What Rising Rates and Surging Insurance Prices Are Doing to Real Estate

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Speakers from GraphCore, Siemens, Deliveroo and Aber Voyage will explore the rapid advance of AI and green technology and delve into the escalation of cyber warfare and more. Learn more at www.bloombegglive.com slash tech summit 2023. Hello and welcome to another episode of the Odd Lodz podcast. I'm Jill Weisenthal. And I'm Tracy Halloway. Tracy, I don't know if I've ever like said it to you directly before. Uh oh. No, but I've said it to others. I believe there is no limit on the number of real estate related episodes we could do. There's literally none. I feel like there are two topics in business media that everyone loves reading about and opining on and one is transportation. So airlines and cars and the other one has to be real estate because it kind of touches everyone's lives in one way or another. Well, absolutely. And one of the most powerful impulses to read anything is anxiety. And the nice thing about real estate is no matter what where you are, you're anxious, right? Like if you own a house or something or if you own like an investment property, your anxious the prices are going to go down or rents might go down. And if you don't own anything in your renter, then your anxious like, oh, rents are going to go up and uh or if you want to buy a house or the cost of buy a house is going to surge. It's your anxious so there is no like person in the world who does not have real estate anxiety. That's perfect. Whichever way the market is going, there is someone who is de facto worried about it. Yes. And so I would say there's a lot of things in real estate right now that are particularly interesting. So we talk about it a lot, but we've talked a lot about why haven't higher rates affected uh the home buying industry, the secondary market and housing and we've talked about lack of supply etc. And of course we've talked about commercial real estate and you know some of the concerns about work from home and return to office and occupancy rates etc. But it still feels like there's more to do on both fronts, particularly as it relates to sort of higher rates, the impact that is on like developing new properties in one sector or another. Well, absolutely. So there's been a lot of focus on what's going on with existing properties for somewhat obvious reasons. But over the past year we've seen this really interesting dynamic where the existing home sales for instance are almost in complete stasis just frozen. But meanwhile a lot of the home builders have been ramping up their activity. We've seen some of their share prices really surge more in Buffett is making investments in some publicly traded developers. Which you know if you're talking about things that get people's attention that has to be one of them. And so I think we really need to dive into what's happening with the actual construction versus I guess the existing buildings. Of course construction is affected by rates. It's also affected by commodity inflation labor costs. So there's just a lot a lot to get into. Let's do it. Well, I'm really excited. I do believe we have the perfect guess because we're going to be speaking to someone with a sort of like very broad view of the real estate market involved in many different angles. We are going to be speaking to David O'Reilly. He is the CEO of Howard Hughes Holdings, which is involved in real estate in many different ways. I'm going to have him explain what the business is. So David, thank you so much for coming on Adelaide's thrilled to be here. Thanks for having me. Why don't you give us the sort of quick summary across the different lines? What constitutes Howard Hughes Holdings? Howard uses a community builder. Okay. We build small cities or large-scale master playing communities where we're not just the bedroom community for the adjacent city, but we're also an employment center. We prepare land, prepare it horizontally, sell it to home builders, take that capital and use it to invest in building office, multifamily, shopping, dining, experiences, amphitheaters, art, whatever the consumer needs we build. The more homes we sell, the more residents move in our communities, the more they need those amenities. The more amenities we have, the more desirable those communities are, the more residents want to move there, and that cycle goes on and on and on. Wow. So sort of multi-use projects, give us some specific examples like what are I guess the most prominent projects that you've worked on? Well, right now we're across six major regions. The largest or not the largest, but the most dense right now is the woodlands, which is 28,000 acres just north of Houston. It's about two times the size of Manhattan. Wow. We have 120,000 residents and one and a half jobs per rooftop. 