Why Utah's Real Estate Market Is Booming

 Get the scoop on Utah’s booming real estate market with Peaks and Portfolios. Join Kip Paul, Michael King, and JT Redd from Cushman & Wakefield as they share insights on growth and investment opportunities along the Wasatch Front. Learn why Utah ranks as the best overall state in the U.S. and how its growth creates a compelling environment for commercial real estate. Explore Salt Lake City's downtown growth, hotel undersupply, and the conversion of hotels into multifamily units in Utah's hospitality sector.

Transcript

Utah's Growing Real Estate Market

Rachel Oh 0:00

Hello Peaks and Portfolios listeners. Before we get into the next episode, we wanted to share a quick update. With summer vacay and travel schedules we will be moving to a bi-weekly posting schedule for the summertime only. Starting in the fall we will resume our regular weekly episodes. So we hope you are enjoying the content and our phenomenal speakers. In the meantime, have a fabulous summer, everyone, and thank you for listening to Peaks and Portfolios presented by PEG Companies.

Rachel Oh 0:31

Welcome to Peaks and Portfolios presented by Peck Companies, your go-to podcast for all things commercial real estate investment. I'm Rachel oh, and together we're diving into current events, trends, issues and opportunities impacting the CRE investment space, from dissecting the latest market moves to sharing insights on today's commercial real estate landscape. It's time to maximize portfolios here in the peaks of the Mountain West and beyond. Okay, welcome everybody. Thank you for joining us on this week's episode of Peaks and Portfolios by Peg Companies. We're super excited about today's guests. I've never had a trio a trio of gentlemen actually, so today will be really interesting. But, as many of our listeners may be aware, this is called Peaks and Portfolios and the peaks kind of pays homage to the mountain peaks here on the Wasatch Front, which is part of the Utah State mountain region and what you may not know is you know we focus on the Mountain West, but you may not know that the crown jewel of these mountain states is the state of Utah, which has become my home state. I'm actually originally from the state of Washington state. I'm actually originally from the state of Washington. I think that originally, when I first came here, most people knew it for it. Or when I would talk to people that I was living in Salt Lake, they talk about the ski mountains you know, the best snow on earth, home of the 2002 Winter Olympics, obviously the famous national parks. But I wanted to brag just a little bit about the state of Utah for a moment. That people may not be aware.

Rachel Oh 2:01

The state of Utah was named again recently the best overall state in US News and World Report's best states rankings. Again, this is the second year in a row and that's based on health care, education, the natural environment, opportunity, economy, crime, infrastructure and fiscal stability. Also showcasing the Mountain West is Idaho at number five. So I just want to give some context there. But Utah is the number one again. Best overall state, second year in a row In the last census counts, the last US census count from 2010 to 2020,.

Rachel Oh 2:33

A lot of people don't know this, but the state of Utah was ranked the number one fastest growing state in the union. Idaho was at number two. And then the Milken Institute publishes a best performing cities report and the Provo Orem Metropolitan Market for three years in a row was the largest performing city. It just got dethroned by Austin this past year, but in the top five also includes Salt Lake City in addition to Provo Orem. And then on the small performing cities we've got St George and the Logan area, but in that top number one spot is Idaho Falls, idaho.

Rachel Oh 3:10

So again, all to just kind of underscore the strength and growth nature of this Mountain West, and we thought it would be really helpful for this episode to really hone in on this state of Utah and the growth of the Wasatch Front. And what better way to do that than to be having a conversation with one of the most prestigious investment sales teams in the region, our good friends at Cushman Wakefield in Salt Lake City, utah. So today we have joining us is Kip Paul, who is the vice chairman of investment sales for Cushman and Wakefield. I also have along with him Michael King and JT Red Kip Paul, who is the vice chairman of investment sales for Cushman Wakefield. I also have along with him Michael King and JT Redd. They are both directors of investment sales at Kip Paul and I believe they are part of a six-person team. But I've got this trio of men. I think they're going to break into a song for me in just a moment. No, I'm kidding, but anyway, welcome gentlemen. Thank you so much for joining us today.

Kip Paul 4:04

We're very excited to be here, rachel, and we just want to acknowledge that we very much appreciate that PEG, who is one of the most prolific and well-respected developers in the market. We really appreciate the effort you and the whole PEG team put together to put these podcasts together.

