Webinar: Multifamily Markets to Watch 2022

Topic:  • By Origin Investments • May 11, 2022 Views

On this webinar, you’ll learn more about the five markets – Phoenix, Tucson, Las Vegas, Austin and Nashville – that we believe have high potential for multifamily real estate investment. Our acquisitions officers explain each city’s job and population growth, business interests, government incentives and lifestyle appeal, and why that unique combination could generate alpha for Origin investors. We also talk about our methodology to find the best places to invest, using our first-hand, boots-on-the-ground expertise, along with our proprietary suite of machine-learning models that analyze billions of data points to forecast rent growth more accurately than the industry standard.

Read a full transcript of the webinar below.

 

Dave Scherer:

Good morning, everyone. Thank you for joining us. We have over 700 attendees this morning. I’m super excited to be working with a big part of our acquisition team this morning. We’ve been going over some of the things we’re be covering on the call, and I think it’s going to be of great interest to you. We’re going to be sharing our top picks for markets in 2022 and beyond.

It’s absolutely critical to get market selection right. When I say market selection, that starts at the city level, moves to the neighborhood, we call it submarkets. Then from there moves to the idiosyncratic property, the address itself. That’s why we have people who live in their cities and have been sourcing for, in some cases, five, 10 years for Origin. Then we pair that with machine learning, which will also cover. AI, so, it’s database, but it’s also local field-based, and we think that really contributes to our decision making process.

We’re going to be highly interactive today. Please send in your questions. Everyone knows the Zoom Q&A box. Please use it. We’re going to actually put priority to the live questions this morning. There were a couple of dozen questions emailed in prior, which I’ll also try to cover. I’m going to be very brief. I’m going to encourage our team members to be brief so that we can be as interactive as possible with questions.

I will tell you that all the questions on this particular webinar will be focused on location. So, location type questions. We had a lot of questions about valuations, rent growth, interest rates. Those will be other webinars that we do. Then you can also go on our website and we have recent webinars on all those topics, construction costs, but we have to hone in on one thing, we don’t have a ton of time today.

I’m going to jump into a brief overview of Origin, for those that aren’t familiar with us. I think a lot of you are, and I’m going to spend two or three minutes on that. Then I’m going to introduce our team in totality, just to save a little bit of time. I could spend five minutes on each team member. They’re very impressive in their own right, but I’m going to do it an aggregate.

Let’s jump right in. Origin is an investment manager that focuses in multifamily real estate, in what we call the smile, which is essentially the Southeast Texas and Southwest. We’ve been doing that for the last 12 years. The bigger we get, the more focused we’ve become. Now, we’re wholly focused on multi-family development. Not only are we in one asset class, but we’re in one investment strategy within that asset class. We do that via both common equity and preferred equity investments.

We’re one of the more active in the country in that space. What we’re most proud of is not the growth. We’ve become quite a large firm, in terms of assets under management or even individual investors. We have over 2,700 investment partners, over 60 registered investment advisory partners, if you’re an investment advisor, we have 60 partners who essentially invest on behalf of their clients in the Origin funds. But what we’re most proud of is our top decile fund manager.

What’s interesting there, is it’s not for a fund. Origin has eight funds, four of which we’re actively raising right now. What this is really saying is all of our activity from 2015 on, we’re talking about seven years now, we’ve done better than… It’s actually 97%. We say decile, but the reality is we’re top 3%, both as a national and global real estate manager. We’re really proud of that because 24% gross IRS, two, one average equity, multiple. These are life changing returns for our investment partners. We also spend a lot of time on risk management.

Don’t look at the returns and think, wow, that could be risky. The reality is, we’re amazingly consistent in our returns, and that’s because we don’t use a lot of leverage, and we believe we have a lot of competitive advantages that build big margins into what we’re doing. With that, I want to jump in, I think I’ve been brief enough, which is great, and I’m going to encourage the team to be brief as well.

The team that’s about to present, these are four of our most senior acquisition officers. They have over 58 years’ experience just at Origin. Many of them came from Blackstone and Reef and GE Capital before they arrived at Origin. But the reality is, they’ve been here 58 years. They’ve been responsible for producing the acquisitions that have produced these amazing returns over a very long, and I would add, a very large data set at this point.

I’m going to introduce Dave Welk first. Dave is going to be covering market selection process. How we meld machine learning with that local presence. Dave lives in Charlotte. He’s an example of that, but candidly, everyone who’s going to present lives in their markets that they cover. He’s been covering deals in the Southeast for Origin for the last 11 years, and he’s produced unbelievable returns on what he has stored. He’s been both prolific and successful in what he has stored. Dave, please take it away.

Dave Welk:

Thank you, Dave, and good afternoon from Charlotte. As Dave mentioned, I’ll be providing a quick overview on our market selection process here at Origin and a little bit about why we developed our proprietary MultilyticsSM platform and how we use it to augment our day-to-day decision making.

Dating back nearly a decade ago, we saw mass migration trends emerging in the US Sunbelt, which was really evidenced by outsized job and population growth, relative to some of the more traditional gateway markets, such as the markets like New York City, Boston, D.C., Chicago, and even LA, which would be considered Sun Belt in some respects, given the quality of the climate out in California. Then we saw the value proposition that these markets located in largely, from Arizona all the way over to Florida and up the Eastern seaboard, offered, in terms of their affordable and quality lifestyles.

We knew that the biggest drivers for rental rate appreciation is when demand outstrips supply. When you have that recipe right for job growth, largely the population will follow. As such, we started to strong pivot into the Sunbelt and mountain regions located in those markets and began establishing a local presence there. As Dave mentioned, we moved our folks into these regions to experience life here firsthand, and develop a deep understanding of market dynamics and relationships with a number of folks in the marketplace.

To put some science behind our boots on the ground approach, we developed an econometric model here at Origin to score these cities that we are investing in, based on 27 or so fundamentals. We started with the aforementioned supply and demand fundamentals, but then we took it deeper and looked at capital flows, which inherently drives evaluations. When there’s more capital, largely institutional capital and foreign capital, chasing deals that will drive up the underlying values of the assets that are located there, we started looking at affordability, the quality of life.