120,000 residents in an area twice the size of Manhattan. I'm jealous, I'm ready. A third of the space was dedicated as permanent green space, and that's part of the amenity base that we think make our communities so attractive. What are some of the others? You mentioned the woodlands. Where else are we? We have Somerlin, which is just west of the Las Vegas strip in Las Vegas. We have 60 acres on the island of Oahu on Almawana Beach Park. We have the South Street seaport or the seaport district here in Manhattan. Columbia, which is the oldest master playing community, started by Jim Rouse in the late 60s. And then a year and a half ago, we bought 37,000 acres today, population zero, known as TeraValus, just west of Phoenix, that will become what we think is the next great community in America. Wow. So when you say you're a community builder, how different or unique is that business model versus say a residential property developer or pure commercial property developer? Right. We do do development. We do residential horizontal development. We do commercial vertical development. That's we do a billion and a half of that a year. I think the mindset of a community builder is different than a traditional real estate developer. A real estate developer acquires a piece of land and does everything they can to maximize the value on that piece of land irrespective of what that does to the surrounding area. A community builder is equally as focused on that piece of land as the impact on the residents that live nearby and all of the land surrounding it. Because we own the majority of that land surrounding it. Where residents, our kids go to school there, we live there. We want it to be a better place to live, a better place to raise a family, a better place to work. So our developments have to be not just great on the four corners of the bricks and sticks. They have to have a great impact on everything around it. Real quickly, you mentioned the tin building. That's the one sort of Manhattan base property. It's the one that I've definitely been to. I may have been driven through the woodlands before. I'm not sure. But you do on the whole seaport. What do you have down there? Under a long term ground lease with the EDC, we have the cobblestone streets on the west side of the FDR. We have the tin building on the east side and pier 17 on the east side. That's all part of the Howard Hughes seaport district. Got it. I really liked the tin building. I went to the one of the Jean-George restaurants there. There's 21 different outlets in there. They're all personally curated by John George himself. The foot traffic, the revenue has been nothing short of spectacular as it's reinvented the seaport and become a great catalyst for growth in that area. Well, one of them I asked the obvious question, how has your business changed in 2023 versus say pre-pandemic when rates were a lot lower? Well, I think there's a number of different changes that have occurred since the pandemic. Pandemic initially hit, the breaks got hit everywhere and it was, oh my god, what's going to happen? Anybody going to live in a home again? 60 days later, home sales came ripping back. Low rates, free money, cost to build was relatively low. We saw incredible demand across our communities for new home buyers coming in and that was. How surprising was that to you because I feel like it, you know, we are not in the real estate business. So we don't necessarily have a lot of skin in the game, but I feel like if you're a developer during the pandemic, you're probably thinking this is the end of the world and then just two months later, everything comes roaring back. Oh, I was shocked by the change and when you think about the impact that the pandemic had on travel and tourism, and as I said, we have properties outside of Las Vegas in Hawaii, New York City. The impact that the pandemic had on energy, we have a project outside of Houston. It was a perfect storm of bad news for Howard Hughes, so we had hunkered in, we had recapitalized our balance sheet extended debt maturities, did everything we could to whether what we thought would be a prolonged storm. The last thing that I expected was when we're not allowed to leave our homes and we're socially distancing that we wanted to buy homes. But I think what led to that was the real acceleration of the migratory patterns that had existed for a couple of years, that flight to better quality of life out of the northeast, out of the west coast, employees that were seeking a better quality of life, better education for their children, better connectivity to outdoor space, more square footage, twice the house for half the price, and the pandemic, as we were all working from home, gave them the flexibility to move with alacrity, and that really accelerated home buying. I want to ask about the new development outside Phoenix and some of the economics that you're seeing there. But before we do- Joe, you're always going to Arizona, aren't you? Yeah, you can't resist it. Before I do, I just remembered something, so just real quickly, the tin building property, it's still not profitable, right? Correct. I read, I think I was reading through the transcript, the one quarter that it was profitable, Tracy, I think was the board apes, the NFTs had like a four-day festival there, and they just like brought tons of money on. Well, that was actually at the peer itself. Okay, that was the peer. Yeah, the tin building wasn't open at that point in time. Yeah, they had an incredible festival for the four-day boners up there with some private concerts. I love that like the NFT craze was so wild at the peak that it was like showing up on the earnings of big publicly traded real estate investment companies as moving the dial for some of their properties. Wait, well, can I ask why isn't that property profitable? Because that's, you know, a premier property in an up and coming like quite trendy area of the greatest city in America, like what's going on? So we