Rachel Oh 4:21

Oh, thank you, Kip. That is such kind words, especially from someone like yourself. I want to maybe just let the folks know a little bit about your team as well, Kip. My understanding is that your team, a team of six, is the highest volume investment sales team in the region for the last 15 to 20 years. Is that correct? That's correct.

Kip Paul 4:42

We're very fortunate to have a lot of quality clients.

Rachel Oh 4:46

That's amazing. I'm going to brag a little bit about Kip as well. Kip has provided transactions my understanding is in excess of $9 billion over the last several years and he is considered to be the most prolific broker in the state of Utah. So again, we're so honored to have you. And then I know he's been so humble he kept underscoring to me in the prep call that he leads a six-person team. So I appreciate that he credits a six-person team for this success and along with that it sounds like Michael and JT are huge parts of that. So they are both directors and they help Kip. And we're going to kind of pick your brains today to better understand this vibrant, growing market. So I wanted to kind of start out and maybe you guys could tell us a little bit more about the team. It does seem like you are not only an investment sales team but you handle all product types and just curious if you could tell us a little bit about what your team covers and maybe the different market segments.

Michael King 5:45

Yeah, so we cover all product type, and what we mean by that is we do investment sales across apartments, office, industrial, retail, hospitality and development land, and I think that us covering all product types allows us to see the market from a higher elevation. There's synergies between all the product types office drives, apartments and vice versa and so you know, ultimately, us seeing you know where all these assets are trading, what the yields are, that investors are looking for across all product type, really give us a good higher level understanding of the overall market and how everything's working together.

Rachel Oh 6:23

Awesome. So I believe, jt and Michael, you both mentioned to me that you're not even from around here. So tell me a little bit about and you guys both had said that you came here for specific reasons. So it sounds like you came here you were attracted to Utah for a few different reasons. Can you share with me a little bit about that?

JT Redd 6:42

Yeah. So I grew up in Connecticut and then moved to Utah to go to school at the University of Utah with every intention, originally, to go back there upon graduation. And then, once I graduated, I kind of realized, hey, the lifestyle here is pretty good, the economy is really strong and it's significantly cheaper to live here in Utah versus in the tri-state area. So I ended up staying and you know, I think that the growth trajectory of Utah and Salt Lake City helped support that quite quite a bit.

Kip Paul 7:13

I'll just tag onto that that not only did JT stay here in Salt Lake City, his entire family eventually followed him out here and now live in Utah.

Rachel Oh 7:23

Oh, wow. So we're talking like cousins and or not cousins, parents and brothers, and sisters, siblings, parents, friends.

JT Redd 7:31

Yeah, a little bit of everybody followed me out here, which is a good thing.

Rachel Oh 7:34

Yeah, no, that's awesome. I mean Connecticut is lovely and you're right there in the tri-state. I mean such a vibrant area. But for you to make that move and to have family with you, I think that shows a lot about the region.

Michael King 7:45

Absolutely. I mean, I think it's a testament to what's happening generally in Utah, where we're seeing a lot of people come in from the coastal regions for a number of reasons, but I think quality of life being very high on that list.

Rachel Oh 7:57

And that was what year.

Michael King 7:58

I moved out here in 2014.

Rachel Oh 8:00

Okay. So then you were before even the pandemic, when we saw a real huge uptick in population growth.

Michael King 8:06

Oh yeah, Beat the wave a little bit.

Rachel Oh 8:09

Excellent I love that Well.

Adapting to Changing Real Estate Trends

Rachel Oh 8:11

So this story, I think, is quite common. Again, like I had mentioned earlier, the state of Utah in the last census count from 2010 to 2020 was the fastest growing state and we're continuing to see that it retains its top position growing state and we're continuing to see that it retains its top position. So, going back to then, what you guys had mentioned, you guys cover all the different market segments, including multifamily retail, industrial, office, hospitality. I'd love to hear a little bit about how that has changed over the years. I mean, kip, obviously you've seen the most significant growth or changes in your tenure here, but with JT and Michael, I'd love to kind of hear your thoughts on what you've seen. We can talk about the pandemic in a minute, because obviously that has changed office, but I'd love to hear what you guys have seen in the time that you've. You know you've been covering the state.