You can segment that out into a number of factors, and you look at average daily temperatures, the average commute time, the presence of major universities, the presence of a number of growing and established employment drivers. So, tech, healthcare, advanced manufacturing, so on and so forth. Then also presence of stable aspects of these local economies, the presence of state government, etc.

When we started even digging in deeper into the percentage of STEM jobs related to highly cyclical jobs, such as tourism, et cetera, and then we weighted these variables based on our importance that we think, in terms of determining rank growth. We dictated where we were placing more of our emphasis on building our investment positions.

This philosophy served us well for employing our compass in the right direction early on and gave us, before some of these large capital allocators made a similar pivot in investing in these markets, which, that in turn helped drive valuation growth and helped give us a leg up on having these entrenched relationships and knowledge in these markets, through our boots on the ground approach.

Fast forward to two years ago, we supercharged our econometric model by bringing in two absolutely brilliant minds from the University of Chicago to apply some cutting-edge data science to our analytics. We made it, what we now call our Multilytics platform. What does that mean? Well, in short, we use a proprietary suite of machine learning models that we aggregate and analyze several billion pieces of data on monthly basis to identify areas that are poised for long term growth.

The driver behind these models is the concept of using the field of spatial analytics, which sounds complex than it is, but basically, what it means is it evaluates the elements within a given location that are most predictive for feature changes, based on a similar set of conditions that created growth in locations previously.

In layman terms, we were able to look at the ingredients of a beautifully baked cake long before it’s put into the oven. One of the largest drivers in investment performance is to spot growth before it occurs, and then also is readily apparent to the marketplace. What we’ve done is we’ve mapped over 150 MSAs throughout the country, so that we can spot emerging markets that are not currently on our radar, and ultimately compare these to the markets on an unbiased, relative ranking to our existing markets. Then we can determine the areas that are poised for outsized rental appreciation.

On a day-to-day basis, we use this tool to identify new areas in our markets for investment, but also to validate the areas in which we are already focusing. All this said, this tool does not replace the knowledge and relationships from our folks that you’ll hear from today, who like myself live in their markets, and they also truly understand the many aspects that go into a successful investment in development projects. These are such factors as political forces and traffic patterns and desirability of local retail and cultural amenities, all things that constitute effectively place, in addition to understanding the product design, how it fits within the local rental base, so on and so forth. With that said, I’m going to kick it off to Tom Briney to get us started, and he’ll cover the first series of our selected target markets. Tom.

Tom Briney:

Awesome. Thanks, Dave. You said the word cake and baking a cake, so now I’m really interested in dessert. Hopefully, after this, I can find some sweets to cure my sweet tooth. One of the things that came up in our pre-webinar questions as it relates to the Southwestern United States and mountain region, which is where I’m based and where I focus my acquisition efforts is this question of water.

What’s happening with the water usage and the availability of water in the mountain region and the Pacific Southwest, as I’m sure everybody has seen, there’s the water shortage, if you will, is making headlines, especially recently with Lake Mead dropping to all-time lows, as a result of the long-term drought that’s been going on over the last 20 years, really in the Southwest.

What I’d like to point to is the Colorado River Compact of 1922. Really, all this is, is an allocation of water between the seven states that make up the mountain region in the Southwest, including Lake Powell. The important piece that I mentioned about this is that it was signed in 1922. It was a 100 year agreement and subsequently been renewed by those same seven states, with some renegotiation. But it’s important that it was 1922, because that was before Lake Mead, before Lake Powell, and it’s been at the top of mind for everybody who lives in the West and Southwest for the last 100 plus years. This is not a new phenomenon, it’s an issue, and it’s always at the top of mind for the people here.

What’s really unique about right now, is that it’s at the top of mind for everybody in the country, because it’s in the news. Why that’s great is because that means we’ll do something about it. When it’s at the top of mind, we can take action. What’s currently being done about the water shortages in the markets that we’re focused on today? Currently, in the casinos in Las Vegas, for example, about 90% of the water that’s used in the casinos is also reused by the casinos. It’s a closed system. When you take a shower in the Bellagio, that water gets recycled into either the plants or the fountains out front or whatever the case may be. It’s very progressive from that regard.

If Phoenix as a metro has an entire system to recapture runoff and pump it back into the system. They’ve got, anytime you over water on a golf course, the water runs off into a system that was created by the Phoenix Metro, again, nearly 100 years ago and gets pumped back into the system that gets reused for watering the lawns again, or into different household uses.

In Colorado, we’ve got reservoir system, that’s very focused on water maintenance and really a bank account, if you will, for water usage over time. During periods of good time, that bank account gets filled up with water, and during times of drought, that water gets pulled down. Every municipality has their own bank account system for water, if you will.

In addition, the Colorado front range is really focused on reducing water usage today and there’s legislation in place or being passed right now that would require zeroscaping or no landscaping for new developments, that would help in water usage going forward. The future is interesting for water in the Southwest as well, Phoenix, as part of the infrastructure legislation that was passed by the Biden administration is going to install a desalinization plant. What that means is they’re going to pull water from the Pacific Ocean, up to Phoenix, pull the salt out of it and use it as drinking water for the communities around.

That didn’t just happen overnight. They didn’t just say, oh, we’ve got a billion dollars, let’s build a desalinization plant. This has been in planning for more than two decades. The money is finally there and the solutions are coming. Additionally, in Phoenix, they’re converting land from farming into usage for communities.

It’s amazing to think that cotton and alfalfa are still being farmed. They’re huge water using crops, are still being farmed in the middle of the desert. As you shift away from heavy water usage, like farming to a more water conserving nature of living or doing business, you’re starting to see the water usage in Phoenix actually drop, even though the community is growing. Similarly, in Las Vegas, they’re tapping aquifers that are underground, that historically haven’t made financial sense to tap, and now they’re able to tap them through increases in technology and demand.