just opened the tin building, and when you open a new restaurant, you have operating losses, you have to get the menu right, you have to get the pricing right, you have to get the overhead right. In the tin building, we opened up 21 restaurants all in the same day. Wow. Go away from the tin building, and you look at the rest of the peer, we have five restaurants on the ground floor with David Chang and Dracarmelini John George. I've been to that David Chang one. They're doing quite well. Okay, quite profitable. Our rooftop concerts series, where we have over 60 concerts. It's the most profitable in the history of the company right now. Wow. ESPN and Nike are in the office space on the third floor doing very well. So the tin building is in its infancy, and it's learning how to go from crawl to walk. And over the next year, if John George's track record is any indication, we're going to be turning the tin building to profitability, which will change the whole dynamic for the seaport. Got it. One thing that I think we really want to sort of get our wrap our heads around in this conversation is basically, you know, like, how is the real estate business overall been affected by the surge in interest rates? And of course, different aspects of the real estate business, particularly residential versus commercial, maybe different. But you look at a new project, you know, Terevolus previously known as Douglas Ranch, you announced this in October 2022. So already rates had gone up. But what do you talk a little bit about like how the math pencils out on something like that long term in a time of 8% rates to borrow it versus a 5% rate environment? How much does that affect how fast you move or how aggressively you can develop it? No, 37,000 acres, Terevolus. It's a 40 or 50 year project. The only thing I know for sure over 40 or 50 years is that rates are going to change. Yeah. Right. We didn't make that decision because we expected 2% rates for the rest of our lives. We made that decision because we saw household formations that outpaced new home construction. We saw 100,000 people moving a year for 10 years into the Arizona to the West Valley of Phoenix. It was the fastest growing county in the fastest growing city in the United States of America. And we have a unique opportunity to create a community like we have in the Woodlands in Somerland at Terevolus and meet the demand of home buyers that are out there that were struggling because of affordability. Phoenix in general is one of the more affordable cities in the state in all the states. And when you think about the median income to purchase a home in Phoenix, it's a third of San Francisco, less than half in New York and half of Los Angeles. And we thought we could build a product for the next 40 years that would meet that migratory shift that need for affordable housing and that demographic shift of workers fleeing to lower tax higher quality of life locations. When you're deciding whether or not to embark on a project, what's the most important factor? Is it the pure maths on the financing? Is it the opportunity? Is it location? The price at which you can acquire the land? How are you balancing all those different factors? Well, price of the land is incredibly important. But if you think about the price of the land relative to the investment you're making in wastewater treatment plants, water treatment plants, roads, parks, community centers, the land purchase price is a fraction of the investment. The more important factors for us is, is it near good transportation? Is it near a major freeway? Does it connect closely to an airport? Is it proximate to a large city where you have great amenities and great opportunities for your residents to have experiences with their families? And is it in the path of growth? Now, it's not often. It may be once every 10 years that you can find 20 or 30,000 acres that are fully entitled ready to go that meet those criteria and are priced appropriately. So these are not things that we trip over every day of the week. We're thrilled that we were able to acquire tariff Alice, but we may not find another one like this for another decade. Does availability of contractors enter into that equation as well? Like, have there been sites that you've identified and said this would be fantastic, but it's too hard maybe to get the labor to build it out? Occasionally there are labor shortages, there are material shortages. We feel like we're at a competitive advantage in that we'll be building this community for 40 years. And you tend to get the attention of contractors pretty easily if you can keep them busy for more than a decade. On public.com, you may earn a 5.5% yield with US Treasury bills, the highest rate since the year 2000. It's one of the safest ways to put your cash to work, and it's one of the easiest, too. There are no minimum hold periods, no settlement delays. Just a low risk place to park your cash and earn the highest yields the US Treasury has offered in over 20 years. Plus, you can access your cash at any time. In other words, you get the backing of the US government and the flexibility of a traditional bank account. As of 9-1-20-23, you may earn 5.5% annualized yield with 6-month T-bills of held to maturity. Go to public.com slash T-bill podcast to get started. This is a paid endorsement by public.com, fees and conditions apply. Treasury accounts at public.com are through Gico