Kip Paul 8:57

Sure. So just to kind of frame the discussion here, one of my favorite quotes is from Charles Darwin that essentially imparts it's not the strongest that survive, it's not the smartest that survive. Rather, those that survive are those that adapt the best to change. And so just in your prior sentence you used the word change. Clearly, our market has changed significantly from what it has been the past 12 years, and I think the investors, developers that embrace the change quickly and get a new game plan are going to be the winners. So with that as kind of I'll call it to frame the discussion here, michael, do you want to start us off with some discussion about multifamily?

JT Redd 9:39

Yeah, let's kick it off with apartments. You know apartments are still, from an investor sentiment, one of the hottest product type that investors want right now. Here, locally in Utah, we are always low velocity and what I mean by that is we never have enough to sell. There's always, for every one apartment project we have, there's 10, 15, 20 groups that want to get into the market. And when you're in shaky capital markets times like we are today, with volatility in the 10-year Treasury and hence volatility in interest rates and heading into an election year and everyone talking about the supply that we have coming, multifamily is in flux right now and really trying to understand where pricing needs to be in order for the market to move again. And right now, what we're seeing is a large bid-ask gap between where sellers want to sell and where buyers want to buy, which is causing that low-velocity nature. I think last year we only had five, maybe six transactions over 100 units, which is extremely low velocity.

JT Redd 10:48

And right now, in order to make decisions, put capital out, move forward with acquisitions, what buyers want is data right Data is knowledge and power and the most valuable thing that you can have in this market. And given we just haven't had a lot of comps due to the shaky capital markets time. It's hard for those folks to really have conviction and jump in and make decisions. I would just add to that that multifamily saw the most cap rate compression over the past due to interest rates getting down to 2% and really cap rates followed that trajectory pretty closely. And ultimately, when you compress cap rates to that degree, those product types are naturally going to be the ones that need to adjust the most. And that's what we're seeing right now is really cap rates widening out on multifamily. We're seeing right now is really cap rates widening out on multifamily, but still a ton of equity that wants to get placed in Utah just waiting for the right time to buy.

Rachel Oh 11:51

Yeah, no, I on our end. You know we're, as Kip had mentioned, you know we've been known most for our development side, right? So PEG development is probably. We have five verticals under the PEG company's umbrella and PEG development is what we're most known for.

Rachel Oh 12:06

But because of kind of where things are with costs and interest rates, we've had to, you know, consider other investment vehicles, including acquisitions, and our acquisitions team is just, you know, desperately trying to find things to buy in the Mountain West because you know, again, being here, and it's just tough, really tough, is what I've heard.

Rachel Oh 12:25

It's just they're not finding what they're looking for and so everyone's waiting on the sidelines and I certainly don't want to crash such that things are just terrible in the economy, but it's I don't know. I don't know what it's going to take for us to find the types of products that we're looking for, the debt encumbered unit, and so I imagine you just underscored that that we're just it's the challenge here in the market, the low velocity, as you mentioned. Okay, so earlier too, you had someone had mentioned and I can't remember who it was that office drives multifamily. So obviously there's a big need for multifamily. Investors are looking for it. It's a tougher market to find that. But how about office? How is office doing? I think that's another question so hot on everyone's minds.

Michael King 13:05

Yeah, I think we're incredibly fortunate to be in the state of Utah when we're looking at office. We have weathered the storm significantly better than some of the other markets. We're certainly not immune to the challenges that office is seeing. That being said, you know, I think theancy in Utah, specific as you get to the Silicon Slopes area, has really emphasized the importance of having people in the office and it's immediately tied to culture, tied to amenities, tied to game rooms, tied to the pickleball courts outside these office buildings. It's really, really important.

Michael King 13:43

And I think during COVID, which is when we saw kind of the glut of office space, a lot of people across the country kind of analyzed hey, where do I really want to be, where do I really want to live?

Michael King 13:53

And ultimately, I think a lot of folks settled on the Western states.

Michael King 13:57

So, as a result, we saw a lot of people and companies moving their workforce here and while they're still working from home, I think what the likely scenario is is that a lot of these employees that are working from home, that moved to Utah, are now going to trickle back into their offices that are located within the state, right, and that will take time, and I think the nine to five work week is likely forever changed and it's going to be more flexible and that you know you need to get your kid from school at two o'clock go.