What are the effects that we’ll see in the near term from a real estate investment perspective? I think it’s going to be pretty limited. Right now, water across those metros are all very cheap, and people are being very proactive, including Origin in our developments, they’re being very proactive with our water usage and making sure that there’ll be water for centuries to come as there have been for centuries in the past. It’s a great question, I think it’s something that we could do an entire webinar on, and maybe if there’s enough demand, we can do a whole webinar on it, but we’re here to talk about markets, so let’s jump right into Phoenix.

The Phoenix Market

Phoenix is an interesting move, because it’s been hot for the last couple of years from an investment perspective. A lot of people come to me and say, “I can’t get into Phoenix. I’ve missed the move.” If your objective of the move is to catch 1980s product below replacement costs, then absolutely you’ve missed the move. It’s not feasible to buy 1980s product below what it would cost to build new product today. However, if your objective is to buy or build based on fundamentals, then you absolutely have not missed the move in Phoenix. I think you’re probably in the third inning of a game that may go of 20 innings. It’s an unbelievable market, and it’s really driven by growth, as Dave Welk had mentioned, growth is really the driver of real estate success in Phoenix is like none other that I’ve seen.

It’s got huge in migration from across the country. But the biggest driver that in migration from a population perspective is California, followed by Texas and Illinois. California makes a ton of sense because it’s extraordinarily expensive to live there, as everybody knows. It’s a high tax state, it’s a low growth state. It’s a very challenging state to live it as a resident. As a result of this in migration, we’ve seen huge population growth in the Phoenix Metro over the last 20 years, really. But in the last 10 years, we’ve seen about 100,000 people a year, every single year move into the Phoenix Metro in the last 10 years. That’s phenomenal.

What’s driving that population growth is really job growth. The job growth over that same period of time has been anywhere from 50,000 to 90,000 new jobs every single year in the Metro. Even though there are a lot of people moving there, there are a lot of jobs being created to support all those folks moving. What’s interesting about that job growth is a lot of times people point back and say, well, wasn’t there a lot of growth happening in 2007, right before the great financial crisis?

Yes, there was, but this time it’s different, and I know those are famous last words, but let me tell you why. Arizona State has been an anchor to the community in the Phoenix Metro since 1885. It’s been here forever. This time though, Arizona State is really focused on helping to diversify the job base in the Phoenix Metro. They’ve gone out to all the fortune 500 companies and said, “What do you need from an employee and we’ll build a program that creates the ideal employee for your business. In exchange, you will move your business or a regional headquarter of your business to the Phoenix Metro. In that way, we’ll provide you with the right quality, highly competent individuals. Those individuals will move from around the country to go to ASU and then they’ll stay in the community.”

What you’ve seen because of this, which has really only been going on for the last 11 or 12 years, is a huge diversification in the workforce and really highly qualified, highly talented quality employees sticking around the Phoenix Metro. Folks like State Farm, Amazon, Carvana, really big fortune 500 firms and Forbes 1000 firms who are staying in the Metro now because they’ve got the right mix of affordability and talent.

Arizona, in general, is also a very business friendly state. There’s a lot of state incentives, tax breaks, that sort of thing, which drives new companies to relocate to the Phoenix Metro, and I’ll talk about Tucson as well in a minute. But you’ve got the likes of Taiwan, semiconductor, LG Battery Manufacturing, Lucid Motors, Nikola Motors, these are all groups that have, in the last two years, decided to move huge manufacturing facilities to the valley and create tens of thousands of jobs. This is in addition to the folks who are already there, like Intel, who have been manufacturing chips in the valley for more than two decades.

It’s really been something to watch and to be a part of. Those handful of manufacturers that have just moved to the valley have more than 50 billion of construction going on, which will result in tens of thousands of new jobs.

The cost of living is also very attractive. Even with all this growth going on, the cost of living is very attractive to folks, especially when they’re coming out of, again, California, Chicago, parts of Texas, Colorado even, is very expensive relative to Phoenix. An example of Phoenix that we’re looking at right now, or opportunity that we’re looking at right now is Haven at Washington, and Jeff, you want to switch the slide. This is an opportunity that we’ve been working on for probably about a year now. We should break ground in the next 60 to 90 days. This is in downtown Phoenix, it’s 350 units of wrap product, and it’s really at the epicenter of infill growth. This will be part of our QOZ Fund I and Fund II funds. It will benefit from all the things I just talked about. It’s in the middle of the valley, it’s got great access to all the jobs. What I really like about this particular opportunity is that it’s a low cost alternative to some of the other development that’s going on in the downtown market of Phoenix right now.

The city of Phoenix has done a really nice job with zoning and encouraging high density, high growth in the epicenter of the downtown market. This is a half a block or a block and a half off of that epicenter. We’re able to build a lower cost, but high quality product that will allow us to compete against those high-rise assets, but at a 20% to 30% discount from a rental perspective. Again, back to the affordability component of what I like about the Metro, we’re taking that to heart in our developments in the area.

The Tucson Market

I know I’m taking up a lot of time. Let’s move on to Tucson, real quick. Tucson, I’ll call it the sibling, the little brother, the little sister of Phoenix. It’s not too dissimilar. The dynamic between Tucson and Phoenix are very similar to the dynamic between Colorado Springs and Denver. Similar to Phoenix, it’s anchored by a university, a recession resistant job driver is University of Arizona. It’s got about 1.1 million people. So, about the fifth of the size of the Phoenix Metro.

What’s really interesting to me is, we talk about Phoenix or Austin or Nashville, or fill in the blank city that’s been known and people will say, “What’s the next Metro that’s coming? What’s the next growth market?” To me, Tucson is it. It’s a market that’s got all the makings, everything’s in place from a fundamentals perspective, and it’s about to be discovered. I’m just starting to see it with my boots on the ground, experience talking to local developers and seeing what’s going on around Tucson, it’s coming.