Securities Inc. Member Finra and SIPC, not FDIC insured, no bank guarantee, may lose value. Full disclosures can be found at www.public.com slash T-bill podcast. No one just watches a movie anymore. They play the video game, stream the soundtrack, and binge the companion podcast. Boundaries between Hollywood and Silicon Valley have blurred. And everyone is scrambling for one thing. Screen time. Join me, Lucas Shaw, for Bloomberg Screen Time. Our new LA event that will connect entertainments brightest minds, with guests like Ted Serandos of Netflix, insecure creator Issa Rae, and podcast King Bill Simmons. Catch it on October 11th and 12th, and find out more at bloomberglive.com slash screen time. I'm reading over the most recent conference call in your president, L.J. Cross, head this comment. So talk about the economics of new developments. He said, increased construction costs and operating expenses of outpaced growth and rental rates, meaningfully impacting anticipated returns on new developments. So let's start with that part of the question. What are some examples right now where between inflation, labor costs rates, et cetera, in 2023, you're making different development decisions than you might have in 2021? Oh, I think it's across every potential development. It's impacting our decision making. It's like property insurance has in most instances doubled. Utilities continue to outpace inflation. And if you layer in just taxes and a lot of the municipalities in which we work, those rates are going up faster than inflation. Now, despite the fact that we're showing double-digit, same-store growth and rental rates in our multifamily properties and our office properties, it's struggling to keep up with the increase of expenses of operating those properties. Layer into that higher labor, higher material costs, although stabilizing. We're still flattening this year. You have seen the stabilization in 2023. So far, knock on wood and higher interest rates, it's harder to create value for our shareholders with new development. With that said, we still see great opportunities, specifically within the multifamily segment, to meet demand of consumers that are willing to pay more for great properties and in great locations. Now, then later on, he says, that's not to say we're pencils down. He said, our development teams in each region are actively engaged in pre-development so that once the market returns to a more normalized environment, we'll be ready to go. What is normalized mean in that context? Is that a right thing? Is it like, do you believe that rates are sort of unsustainably high here? Is it the inflation, labor aspect? What is normal means? No, I think normal means in terms of return expectations. A lot of things can impact that. It can be higher rental rates, it can be lower operating expenses, it can be lower interest rates. The pendulum is swung a little bit and it's tilted slightly out of favor. It's usually half a minute before it swings back the other way. We're having you on, Sue Maeve, Virginia. Maybe this one, this one, Junction, the other direction. It's all right. We have patience. We're going to be here for another 40 years. What are you seeing from consumers in terms of demand? Because obviously, mortgage rates are a lot higher than they used to be as we were talking about in the intro. Do you see that crimping demand or maybe changing the types of properties that people are interested in? From a consumer perspective, there is still a demand for homes. It's slightly lower today than it was, about 7% lower than it was in the middle of 2022. But I would tell you that higher rates has impacted supply as much as it's impacted demand. That the resale home market is non-existent and for the past 20 years, resales have averaged about 87% of all home sales. Today, they're about 70. That means new home sales have doubled as a percentage of the total home sales and that trend is continuing to go higher every day. As a result, builders are still making very strong margins. They're still selling lots of new construction homes and they're still in the market to buy our land. I would tell you that the price per square foot has maintained very steady over the past year in terms of what consumers are paying for home that hasn't fallen as many would have expected. Because that demand is there. What we have seen is the average size of a home come down about 15%. Interesting. As higher rates clearly are impacting affordability, note how it about that. People still that want to buy a home are going to buy a home. They may trade the office, the third bedroom, the third car garage may wait on the pool for two years, but they're transacting. They're still forming households, they're still having children, they're still moving for jobs. They still need a place to live. Sorry, I want to go back to the development component a little bit more. I'm not sure if there's a normalized pace. One question, are you still buying land? We have 80,000 acres. We're good. Because I mean, this has been a question where the home builders are buying land, etc. We have 20 years of land to sell the home builders. We have 50 years of land to do commercial development. We don't need to buy land to keep our business model moving. What type of development right now? It doesn't pencil out to break ground on right now. In terms of like, okay, yes, you say the multi-family, yes, there's still