Michael King 14:23

Do it just plug back in. But it's really, really important. I think when we're looking at both office and how it relates to multifamily is they're all immediately tied to each other, right? So we're finding that having office space next to housing, next to retail and having kind of that whole environment versus just maybe standalone office or standalone retail or standalone multifamily is really, really important, and that's what we're trying to create here in Utah. Unfortunately, we're a young enough market where we're able to develop and create these communities that encompass all of these different asset classes and we're able to adjust and adapt to kind of what we saw change during COVID, and I think that's really really important to mention.

Kip Paul 15:02

So I'll tag on to that, rachel Office buildings that we used to sell on a consistent basis at approximately $350 a square foot on average. Those are now trading at $150 a square foot and in some circumstances $100 or slightly less per square foot, which, to put that in perspective, we sell industrial buildings for over $200 a square foot. So the value of office buildings has just been absolutely devastated. I would use the analogy that office is going through perhaps what retail went through when COVID hit. When COVID hit, everybody thought nobody was ever going shopping again. Everything will come from Amazon. Shopping centers are dead and gone, never to exist again.

Kip Paul 15:47

Well, give it a little time. The market eventually finds itself. The market always figures it out and we've been saying for the past few years that investing in retail was a good contrarian bet and that has proven out. Right now, vacancy and I'm kind of morphing from office here over to retail the retail is now less than 5% vacant and rents are rising pretty dramatically. So I think eventually you'll see the same stabilization and correction in the market with office space, but right now it is just being devastated.

Rachel Oh 16:27

Yeah, no, it's true, we've had other guests on earlier in the year and I'll ask you folks this too as we wrap up like you know, where would you put your monies, like, where are the investment opportunities? And I think the majority of them all mentioned retail as being something. So you're just echoing that and and yes, I have confidence that everything is cyclical and I don't think office is dead completely. I think it's changed, certainly. But but I have confidence that there will be and I think we're starting to see that like and just for context, you know Peg, I don't know Kip, you probably know Cameron quite well, but I mean he was in here all during the pandemic. I never missed and I also, cause I can't stand working at home, that's just not my, my jam, but we came in. So office culture is still very, very important here at PEG, and I think other organizations are that way too. So I think we'll think, see things come around, but I think, to your point, it'll be different.

Rachel Oh 17:18

So I did want to talk a little bit more about multifamily, because one thing that, as I mentioned, peg is still. You know, we've done a lot of construction, we've added a lot of units to the downtown Salt Lake City area specifically, along with other groups. There's been a lot of supply coming into the market and there will continue to be. Just wanted to get your folks' thoughts on do you think there and I have my ideas on that but do you feel like the market is at risk of oversupply, not just the downtown Salt Lake area but you know, all along the Wasatch Front? Any comments there on what you're seeing in multifamily?

Utah Real Estate Market Trends

JT Redd 17:53

Yeah, you know, naturally we're seeing a big supply boom, but we're not alone in that. Other markets in the West Phoenix, denver, I mean, you name it everybody is dealing with a massive supply wave right now and we view this supply wave more as a speed bump or growing pains than we do indicative of a future trend here. So we did a downtown study where we're having majority of the supply along the Wasatch Front concentrated, and this year we're going to have our heaviest delivery year on record, of about 2,600 units in the downtown and granary markets, right or more urban markets. That represents about 16% of our existing inventory base, which is significant, right. That being said, the downtown renter demographic has grown at about 8% to 10% a year.

JT Redd 18:45

We've always absorbed everything that we've delivered up until this point. We had another high delivery year in the past in 2016, 2017 of about 16%, and market vacancy stayed fairly consistent, right. And so if you isolate that supply statistic on an island with zero context, you're going to say, oh gosh, how are we going to absorb that many units? And ultimately that's a fair question. But I think it's important to understand the historic context of where we've been. Salt Lake City, for the past 14 years have been sub 5% vacancy consistently every single year. So we've been undersupplied for the past 14, 15 years.

JT Redd 19:29

And so sure, given the shaky capital markets times right now, the volatility in the greater capital markets it's an inopportune time to deliver all of this in the current environment.