It’s a 90-minute drive from Phoenix and that’s from city center to city center. If you happen to be Northwest suburban Tucson, and you’re looking to commute to a Southeast suburban market within the Phoenix Metro, that could be as little as 45 or 50 minutes. It’s a place where if you have a spouse or significant other needing to work in Tucson, you can split the two markets pretty easily. What’s really interesting about the Tucson market is it’s even lower cost to live than the Phoenix Metro. They haven’t had the same level, although there’s been tremendous rent growth, it hasn’t been the same magnitude of rent growth that we’ve seen in the Phoenix Metro over the last several years, but you’re still getting the same state benefits from a job growth perspective, in a population movement perspective.

Caterpillar recently moved there, their US mining headquarters to the Tucson market because of those state incentives. That, again, created tens of thousands of jobs through state incentives, and through this desire for the state government to help grow the metros around the state. You’re just starting to see the boom in the Tucson market now. I think you’re probably five to seven years behind where Phoenix is. If we can continue the pace of growth right now, I think Tucson is going to be a really phenomenal market, going forward. It’s got the low cost, it’s got the jobs and it’s got the infrastructure.

What a lot of people don’t recognize is that the airport in Tucson has a number of direct flights, not just locally, but to Denver, to Chicago, to New York. It’s actually a really high quality airport, and it’s got that infrastructure plus the infrastructure of driving between Tucson and Phoenix. One of the challenges that I see with Tucson in the near term, specifically, is development. Where Origin has shifted its focus, as most of the investors and folks on this call will know, is in development. Because Tucson is such a low cost, low rent environment today, development is just at the precipice of making sense. The cost of rents relative to the cost to build is just at that inflection point. I think that you’ll start to see new development occurring in the next 12 to 18 months, some of which Origin will be participating in, and I would expect that flywheel to gain momentum and accelerate over the next several years as the cost of living starts to creep up a little bit to where it makes sense to build new product in the Tucson Metro.

The Las Vegas Market

As I run out of time, let’s move quickly to Las Vegas. Las Vegas is similar to Phoenix, in that people say, well, didn’t they get absolutely clobbered in the great financial crisis, and didn’t they just get hit during COVID? The answer is yes, but this time is different. Again, the state is really making a big effort to diversify the economy.

As folks immediately think of Las Vegas, they think of entertainment, casinos, shows, that sort of thing. That makes up about 28% of the local economy today, which is outsized for an individual economy to have a single piece that’s driving that much of the economy. That’s down from 32%, a few years ago, and it’s continuing to shrink through the efforts by the state and local governments to diversify away from the entertainment district. They don’t want to eliminate that. That is their heartbeat is the entertainment. They don’t want to change that, but they do want to diversify away.

They’re doing that through, again, state incentives. It’s a very government friendly place to do business. You’re seeing the likes of Haas Automation, which is a manufacturer of highly sophisticated machine tooling, recently announced and is currently building their manufacturing facility in Southern Las Vegas. You’ve got Google who’s building a $1.2 billion data center. You’ve got T-Mobile, DaftKings, NYU, Tesla, SolarCity. The list goes on and on of folks who are relocating their businesses to Las Vegas, because of those state and centers, because of the high quality employment potential, and because of the low cost of labor relative to California.

Again, Las Vegas, like Arizona is a huge beneficiary of the dysfunction of California and the high cost of living. Not only do we not have… We, meaning Las Vegas, have a 14% state income tax, but it’s actually one of nine states in the country with a zero income tax. It’s a pretty easy decision for companies and individuals in California to choose, let’s get out of California, let’s move to Las Vegas, let’s join the 2.2 million people that are already in the Las Vegas MSA, and let’s follow our football teams. Let’s follow the Oakland Raiders to be the Las Vegas Raiders, and we’ll see what happens with the Oakland As, maybe they’ll be joining in the not too distant future and really put Las Vegas on the map.

I think that Las Vegas has a very bright future and not just from the neon lights, but from the actual diversification of the economy that’s coming, that’s already started. Again, I think that you’ll see a huge amount of growth, population, job and rent growth going forward from Las Vegas. All three of these markets have the same thing in common; population and job growth. That’s being driven by out migration from the higher cost states like Colorado, California, and Chicago, and to some degree, Texas as well. Then they’re structurally supported by state and local governments.

I think that the Southwest, in spite of the water challenges, which have been in existence for hundreds of years, will be ready to shine for the next several hundred. With that, I’m going to send it over to Phil to talk about Austin.

Phil Schuholz:

Thank you, Tom. Really appreciate the overview of the Southwest, still a lot of similar items you’re probably going to hear from me about Austin and stealing some people. Hopefully some of these Texans stay here though, and not moving over to the Southwest, they hang out with me. But let me dive into Austin. Obviously, Austin has a lot of headlines these days. I’m sure everyone reads in the papers, the news, et cetera. Similar story that Tom just dove into with the in migration. Austin has been on fire when it comes to employment, population growth, jobs, all the announcement that everyone sees.

The Austin Market

Let me back up for a second. What’s interesting is Austin, just not so long ago in 2004 was only roughly about a million people MSA and today it’s sitting right around 2.3 million people. The expectations for Austin, moving forward, are quite strong. You have roughly people predicting 2.9 million by 2030, all the way up to 3.6 million people by 2040. Quite the growth in runway that’s expected to continue in the Austin MSA as the years come.

Some other interesting stats that I think are very relevant for what’s going on is, the MSA itself, and that timeframe from 2010 is 37% increase, and a 34% increase from 2010 to 2020. When you compare that to other places in Texas in that relevant timeframe, that’s a 20.6% and 16.8% during those two timeframes. As you can see, Austin has done severely more growth than other markets within the Texas region. Then we look at the United States as a global perspective, that same numbers in those timeframes are only 9.7% and 6.7%.

Again, this really goes back to what Tom alluded to in his market, and we’re seeing the same thing here in Austin is, people want to be here, the jobs are coming, people are moving, lower taxes. Well, in Texas, no income taxes is huge. That really is the story with Austin. Another really interesting thing about what’s coming though, obviously we know it’s the tech center right now. Everyone sees the headlines of Tesla, Apple, Google, Meta.