demand or maybe home building in general that, you know, maybe people just want smaller lots. What are the types of things that in the current non-normal environment, whether it's rates inflation, etc., does not make sense to work on, right? That's a very market-specific question for us. To peel that layer of the onion just to hair, it is very difficult to get financing for certain product types. That becomes a bigger barrier. Right now, if I wanted to do an office building, it would be almost impossible to go office construction loan done. With that said, we're working on multi-family projects. We're working on storage projects. We're working on medical office. We're working on senior housing. And, you know, we're hopeful to get a movie studio construction project started here in the next six months or so in the Las Vegas Valley out in Somerlin. That's exciting. Well, talk to us a little bit more about financing. Like, what is your financing mix actually look like at the moment? How do you fund a lot of these projects? And how does it differ for say a residential project versus an office project where I understand a lot of the anxieties in the market are more focused on at the moment? We rarely finance our horizontal development. If we're selling land to home builders, putting in roads, water, sewer, infrastructure, we're not generally borrowing against that capital availability doesn't impact that business. And that's largely because in the municipalities in which we work, there's municipal financing for that. In Texas, they're called MUDs. In Nevada, they're called SIDS. In Arizona, they're CFDs, but they're all basically the same thing. Developer puts in water sewer infrastructure curves. When the homes get sold, then they create a tax basis. That tax payment becomes a debt service that services bonds. Those bonds are issued and repay the developer for the infrastructure. That is the primary tool of why housing is much more affordable in those areas. That type of municipal municipal financing really doesn't exist in the northeast. Interesting. You don't see it in a ton of locations, but where you see it, housing is generally much more affordable for that very reason. So we're not relying on financing there. We're doing a billion to a billion and a half of development a year. We need construction loans to get those going. They're more expensive. They're lower leverage. They're harder to get. And then those construction loans mature to three years later, we're terming them out with permanent financing. And that market is a little bit sideways right now. What does that mean? Well, taking a step back, the big banks' balance sheets aren't growing. And they're not getting the repayments that they would have expected. Those office loan maturities aren't getting paid off the way they thought. And if they're not growing their balance sheet, that means very little new loans. Regional banks out of the market, post-signature, they're hunkered in on their capital. So the balance sheet capacity that we've been talking about for a while and lots of people have been talking about constraining banks. It's showing up for you in certain areas like it's noticeable. Absolutely. Absolutely. Are there alternate forms of financing when that happens? Well, we hear a lot about private credit getting into various parts of the market. Yeah, but the big mortgage reads. The XYZ private equity funds that they're the ones that are naturally going to fill the gap. But they rely on usually either letters of credit line to credit repo facilities are some sort of financing from the big banks. And if the big banks don't want to backstop an office loan directly, they don't want to backstop it secondarily. So those players have largely been out of the market. And I think that there's a segment and myself included that feel like CNBS could be part of the solution here. And going back to the securitized mortgages, the typical conduit in large loans that we did for years and years and years back in my investment banking days that right now those bond spreads are pretty wide. I think probably too wide relative to the value that's in the loans under them. But if those bond investors come back to the market, CNBS could be the relief valve that would help this bottleneck right now in the capital markets. It is kind of weird that we've seen recently a big boom in like vanilla bond issuance corporate bonds, but a lot of the ABS market seems to have stalled. It's kind of strange. Can you talk a little bit about there's this sort of ongoing question of whether the impact of higher rates has really been felt by the economy? And like economists always debate this like there's going to be this lag defect. Right now my impression is that you've issued an corporate level fair amount of debt prior to the rate surge and that a lot of that is locked in and that you haven't seen a big jump. Can you talk about your overall sort of like debt profile, like how people should think about it and like at what point would it result in a big jump in monthly cost or whatever financing cost when it when does it have to be? The looming maturity. Yeah people talk about the maturity wall that Tracy got it. Yeah absolutely. That was the phrase I was looking for. Yeah and I think that the maturity wall is often just looked at in terms of the debt maturities that show on the schedule and unless folks look a little bit deeper and