JT Redd 19:41

But again, we view it more as a speed bump and believe that in the next 18 months to 24 months all of this will get absorbed and ultimately the market will revert back to very tight conditions. I think second to that would be because of those costs that you mentioned, rachel, and because it's very difficult to get the yield that equity. Wants on new construction right now the faucet's been completely turned off. Wants on new construction right now the faucet's been completely turned off. There are very few starts last year, very few starts this year, and so once you get out to the end of 2026, end of 2027, we feel that we're going to be back to very tight conditions with almost no new product on the market. And if you're a developer that has the right equity behind them and has the confidence and the conviction to go right now and hit that window, I think you are going to be a beneficiary over the long term.

Rachel Oh 20:37

Yeah, no, I love that you say that, because we're a little bit in that. At PEG, you know Cameron, our founder and CEO. I think you guys know that he's convinced that it's. You know this is a vintage year and he's all about doing or pursuing things when no one else is. So it's harder to maybe convince investors of that. But at the same time I, you know, I agree with you. I think that this could be definitely a vintage year and we're seeing that in hospitality as well.

Rachel Oh 21:03

And I just want to shift a little bit too. I know you folks cover hospitality. Just curious your thoughts on hospitality because we're seeing, at least from our perspective, there was almost a complete halt on building hospitality during the pandemic, for obvious reasons, and then since that I think, there's been a little bit of a distaste for it or just, you know, hesitancy around that. So there's we're seeing a complete undersupply of new hospitality and then a lot of keys you know units, hotel units were taken off the market and a lot of conversions from hotel to multifamily. So your thoughts on hospitality in the market and kind of where you see things.

Michael King 21:40

Yeah, during COVID, to your point, our team did a number of conversions from call it economy-grade hospitality to multifamily, whereas studio micro-unit conversions. That did very well but that was a product of performance metrics just coming in a lot because people weren't really traveling as much. Right, fast forward to today. Most hospitality owners are doing very, very well. Performance numbers are back up. But, to your point, from a delivery standpoint, there's been very few new deliveries in Utah over the past even five-plus years. Downtown you had Elliman Lake, meridian Highland, regency, you had a Fairfield out in Cottonwood deliver, but still very, very light from a delivery standpoint.

Michael King 22:24

I think a big thing when you're looking at hospitality development is people are trying to figure out how much we could push ADRs right while still hovering around call it that 70, 75% occupancy level. And it's the same situation that multifamily is going through. Where you know multifamily is pushing rents. We're seeing $4 rents and a lot of product. I think hospitality developers are trying to figure out hey, how much movement is there within Utah to push rate up and it's unproven at this time but to hit the yield to develop hospitality. It's the process we're having to go through. It feels like right now and we say, multifamily, is incredibly low velocity in Utah. I think hospitality is even more so.

Michael King 23:03

I mean, apple Hospitality recently took down three assets in Utah which are the more notable trades. But aside from that it's very thinly traded and I think that's just a testament to the performance in Utah. Most ownership groups that own in Utah and I'm sure it's the same for you guys they're doing very well right and there's no reason to sell but there's reason to grow. So if there is an asset that comes online, you're probably going to have, you know, 15, 20 groups looking at it trying to bid on it, which is great if you own an existing product. I think in our eyes we're trying to look at OK, what is the future for hospitality development in Utah and how much farther are we going to push rate? But ultimately it's a really really good position to be in, particularly now as we've stabilized. We clipped up 22. Everyone is performing really well. I think we are now going to stabilize down and see what future performance numbers are going to look like across the board for all hospitality product.

Rachel Oh 23:54

Yeah, no, that's super interesting. You know, we've developed all along the Wasatch Front kind of in the earlier years. We haven't done anything recently We've been shifting a little bit more to Arizona and Arizona's, you know, growing in a huge clip right now as well. But that being said, yeah, I think that you are. I think it'll be interesting to see how hospitality continues to grow. I mean, I thought for sure, with that Hyatt Regency delivery of the 750 plus rooms, that there was no way right. And then right behind that came the La Meridian and the Element and all that, as you had mentioned, and they all seem to be doing really well and our AC is doing phenomenal downtown.

Michael King 24:31

Yeah, and to that point I think if you're looking at just downtown Salt Lake City, those three hotels, in conjunction with the other ones that are in downtown, have derived a lot of the walkability right, so office has been quieter Downtown utilization is still down. A lot of the activity we're seeing downtown right now has been a product of the hotels that have gone up, which is really exciting to see and I think this is a testament to if you're building good product hospitality and sound markets, it's going to drive walkability and it elevates the entire sub market and we've certainly seen that downtown.