What’s really interesting is the makeup of the people coming. 46% of the demographics in the Austin MSA have a bachelor’s degree or higher. That is outstanding numbers for college grads with a bachelor degree or higher. Another interesting thing to note is 25% of the population out of Austin is 20 to 34 years old. That bodes extremely well from a renter perspective, as most people typically younger are buying homes. Especially in the Austin MSA, I think that’s one thing I want to touch on here is the home prices. A lot of headlines and stuff that you see now is, homes are out of control, touching half a million dollars to get into a house in Austin. Not only is that a significant down payment for a lot of people, but that monthly payment in Texas, given those property taxes is quite staggering. You’re talking anywhere from $3,500 to a little over $4,000 of a monthly payment on a house in the Austin MSA if you were to buy one, let alone the down payment that you have to come up with.

That really bodes well for the people coming in, in the tech scene. You have, again, a lot of high end comes from these tech jobs coming in tend to be younger. That obviously there’s a lot of rent-to-own spread. I see that continuing to expand in the Austin for quite the future here. The one downside that a lot of people might be talking about in Austin is definitely just the supply side. 24,000 units are under construction right now in Austin, and expected to deliver over the next couple of years. On paper, obviously, that sounds crazy. That’s 10% to 11% of the existing supply and inventory. However, when you look at the demand side, last year alone, Austin took and absorbed 20,000 of those units.

There is no slowing down from what we’re seeing in the demand side. Are there pockets within Austin that we might be a little cognizant of the supply? Absolutely. But again, that goes back to what we talked about earlier about knowing the submarkets, boots on the ground and knowing where it’s harder to build versus not hard to build and really understanding what the barriers to entry look like.

A couple of other things, I just want to point, obviously everyone knows about downtown is vibrant. I think there’s a recent article about how Austin’s, the first back to work in terms of just the vibrant downtown, a lot more people are actually back in the office. That’s great. I do see that trend. Every time I’ve gone down in the last month, I sit here in Dallas, but go down quite a bit. That’s the first thing I notice is just all the people out, going to the office, going out to restaurants for lunch. It really feels back to normal in Austin relative to maybe some of your other cities that you may have traveled to in the past.

But in terms of that, like you have just a tremendous amount of development going on in the CBD core area. You got places like the domain popping up, obviously in providing more office space. You have Apple, which actually just finished their campus or didn’t finish the whole thing, apologies, they moved in actually this past month, starting to move some their employees in. That will be 7,000, 8,000 people once it’s fully built out. Again, I think the overall theme here, and I think you’re going to see this a lot today from obviously Tom, but now Kyle who’ll be next, but job growth, population growth really is driving a lot of why we view these markets as long term growth markets, even with potential supply concerns.

Another thing that I want to touch on just on some concerns of Texas, especially Austin, there’s two things that a lot of people talk about. Obviously, taxes are huge problem, property taxes. As you might know, the tax situation in Texas, especially Austin, they just released them last week or about two weeks ago. What we’ve seen is obviously the assess values are getting hammered hard, but the nice thing about Texas in general is obviously everyone that’s a property owner appeals this every year. We’ll start seeing that again, but that is something definitely that’s on my radar, especially in Austin, just seeing how far they push these, given where rents have gone in the area and especially, just all the headline news that surrounds Austin in general.

As I mentioned, I just want to point out some of the big jobs announcements. Again, Tesla, obviously the Gigafactory is super impressive. If you ever have a chance to get down to Austin, recommend driving past it. It’s a site to see. It literally fills like six football fields. Definitely, you should check that out. Samsung obviously announced big news, 17 billion semiconductor plant in Austin, going up in the Taylor market. That will be super fascinating to see that play out over the next couple of years as it gets built out and employees start moving in. You have Amazon taking down office space in the domain. You have practically their campus opening up right on the west end over there, just north of the domain. Then you have Facebook announcing recently that they just took down 600,000 square feet of office in downtown Austin alone.

As this keeps playing out, they’re going to have to keep hiring more people, and that really is the theme here in Austin is just tech, tech, tech, and we’ll see how this continues to play out over the next couple of years. If you can move to the next slide, Jeff, and I’m going to hit on the preserve deal here.

Preserve at Star Ranch, we love this opportunity at Origin. It’s super unique. Little quick backstory of how it came about. This deal’s located in Pflugerville, a northern suburb within the Austin MSA. What’s really interesting is, for how infill this location is, this deal came about by having to cobble together five separate landowners to essentially amass 30-ish acres of land, to be able to put this deal together. We closed back on the land in Q4. We’re currently working through obviously the plans and working with the city to get all the final entitlements and stuff to essentially break ground in Q3 of this year.

Location wise, it’s phenomenal. Again, it’s in the Pflugerville, North Austin. You have rumors of St. David’s potentially building a hospital right at the corner there of Highway 40 and Highway 130, which could be a tremendous economic spark to the area. But what’s really nice is you have great access via Highway 45 and Highway 130 running north, south. You can get down to the airport super quick. You can get over to the domain. You can get over to Leander, Round Rock, all within a 10, 15 minute drive. That really helps the commute for people trying to get to where they need to get to work.

Another nice part is it’s really just an easy commute to shopping. You have the Stone Hill Town Center, just down the street, which, regional national retailers target Home Depot, Chick-fil-A, and you got a HEB Plus just three minutes up the street. Really, from an access perspective, this is really unique. The deal itself is going to be a build for rent. That’s obviously our first build for rent deal in Austin. Again, super unique how infill this is, given to amass 30 acres in Pflugerville is not an easy task.

We really think there’s a lot of potential for this deal being, roughly 300, 310 unit BFR deal. We think that, obviously, given the incomes here and the demand we’ll be able to achieve, obviously the rents well in excess of what traditional multi gets, which is fairly typical for BFR, given the unique nature of the deal and just alone, having your own space, which is nice, not being part of necessarily a full multi-community conventional. That being said, I will pass it off to my colleague, Kyle, who’s going to be able to cover Nashville for us.