say well what are your swap maturities? What are your hedging? What are your derivative maturities? That's a much more important question in this market. For Howard Hughes we did $2 billion of financing in 2022, a billion of which in the fourth quarter of 2022 which puts off all meaningful debt maturities for five years average weight average maturity we have is six and a half years right now at locked in fixed rate financing. We do have just over a billion dollars of swaps that have floating rate to fixed and those expire staggered over the next four years. Most of those are associated with construction loans and those construction loans on condos in Hawaii for example pay off when we close on the condo tower. The buyers give us their money they take back their condo and we use those proceeds to pay off the loan. So it doesn't roll to a new higher rate that would impact us. So we feel like we're pretty well insulated in that area. Can you talk a little bit more about the swaps because I feel like this is a kind of maybe an underappreciated aspect of why we haven't yet seen a huge impact from higher rates on a lot of companies like there are these hedging strategies in place to help insulate them in one way or another. Yes it's not uncommon for a borrower or large corporate especially in real estate to get a floating rate loan but I think investors pay public real estate companies to take real estate risk not interest rate risk. So therefore the natural inclination is to hedge that to fixed. Sometimes those hedges are shorter durations than the notional maturity of the underlying loan and that's where you take the interest rate risk not where the loan gets paid off. When the loan gets paid off that's where the principal risk comes in and if I think about the public real estate companies today a lot of them are hunkered down with their capital and going to be relying on the bond market as much as they can. If you have an office loan that's maturing in the next several years you're hopeful that your lender will blend and extend and push that off in some way because if you have to refinance it not only is the rate higher but the proceeds are going to be much lower and it's really going to put a strain on the cash that you have available and a strain on the liquidity of a number of these property owners. Sorry I keep you know what I keep going back and looking at all of your corporate you know I'm reading your transcripts while we're doing this I'm looking at your latest investor presentation and it's 142 pages and like the looks like dozens of pages are about this development pipeline and what you're adding to existing communities so it's like in the woodland there is like something about a river row multi-family and a corporate campus that you're planning on building and something that looks like a really it's going to be maybe a really nice spot for a grocery store or something like that. Like are these the types of things that are not are they being constructed as fast in 2023 as they would have been in 2021 some of these things on the presentation. Our strategy has always been to build to meet consumer demand. If there's demand we build. If not we're ready for when that day comes you know those projects that you mentioned river row our multi-family projects across the woodland six of them were 98% lease with 15% same-shore growth. We need more product in the woodlands because we don't have enough if you're 98% lease you need more product more supply to meet that demand. The corporate campus that you referenced that's really the pinnacle of what we're trying to do is recruit businesses to come into our communities and we're ready to go whether you're a tenant that's 2000 square feet or two million square feet I have an office solution for you and unlike a lot of office developers when I meet with those CEOs I'm not solving your office needs well I am but not just your office needs I'm solving for where you live where your employees will live will they go to school will your church will be you know we just did a corporate relocation for a cosmetics company out of San Diego they moved into the woodlands and I met with their CEO and I asked her what was a driving factor you know was it taxes politics crime and I was surprised that she said she didn't employees survey average age of different employees in the mid 40s and the results of that survey was that over half of them said that they didn't think they would ever be able to own a home and more than half of them didn't think they would ever be able to send their children to college in California because they would have to get into state school to be able to afford it and the the application pool and the challenges of getting into state school in California so high and she said that was the flare that went off that said we needed to change they moved to the woodlands her almost all of her employees moved with her and now they're homeowners in the woodlands and spring in all the local area and they're pursuing education for their children with the University of Texas Texas A&M or any one of the great schools that are out there that are perhaps more affordable and a little bit easier to get into you know Joe and I were in Jackson Hole Wyoming recently and I remember joking that I really wanted Mike Bloomberg to start a company town in some beautiful part of Wyoming and we can all live there happily and you know maybe