Rachel Oh 25:05

Yeah Well, and you know we were just with Ryan Smith Smith Entertainment Group with all the NHL stuff that's happening, and then of course, the Larry H Miller Group with MLB and I just think, with all the professional sports activities and things coming to Utah as well, I think that's going to continue to drive the need for hospitality and for everything else. It's so exciting. It's again. Kip, you've been here this whole time. It's got to be exciting for you to watch the state grow like it is.

Kip Paul 25:34

Oh, absolutely, when I was the age of Michael and JT, we'd get some of the institutional groups that would come to the market and say, tell us why we should invest here, and we'd try to give them our best pitch and apparently we weren't very good because not very many of them came and fast forward. To today it's the exact opposite. If we put anything on the market of quality or substance of size, at least 50% of the bidders are pure institutional, if not 100%. So it's completely reversed.

Rachel Oh 26:04

Yeah, it's completely reversed. Yeah, no, it's interesting you say that, kip, because a big part of our business is the development side, and one of the things that we're able to do that, you know, other groups may not be able to is that we have relationships with landowners and or we just have a reputation and we are quote unquote locals. So I remember we were talking to one landowner because we're doing build for rent and I'll talk about that in a second and you know they had lots of groups approach them. They liked us because we were local, because I think back in the day they were snubbed by some East Coast group that just kind of treated them like hicks and they never forgot that and so meaning they will only work with locals because they remember being treated so poorly. And now everyone wants to be their friend and wants to buy their land and they're like, nope, nope, you treated us like we were hicks. And now you know so it's. It's just so interesting how you know, to your point, 10, maybe, even well, obviously 20 years ago, but maybe even 10 years ago, people just did not take this region seriously and now they're all clamoring to come in and they're going to have to come work with a local type person in order to get in, because people just distrust, right, those outsiders. If you will, I think that'll change, but for now there's still a little bit of that.

Rachel Oh 27:15

So it's interesting that you said that, kip, because we had that exact same experience. So to our favor, actually. So let's talk about that. We've been talking a lot about multifamily. One of the things Peg also does, and I think you folks are familiar with too, is we're doing build for rent. So we're building single family rental communities along the Wasatch Front and we're trying to at least it's hard to pencil, but we're trying to do that and I wanted to get your thoughts on do you think that the Wasatch Front is becoming more of a forever renter market? It didn't used to be that way, I remember and I'm dating myself but back in the day you could save up for a couple of years and do a down payment and buy a little home, and you know, after college graduation, and it's just not the same anymore. So curious if you think that the Wasatch Front is becoming more like the nation in terms of unaffordability and the need for rentals in this region.

JT Redd 28:07

Yeah, it's a great question, a great topic.

JT Redd 28:10

We are unfortunately losing our affordability story here in Utah and I think it comes down to our land constraints, right, we've got mountains to the east, mountains to the west, lakes to the west, right, and so we have a finite amount of land and you can only and you can only, you know build so much and ultimately, I think that that that build to rent space is going to solve for some of that.

JT Redd 28:36

As millennials get older, right, they don't want to be in a small apartment anymore, but they still can't, unfortunately, afford a house to buy. They want to continue to progress in life, they want to step up, have more space, you know, as as their family grows, and I think that's where we're seeing a lot of the demand for, for build a rent product. Additionally in Utah, it only represents about six, 7% of our existing inventory base, right, so not very many or not very much inventory of BTR and a lot of demand. So, for, if you can find the acreage that you need to build the density that you need, ultimately you're not going to be competing with all the rest of the supply in the market.

Rachel Oh 29:20

Yeah, yeah, no, that's again, that's what we're seeing, and you know I hate to see it. On one hand, from an investment point of view, it's interesting, but it's so crazy how the Wasatch Front is falling suit with the rest of the country. But to your point, I think it's important to note that it's more about land constraints. So it's less about, I think, what the rest of the country is seeing, but more just about the land constraint nature. And then you can see that when you're trying to buy a home here, I think people are surprised at the cost of homes, given the quote, unquote affordability.