The Nashville Market

Kyle Verhasselt:

Thanks, Phil. Well, from one cool city in Austin to another cool city and city filled with energy, we’re going to touch on Nashville here shortly. Nashville, known as a country music capital of the world has really transcended its musical roots to become one of the fastest growing and dynamic metros in the nation. I think one of the most exciting things living here and telling people you do is, no matter where you are in the country, there’s always somebody that’s, “I love that city, and I can’t wait to visit, or I’m thinking of moving there, or I have just recently moved there or I have a friend.”

It’s definitely a city that’s grown quite tremendously over this last. Touching on similar points my colleagues made earlier, population and job growth app, but really one of the first big things, similar to Vegas and Texas, residents that moved here benefit from having no state income tax. Your quality of life goes up dramatically, just moving here and not having to pay. As such, you have a lot of folks like myself, moved from Chicago, New York and California. Nashville is still averaging about 80 to 100 people here moving a day. That shows no signs of slow down with everything that goes on. Everybody’s super friendly and embracing that Southern charm and lifestyle.

Secondly, Nashville really offers people that move here, a diverse culture. As I mentioned earlier, music’s what got people famous and got them here. They have over 120 [inaudible 00:42:30] venues, and you can see it any day of the week. We also benefit from folks moving from larger metro professional sports. We have the Titans, the Preds, we just opened our Soccer City in the largest in the US. Minor league baseball, but we’ve also started hosting some larger events such as like the Music City Grand Prix Indie car series last year, and housed various other things like SEC tournaments, NFL drafts.

Those key people, and it helps build a sense of community and everybody having fun and feeding off of that energy. Culinary scene here has grown significantly in my two and a half years that I’ve lived here and many more that I’ve covered the market. With folks moving from Atlanta, Chicago, New York, California. A lot of those chefs have come an open up presence. I think during the two and a half COVID, in 2020 and 2021, over 197 new restaurants were open. We get back to other cities like Chicago, New York, California, a lot of their cities were struggling with lockdowns and restrictions on COVID, not Nashville. Nashville also added 23 hotels during that timeframe, just speaking to the volume of business and other components around there.

Lastly, in terms of diverse culture, the recreation outdoor. Residents can take advantage of nearly great weather year round. You still have seasons, but not quite as cold as those in the north. Nashville, Tennessee is known for its beautiful terrain. You have access to get to two state parts, 2000 acres, only 10 to 15 minutes away from the city. Whereas in other cities, that’s a half a day trip or a day trip to get that.

Talking on the other side of the equation, just in job growth, Nashville’s added over 40,000 jobs, the last 12 months. They’re expected to add another 135,000 by the end at 2024. A lot of rapid job growth. Would’ve been the staples of the industry. Healthcare, obviously is the long known Nashville, we have some of the top tier hospital systems in the country. We also have a lot of good education. We have over 24 universities and that’s about 123,000 students in the Nashville MSA, and obviously led by Vanderbilt.

But before the last few years, we really didn’t have a depth of diverse jobs. Alliance Bernstein kicked that off with their corporate relocation from New York, they’re in their office now. Then most notably, the last three years here, you’ve had Amazon opening their Regional Center of Excellence with 7,500 jobs. Oracle last year announced 8,500 employees going to build a regional hub. Likes of other groups like Postmates, Smile Direct Club, all these jobs, all their vendors and suppliers are going to get tremendous growth that want to be in this location.

For a lot of folks that have graduated from universities in Nashville, historically, they’ve had a good other areas if they wanted to advance their career, but now those jobs are coming to Nashville. Especially people are realizing the good set of talent that they have, the local universities. Of course, I’d be remiss without announcing a huge office we got here a few years ago for Origin Investments. They have recently just expanded to double their size of their office last week. Great news there.

Wow. That Nashville you can get anywhere from the city, from their airport, they’re building and the infrastructure, I think you can get to 70% of the country with under a two and a half hour flight, which makes it so great, and also, obviously, helps our tourism industry. Then, just lastly, in the last GFC, Nashville was smart ahead of the time. They built Music City Center, what is our convention center downtown. That’s 2.1 million square feet of space. They host conventions daily. Even if folks don’t want to attend the conference for the respective business, they have no problem coming to hang out for a few days in Nashville, take advantage of Broadway and the honky tonks.

Nashville’s just got a lot of cool energy, positive vibes, which continue to see the migration flowing in. If we could get to the next slide, we could talk about one of our assets in Nashville. This is PDG Charlotte. This is in our income plus one, as a built to core opportunity. Super excited about this asset. Why we liked it most, you’re two and a half miles from the downtown CBD, where we talked about Amazon and all those other droughts going. There’s six minute drive Uber, there’s bus transportation, you can get there now. Super easy to the downtown core.

I touched on Nashville’s robust healthcare system in the midtown medical district is exactly one mile just to the east, towards downtown from our site. Great accessibility for all the folks that work there, and it’s based off of Charlotte Avenue. That’s a major corridor coming in and out of the city, but also I-40, which is one of the major interstates in Nashville connects. You can get anywhere from there. Connects to 440, which you go to the other interstate, I-65.

Most notably, when you talk about real estate being local, this is centered on two neighborhood, Silver Park on one side and the nations on the other. But immediately adjacent to this site, there’s L&L Market, which was a 1920s historic building converted into really cool hip and vibrant luxury and entertainment spots. You have fitness, like yoga, cycling studios, all the way to breweries that have live music and get tacos and coffee, and just a cool place for folks to hang out.

Then you go across the street, you have Sylvan Supply, you have another similar type of project, a lot more breweries. Accenture just opened an office down there. A lot of movement. Then in and around you have million dollar homes being built. Great access to a lot of different major job nodes in the city, and also a lot of great immediate access to local retail and amenities for residents enjoying top of their Class A product we’re building for them.

Most notably, what we’re so excited about that project, our basis, there’s a project that just got capitalized a block to the west of us, their basis is going to be 57% higher than all our all-in basis. I think there’s substantial upside with just the growth growing on, and it also speaks to the volume of other investor demand in the area.