go into the office maybe while you're in the office here you can convince our boss to start a company town you don't need a company town I have them no like you just come right into our town we're welcoming with open arms Tracy really wants one in Montana so if you could please open a master plan community preferably in the middle of a national park can you make that happen Tracy would be extremely appreciative I have a question about the broader market so as you say like a lot of these developments that we're looking at on this deck might be like okay you're gonna like try to fulfill some solution for some company in terms of like competition like people want to move to Texas one of the stories that there's been a lot of supplies generally in the last couple years especially across the Sunbelt absolutely booming you're pricing it in Arizona on other pieces of land that aren't yours I'm sure you're seeing it in Nevada I'm sure you're seeing it in Texas and that at least in the short and medium term there's just a lot of capacity coming on and that there's a lot of spec building that a lot of not everyone is building with a specific customer in mind can you talk a little bit about what you see as the sort of competitive market in the short medium term in some of these boom areas like Arizona Nevada Texas etc no doubt that when capital was cheap there was a lot of folks that built and hope they would come I think the benefit that we have is that we are the master developer within our communities and within the 28,000 acres of the woodlands there's only one company that can really add new supply and we only do it one building at a time and it insulates us from that over supply risk so when we're developing we're not competing with developer on the second third and fourth corner of the intersection to be first to be best sure you're competing with Howard and use and you get the same answer no matter which one you ask and that allows us to not only insulate us from over supply but drive better results when we bring on a new project right well we have new multi-family that come online typically when you open a new multi-family project the project that's across the street cuts their rates to keep their tenants they don't want them moving to the competitor across the street we do the opposite we slightly increase our rates we own the competitive property across the street and if people want to move great they're moving into another one of our units and it really allows us to drive better results in both the existing property and the new property giving that kind of dominant market share that we have of class A space both of office and multi-family across our communities on public.com you may earn a 5.5% yield with US treasury bills the highest rate since the year 2000 it's one of the safest ways to put your cash to work and it's one of the easiest too there are no minimum hold periods no settlement delays just a low-risk place to park your cash and earn the highest yields the US treasury has offered in over 20 years plus you can access your cash at any time in other words you get the backing of the US government and the flexibility of a traditional bank account as of 9-1 2023 you may earn 5.5% annualized yield with six month t-bills of held to maturity go to public.com slash t-bill podcast to get started this is a paid endorsement by public.com fees and conditions apply treasury accounts at public.com are through gico security zinc member finra and s ipc not fd i c insured no bank guarantee may lose value full disclosures can be found at www.public.com slash t-bill podcast hi i'm Eric Schatzker the editorial director of Bloomberg new economy at Bloomberg we believe in the power of ideas that's why we launched Bloomberg new economy catalysts this global community of entrepreneurs and innovators is blazing new trails in every corner of the economy like using a i to speed up supply chains and saving our coral reefs with 3d printing the 2023 catalyst class is reshaping our world radical and exciting waves learn more about the catalysts and what they're doing at lumbardneweconomy.com slash catalysts joe and i started out the conversation talking about the um discrepancies between existing home sales and new construction at the moment and i think the difference between new and existing home sales is at something like a more than decade high i believe and this has surprised a lot of people because we thought that interest rates going up would impact affordability and demand and instead we saw the market prove relatively resilient and this seems to have incentivized a lot of home builders to ramp up construction i know we've been focused on your business but maybe talking more generally what do you think would be the thing that would give home builders caution i think what has impacted home sales more than the face on the rate the rate of change when rates are volatile home buyers pause 60 90 days and if rates stabilize and then they can predict their payment and they can predict what they can afford they'll transact we have depending on which researcher be three five million home shortfall relative to household formation since the gfc so the demand is there i think home builders realize that i think Warren Buffett's investment in the public home builder signified that he sees that long-term supply demand imbalance out there what gives them pause look if rates fell precipitously