Rachel Oh 29:53

You know story that up until recently we're probably been telling Okay, so let's shift a little bit. I think I can't remember who it was that mentioned this earlier on. But what about distress and foreclosures? I think I know the answer to this, but are you folks seeing that now, like you know, there's looming trillions of debt coming due and people are all on the sidelines kind of waiting for distressed assets and whatnot? Tell me about what you folks are seeing. You know, in this region Do you think there will be the distress type properties that a lot of the country is seeing?

Utah Real Estate Market Resilience

Kip Paul 30:26

So, as JT mentioned earlier, our market is weathering the downturn better than most. We thought we would see more foreclosures and challenges out there than what we have. To put that in perspective in 2022, we did about 19 BOVs broker opinions of value. In 23, we did over 100. And I think that really goes to the point of investors. Owners, developers are trying to figure out the new world. If you will. Recent BOVs that we've done. I think we've technically only had one lender foreclosure or imminent foreclosure. There's probably two or three more pending out there. Our belief is that there's more beneath the surface that will be coming. But you know, we get call after call from investors wanting to come into the market saying send us the list of all the foreclosures. Well, there's actually kind of zero so, but they are starting to occur. But I think it's going to be light. I don't think it's going to unfold the way other market cycles have.

Rachel Oh 31:30

And will it be one asset class or a couple, or like what are you seeing? What do you predict will make up that list?

Kip Paul 31:37

You know, top of that list is going to be office. For sure there may be a little bit of a. There's one foreclosure on a partially built apartment complex right now, so maybe we'll have one or two there. But the counter argument as to why there are not foreclosures is there's still a lot of capital in the market and in the world, and so if an owner gets pressed hard enough, there's always capital out there. It's just going to be very expensive capital to solve the problem.

Rachel Oh 32:05

Yeah, yeah, no, we're definitely seeing that. No, that's super helpful. I really appreciate that. So, okay, kip, since you were kind of commenting, you've been through, then, a number of market cycles not to underscore that but I think that gives you some perspective, more so than JT and Michael can offer. How does this current cycle compare to prior cycles?

Kip Paul 32:30

Rachel, did you just say I have platinum or silver hair? I think that's what I heard.

Rachel Oh 32:34

I think you have beautiful platinum hair.

Kip Paul 32:38

Fair enough. As tough as this cycle is, this is actually one of the easier cycles we've been through. If you're 40 years or younger and you've been in the business, all you've seen is rents increase. There's no downside, nothing ever goes wrong. It's just been how much money can investors and developers make? And some of the more seasoned guys I remember through this up cycle, roger Boyer would continually ask his team have you guys ever considered that rents could go down? Yeah, and they would look at him like he was crazy, right? So, relatively speaking, I'm not saying this is without challenges and without pain, but this is certainly not the worst down cycle we've ever been through.

Kip Paul 33:21

Oh, 708 was really brutal. We watched major entities go broke on a daily basis. Sure, we watched major entities go broke on a daily basis and, going back to the late 80s, the lenders foreclosed on. It seemed like the entire market. They literally most of you guys are too young to know these remember these days, but the banks would literally publish thick magazines of all of their foreclosures and they were begging for somebody to come buy something. So you've got to keep it in perspective. We just had 14 years of nothing but great times. There's a little adjustment here. You know, the younger people think the sky is falling because interest rates are seven rather than three.

Kip Paul 34:02

I remember the days when they were 18 to 24. So, keep your wits about you, it'll all work out.

Rachel Oh 34:07

Right, no, no, I appreciate that. To that as well, and any one of you can comment do you feel like Utah weather, is things a little bit better than the rest of the country? Thoughts on that.

Michael King 34:19

Yeah, I mean, I think it's just a product of the number of people moving into the state right, and that's shown by kind of the growth we've had across all product type. It's quality of life, it's cost of living, it's proximity to the airport, it's all the important things. You can get a direct flight out of Salt Lake City to just about anywhere. All those things mixed together, I think, has resulted in the growth of the state. That, in combination with together, I think has resulted in the growth of the state.

Investing in Utah Real Estate Market

Michael King 34:47

Um, that in combination with, again, I think it's if you're looking at or speaking with somebody from New York or California or even Chicago, you know, to Utah natives it all may sound expensive now but to all those people coming in they're saying, hey, this is, this is still half of what it was where I'm coming from, um, and I think that's that's a big part of it, in combination with things like, you know, the announcement of sports teams. I think that's going to continue to aid the growth of the state. We're a maturing market and you know, we're slowly becoming I don't want to call it real, but a very big primary market, which is exciting.