Dave Scherer:

All right. Thanks, Kyle. I’m going to take us to Q&A. We are five minutes behind, but we will go five minutes over. I’m going to start with the live question and I’ll just the quarterback. I’ll answer a few, but I’ll also just call out who I think might be the best person to answer a particular question. I’m not going to answer questions that aren’t locational. We have a lot of questions that are not locational, but we will have other webinars to cover those.

Question: Are there any markets that Origin doesn’t like?

Dave Scherer:

Okay. The first question I will cover is a question about markets that we don’t like. We talked about a lot of markets we do like. I’ll be very brief. First of all, our machine learning and AI, it takes in 3 billion unique pieces of data a month. It’s unbiased. It doesn’t make decisions for us, but we use it as a tool. One of the markets that we don’t like based on the AI, but also our own experience is right here in Chicago.

For those who are investment partners at Origin, you would know that we’ve sold all our Chicago area assets from Fund II and Fund III, lots of exits in the last year, and it’s not that we don’t believe in Chicago, we just think there’s much stronger opportunities for long-term growth in other cities that have population flows, affordability, stronger balance sheets, more business friendly, et cetera.

This tool is a national tool. We have every city mapped out in the country and, of course, we only focus in the smile states, but we can do it anywhere, and have the data everywhere. But direct is Chicago.

Let’s go to the next question, this is a question about AI. Phil, I’m going to direct it to you. The machine learning, he’s talking about how granular the tool is. Does it get to the zip code level or down to specific blocks within zip codes? This is an anonymous question. I will use the first name on questions where you provided it.

Question: How granular does Multilytics get?

Phil Schuholz:

Perfect, Dave. Happy to take that. Yeah, no great question. Our machine learning models actually even go way more granular within than zip code level. We actually can actually generate reports specifically to coordinates of longitude and lat to a specific property level. We do view that very unique. I’ll just go one step farther and say, typically, we don’t use zip code levels too much, just given how big and just size they are.

As we all might know in where you live, a zip code can have a natural barrier going through it, such as a highway, a train line, it can be totally different on either side, depending on what side you’re on. Overall, we don’t use zip codes too much. We go down to more granular levels and all the way to the actual coordinates of longitude and lat.

Dave Scherer:

Thanks, Phil. All right, next question. I’m going to actually give this to Tom Briney, because, Tom, you’ve been looking at single family rentals for bespoke communities. We all have been, but I believe you brought the first one, four years ago in Phoenix. We’re pretty deep into single family rentals now. We’re developing them in lots of our markets. We’re very familiar, and in favor of the asset class of the question. Terry, thank you for your question.

It’s a fairly new asset class. Terry says, how do you get comfortable with replacement reserve capital expenditure requirements, CapEx, et cetera. But, Tom, this isn’t really for that. I’m going to rephrase Terry’s question into, because this is a submarket webinar. What areas of the country do you think single family rentals will be most successful? Maybe you can give Terry an example of some of the developments we’re doing here.

Question: Where in the country will single-family rental communities be most successful?

Tom Briney:

Sure. I think single family residential or rentals, BFR, has a potential to be an and. And it’s in addition to apartment communities, not an or. I don’t see them pulling away from each other. It’s not a zero sum game. It’s a folks who either can’t or choose not to live in a for sale home, choose to live in these BFR type assets. Any place that you would like to live for a single family home is a good location for BFR nationally.

The epicenter of the growth of BFR movement was really Phoenix. There are a couple of developers who started building the product there and it took off like wildfire and it’s really been spreading across the country. Some markets like Las Vegas, haven’t seen a proliferation of the product yet, and some markets like Austin or Dallas are starting to see that momentum really pick up in the space. The biggest challenge with BFR in general is not the idea that it’s going to be more expensive to maintain over time. We do account for that in our underwriting. The change is minimal, but really the challenge is finding space big enough to operate those products efficiently.

In order to operate a multifamily project efficiently, you need 200 plus units, but when you’re building homes that are scattered horizontally versus vertically, instead of a three story or four story, you need three to four times the amount of space to build it out horizontally. Instead of 10 acres, you need 30 acres plus. A lot of the BFR locations tend to be more suburban in nature or even exurban, 30, 40, 50 miles outside of city center.

The key to our developments in the BFR space is really find that unique location where you can have 20 to 30 acres in a really infill from the suburban perspective, a really infill location that provides the excellent access to the jobs and the balance of lifestyle, versus having to commute a very long way. I think they have the ability to be successful, really in all the markets that we’re focused on. The key is to find infill enough locations with enough space to have operational efficiencies.

Question: What does “build to core” mean?

Dave Scherer:

Thanks, Tom. I’ll answer a quick question. What does build to core mean? One of us might have mentioned that on our… Sometimes we use terminology and we shouldn’t… Build to core, thank you everyone for your question. Build to core just means, we’re developing it to own it, not developing it to sell it. If we were developing to sell it, sometimes you would hear, we’re merchant building it, we’re building it to sell. We’re building it to hold.

The reason for that is we’re tax investors, so are you. I mentioned earlier we have 2,700 investment partners. They’re also all the same. They’re just like us. They pay taxes. The beauty of real estate is you get to make great returns, but also it’s tax efficient, if structured correctly, and that’s what we’re trying to do is build long term tax efficient wealth.

Okay. I’m going to give a question to Dave Welk. This is about the deal funnel, and I didn’t want to find it because I want to acknowledge who asked it. Thank you, David, for your question. He wants to know how many deals we look at per year. Maybe you can start at an aggregate, don’t break it down by markets, you’re a market officer. Obviously, the name of the game is to spend the most time on the deals that you actually closed, but why don’t you take them through, very briefly, our process and some of the numbers.

Question: How many deals do you look at per year?

Dave Welk:

Yeah. Happy to do so. Tom mentioned this earlier that we’ve shifted to a development focus and what that’s done is it allowed us to really focus more on site selection, development partner, relationship formation. We’ve shifted our business model to frankly, marry up with the types of investments that we’re making. Previously, we would look at, when we were more of an acquisition and value ad strategy, we would look at upwards of 2000 to 3000 deals per year.

