartments is huge. And to include that in our common areas where the office area in an apartment isn't an afterthought, but it becomes almost a WeWork level office environment where they can work and collaborate and produce and be comfortable and be safe.
Adam Mait:
All right. Let's go back to a different overall topic here. Which is, is there anything that I have not yet covered? I know we've sort of covered a lot, but is there anything I've not covered that you think is important that we should discuss here? Let's jump into it. If not, that's okay too.
Scott Knauer:
Well, the way people find their apartment community, end of sales cycle has changed dramatically. We used to spend a fortune in print media. We don't do that any longer. And the expectations of technology from an acquisition standpoint, reporting standpoint, and a management standpoint are very high and ever-increasing. And the ability to gather data, to make informed decisions is at a point that we could not have imagined five years ago. And the opportunities to acquire quality multifamily and make above market returns are starting to manifest right now. Now we won't see rent growth of 20% and cap rates go from 5 to 3, but we'll see rent growth of the 3 to 4% and cap rates go from 5.5 to 5, and that creates a good return and that's sustainable.
Adam Mait:
You said it on the acquisition side, one of the trends we're seeing a lot of is on the tenant acquisition side as well, a big push to get really good quality tenants. And a lot of the managers we're dealing with are in that transition phase where they, no, I have my own piece of paper, PDF application, and I have them come by the office and fill it out and they bring by their driver's license. And we're in a dynamic shift. And one of the things we offer is this amazing online application that's fully customizable where people can upload their documents and the like run background checks and really get great insights into their tenants before they even show up really in person to look for that apartment, so to speak, and to do the tour. So I think it's on both sides of the equation.
Scott Knauer:
Absolutely and what you're allowing owners and prospective residents to do will become the norm over time, but you're on the leading edge of that and that becomes a competitive advantage for those people who embrace the technology you offer and provide.
Adam Mait:
Well, thank you. On that note, if somebody wanted to work with you or invest with Orion, is that an option? How would they get in touch with you? How would they deal with that if we have have many, many listeners? So if that was to happen, is that something that's feasible?
Scott Knauer:
Maybe in the future? For the last 20 years we've been backed by large institutions and for the first time we are really contemplating opening up our investment portal to individual investors. It's something that we'd like to do. We want to help people with those decisions and we want to make certain that they get the best possible risk adjusted returns that are available in the marketplace today. So stay tuned.
Adam Mait:
All right, well we'll definitely stay tuned. I guess on that note, any final words of wisdom that we should have you impart to our users and to our listeners?
Scott Knauer:
Work hard, stay focused and apply good data driven decision making to every process that you possibly can. And work with great firms like yours to make that data workable and usable and implement it as soon as you possibly can.
Adam Mait:
Scott, you're awesome. I really genuinely appreciate your time. Thank you so, so much by the way, on a separate note, yeah, I think there's a conference in Arizona happening later this year. I'm going to check my calendar, one of those big multifamily conferences. If you're in town, let's grab a bite.
Scott Knauer:
I'll be in town. I'll look forward to it. I was in Vegas at the conference last week. That was great. Lot of fun. Saw a lot of good people and I'll look forward to seeing you.
Adam Mait:
Was that NMHC?
Scott Knauer:
Yeah.
Adam Mait:
Was it NMHC?
Scott Knauer:
Yeah.
Adam Mait:
Okay, we'll have to go there next year.
Scott Knauer:
Please.
Adam Mait:
We'll definitely will attend.
Scott Knauer:
Good.
Adam Mait:
Absolutely. Awesome. All right, so let's not end this application. We'll let it keep offering anything else you want to talk about because we can splice it in and splice it out. Is there anything else that you think we need to address?
Scott Knauer:
We covered a lot and-
Adam Mait:
We covered a lot for sure.
Scott Knauer:
We did cover a lot and I'm happy to do this again, a little bit more organized. I jumped around, my fault, a little bit, but I hope it came out okay. And I can tell you that opportunities will emerge. There'll be money made in all aspects of multifamily. I would rather buy at a five cap and finance it 4.5% and be at 80% of replacement cost, then buy at a three and a half cap and finance it 2.5% and be it 125% of replacement cost. And over time valuations tend to stabilize at or about replacement cost plus a normal incentive for the risk, right? If properties trade well above replacement cost, developers will build, right? Because there's a profit motive and as they build, they add to supply and prices regulate. And what happens in real estate is you can't turn off the switch immediately.
So gosh, we're oversupplied, but my building's already broken ground, I can't stop and it won't be levered for 24, 36 months. So that's how we get that big momentum that puts us into an overbuilt situation where rents start to fall and occupancies start to deteriorate and opportunities become available. And now I can buy at the low replacement cost. So why would I build for a hundred million when I can buy that property for 80 million? I wouldn't. Now supply starts to drop dramatically, as you pointed out. Demand continues, migration patterns continue, and rents go up and people do well. So we're entering a very, very good time to acquire and invest.
Adam Mait:
Awesome. I'm looking forward to hearing more from you and I look forward to the next time we get to do this. And genuinely, again, thank you so much for your time.
Scott Knauer:
Thank you for having me. It's been fun.
Speaker 1:
Thanks for listening all the way to the end. Don't forget to give us a good rating on whatever platform you're tuning in from and we'll be back soon with another new episode. We hope to see you there. And until next time, this has been Loop It In.