JT Redd 35:21

Yeah, we like to say that investors can't control the macro, they can't control the uncertainty, they can't control what the Fed does, they can't control interest rates or the volatility. But what they can control are the markets that they invest in, and what we're hearing is that investors are hyper-focused on high-growth markets with solid core fundamentals and Salt Lake checks all those boxes, rachel, you mentioned. Us News, and World Report ranked us the best state in the country, two years ina row. Now, we're one of the most diverse economies in the country, so we're not handcuffed or dependent on one industry, which helps insulate us. We're one of the most fiscally conservative states, one of the few states with a AAA credit rating. I mean, the list goes on and on and on the airport, the infrastructure, all of that and so I think everybody's fighting the macro level volatility. Well, go to the markets that have that high growth potential, that long runway, and have those strong core fundamentals.

Rachel Oh 36:27

Yeah, no, I appreciate that. I also again myself a transplant. I grew up in Washington, but I did go to school at Brigham Young back in the day and then spent a lot of time in Los Angeles in my career. But I also think there's a uniqueness to the state in terms of not just fiscal prudence, but I do think that the overall populace tends to be. You know, they called the beehive state for a reason it's industrious, I think, kip, even in your bio it talks about your hard work ethic and I imagine JT and Michael are just the same.

Rachel Oh 37:00

But I think there is just a a unique character to the state, of its people and the people that come here and the people that choose to stay. I've just never seen anything like it. And we have our team is growing here at PEG, and when I started we were at 80 in the office. We're now at 160 and we actually have 1100 employees nationwide. And the work ethic and I don't know, the commitment to excellence and high integrity, I think is just something we hear constantly from folks that come to us from different states that they hadn't seen before, and I think that's what makes Utah super special as well.

Rachel Oh 37:34

So again, that's my little plug, but I think there's so many things and so I'm just so. I mean, I love my adopted home state and for all that, okay. So we're going to wrap up a little bit, but I'm just going to ask each of you one question If you had $100 million, where would you invest it today? And I'm going to ask each one of you and I don't know who wants to start, but if you each had $100 million, where would you invest it today?

Kip Paul 38:03

I would spread it among all of the different market segments. Each one of them is going to have its up times. Each one's going to have its down times. They're all going to have different risk profiles at different moments in time. For example, if you chose to invest the money in office right now, it's a bigger risk, but the potential reward could be very significant, depending on the time it takes for the office market to recover. I don't think you can go wrong with multifamily retail industrial hospitality. To Michael's point earlier, it's really about just get into the market. Utah is going to produce good results for everybody.

Rachel Oh 38:41

Excellent.

Michael King 38:42

Yeah, I agree with that. I mean I think if you're buying good assets in good locations at a low basis, you're going to be positioned very, very well. If you're, you know, into Gibbs Point on Office, it's at an incredibly low basis. We recognize there's going to be pain for the next few years but I think there's a few good buys out there that you know will benefit from the recovery of office. And then on the multi-hospitality and retail side, I think spreading it across all of those diversifying risk a little bit is incredibly smart and buying below replacement cost.

JT Redd 39:14

Yeah, I agree with all of that. I'll get a little bit more specific, I think, trying to with the supply story we talked about on multifamily trying to find existing multifamily assets in those heavier supply areas where everyone's scared to buy in right now or scared to build in, understanding that replacement costs in our market in Utah to build you know, podium right now is $400,000 to $450,000 a unit. I would look at really well-located apartment assets that are $100,000, $150,000 per unit discount to that new product and that replacement cost that allows you to be a low-cost provider in the market while still getting great assets and great geographies, allows you to weather that supply storm, storm and you'll be a beneficiary of that basis once we are back in those tight conditions again.

Rachel Oh 40:08

Okay, excellent, I couldn't have said it any better. I love that. I love diversification across asset classes, I love trying to find the right cost basis and then, I think, commitment to this great state of Utah which, if those of you have not yet visited, you've got to come and I will personally take you out and about if you'd like us to join. So thank you, gentlemen, for joining us this week. Your insights have been incredibly insightful. So honored to have you all join, and thank you to all our listeners who have joined us today. From the peaks of the Mountain West, I am Rachel oh, your host for Peaks and Portfolios by Peg Companies. Thank you all for joining, until next time.