We were underwriting a lot of these deals or in some cases, very topically looking at expectations for pricing, and we would throw them in the trash. What I would say is that, now, today, we’re much more laser focused, much more pinpointed, Dave, as you mentioned that, I’d say that in terms of gross aggregate deals that we’re looking at on an annual basis, it’s still probably over 1000 deals. But what we’re doing with a lot of those deals is we’re getting market intel for stabilized assets. We’re looking at the underlying rental rates. We’re looking at what is the cap rate that these projects will trade at, so that we can understand how our exit underwriting looks like compared to new stabilized trades in the market today.

Our process is very different. We’re using our AI tool, we’re using our boots on the ground approach to frankly source proactively sites that we want to go after. In some limited cases, we’re taking land sites to our development partners and saying, we’ve identified this location within this market, or more particularly within this submarket that we’re focused on. Would you like to figure out a way to partner with us and develop this asset? We’re taking a very granular, in some cases, more rifle shot approach to our deal sourcing than we ever have historically.

Dave Scherer:

Thanks, Dave. I’m going to give Phil a question. Actually, sorry, Kyle. Kyle, I’m going to put you on the spot. This is a great question. Gina, thanks for your question. It’s related, but unrelated. Gina is concerned about the economy slowing and the potential for a recession, and she wants to know how that will affect market selection, which markets will underperform, overperform relative to a slowdown in the economy.

Question: How will the economic slowdown and potential for recession affect market selection?

Kyle Verhasselt:

Yeah, that’s a great question. I think one of the key things about a lot of our markets that we touched on here, and all of our other selected targeted markets that we’re investing heavily in is, all of those markets have, now, a diverse, strong job base, as well as they’re winning from population migration trends in low tax states.

We continue to see those. They may be impacted, but we do not believe that they would be impacted, the more resilient compared to other markets, just because of their diverse job set economy today, and the growth that has occurred relative to markets, like Dave mentioned Chicago losing people and jobs, and certainly, Boeing last week, and where those jobs are coming down to markets we’re in because of the pro-business friendly component.

Question: How do you look at cap rates?

Dave Scherer:

Thank you. I’m going to answer a question in the chat from Daniel. Daniel’s wondering about how we’re looking at cap rates, and I’m drifting into non-geographic questions here, which is fine. We never started cap breaks in our development models really below 3.8. We just don’t approve them. The private spot market has been trading anywhere from 3.0 to 3.3. Certainly in Q4, it might be slightly higher today. Maybe it’s 3.4 to 3.5-ish, depending on the market. But generally…

The first thing we do is even though the market’s there, we don’t underwrite, we set in cushion. But then we also bake in another 50 basis points. We drift it on a linear fashion over the development lifetime. Long winded way of saying, we’re extraordinarily conservative. We also don’t trend rents. Obviously, there’s huge rank growth right now and has been.

What we’re finding is the outcomes of our developments are incredibly insulated. We view this, not only as a high margin business, but also as a very defensive business. If you’re not familiar with all this terminology, I’ll say it a different way, our developments we’re building for 250,000 to 300,000 a door. I’m generalizing, some markets more, some markets less, but generally in that range. We generally sell a $300,000 a door development for $400,000 to $425,000, $450,000 a door. If there’s a correction, you’re losing margin, not money.

I do this as extraordinarily defensive, but obviously with an upside tail. That’s what Origin is. At our root, what we really are is a risk manager. We protect your money and we let the upside take care of itself. What the future holds, I don’t know. I don’t know what the next six months, the next two years, the next five years looks like. I do know that the expected value in what we do is better than other places you’ll be.

Okay. Last question, and I’m going to send this to you, Dave. Avery, thank you for your question. It’s a question on Charlotte. Obviously, you’re an expert there, you live there. You probably know every block. Are you focused on Charlotte proper or you’re focused in the total MSA and submarkets and if so, why? You can answer that and then I’ll kick us off.

Question: Are you focusing on the city of Charlotte, or the surrounding area’s submarkets, and if so, why?

Dave Welk:

Yeah. Pretty quick answer to that. We are focused on a variety of submarkets throughout Charlotte. The MSA itself has seen rapid growth. Fundamentally, Charlotte ranks as one of the highest performing markets, in terms of absorption. There’s a lot of supply here, but I’m very proud to note that, we’ve led the country, in terms of the increase as a percentage of our existing stock. Meaning, most departments have been added here more than any other Sunbelt or city in the country. But we’ve also had the highest absorption rate and some of the highest rent growths. Not at the top, but we’ve absorbed all of our supply, and we’re still tracking near the top, in terms of markets like Phoenix and Tampa.

Drilling down within Charlotte, we talked about at the outset, we are block by block. If there are locations within each of these suburban locations within Charlotte that are poised for outsized rent growth, we’ll be there. If there’s infill locations that similarly that we’re tracking, that have some strong fundamentals, we’ll be there as well. We don’t have an urban versus suburban approach per se, but I will say that generally speaking, most of our suburban locations are poised for out performance, relative to their urban peers, as a broad statement.

Dave Scherer:

Thanks, Dave. David had a question about submarkets in Tucson, but I’m going to make this much broader. Everyone who registered is going to receive this report, and we have lots of questions about submarkets in cities and how do you get deeper? There’s just not time. You’re going to get the entire report. It’s quite extensive. Please review it. I think you’ll appreciate the level of granularity and what Origin’s willing to share.

By the way, for new people, the reason we’re so transparent, it’s not just about our markets, but it’s also about our investment strategy, our returns, our team, really answering any question that you have. We want you as an investor to be as educated as you can about all of your investments, certainly your real estate investments. It’s something we provide to the market. We also believe the more you know about real estate and an Origin in particular, the more you will choose Origin as a partner from an educated standpoint. We believe we’re the best in the industry at what we do, and we want to share that with you. Thank you for your time today and thanks everyone on the team for taking the time as well. We appreciate everyone’s time this morning. Thank you.

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