would they pause for a second maybe i just think that long-term supply demand imbalance is going to create great opportunity for home builders for a long time that's not to say that every quarter is going to be perfect we're going to have some volatility in between but over the long haul there's a lot of value to be created and so much demand is coming for those new constructions because the most valuable asset that most Americans have it's not cars it's not jewelry it's not art or wine it's their mortgage and if they have a two or three percent mortgage in today seven percent rate world it's really hard to sell your most valuable asset you know you mentioned the long haul and this is something i always wondered for a business like property development but you're talking about projects that take years perhaps even decades to complete i think you mentioned the land bank you have is good for was it 80 years something like that 20 years of residential and much longer than that for commercial so these are very long time horizons how do you balance that sort of long-term thinking with you're a publicly traded company you have shareholders that are looking at your results on a quarterly basis how do you balance the sort of short term with the long term here we're really focused on long-term value creation and our board is been steadfast in directing management to focus on creating making decisions a creek long-term value for shareholders we're never under pressure within our board room to make a short-term decision for next quarter's earnings at the detriment of a long-term value creation and that has been our focus throughout due to SEC rules the first bullet in our earnings releases what our earnings per share is that's the last time we'll talk about it and Bill Ackman is your chairman yes he owns over 30 percent and he is incredibly supportive, thoughtful and articulate member of our board that's actively engaged you know we've been talking about a lot about residential and been talking about rates the other aspect with office in particular as people are concerned about vacancies and of course that it's different in different cities so in New York there's tremendous anxiety obviously about work from home returned to office and there's a story about it every day what are vacancies rates look like at the commercial offices on your properties and say you know Houston or Summerland right now well within our portfolio we're in the single digits across the board in terms of vacancies in terms and how does uh sorry what would that how does that compare to like relative to Houston overall we're about half Houston's 20 were nine and what about for you say in 2019 those same property like pre-panded very similar so would you say I mean are these markets normalized now I mean again I think our listeners maybe like we probably have a lot of listeners in LA San Francisco New York who are just like oh god no one's going back to work well talk to us from your perspective what you're seeing there's no market that's immune right and every market has be office buildings and challenging locations that have no business being office buildings in New York you can look at third Ave in Houston you can look at a certain sub market any market there's an area where that building's just not going to meet the demand of today's needs of a company of a corporate user companies want to attract employees back to the office they realize that for several years now we've been borrowing from the culture bank and it's time to make some more deposits and get folks back to the office and to do that you need highly monetized space you need space with access to clean air hopefully some connectivity in nature a great amenities but really importantly short commutes right right I think that those office buildings in New York is no exception if you're on top of Grand Central or Penn station I think you're going to be great long term because you can offer really short commutes yeah and in the woodlands we're the largest lead pre-certified community in the country without mass transit and I was really worried when we went to get lead certified because it's still Texas there's still a lot of pickup trucks and everyone drives to work but your average commute in the woodlands is less than five miles less than 10 minutes wow you know we've talked about residential we've talked about commercial can we talk a little bit about retail because I feel like this was the pre-eminent area of concern between sort of 2008 to 2020 all the dead malls and then it's sort of I we don't really talk about it anymore we just ask about the office building so what's going on with retail so the dynamic today of nobody's ever going to work in an office again rewind the clock 10 years ago it was nobody's going to shop in person again yeah everything's online we're never going to go to the store as I've learned over time pendulum always swings too far right and I think that was a perfect example but what that did over the past 10 years is it really stopped not completely stopped but shrunk dramatically the amount of new retail supply that came to the market and we went from an oversupplied retail to right now an undersupplied retail market and when the pandemic came and it hurt a lot of those weakened performing weaker performing retailers that they went on to business they left if you look at the public real estate companies that are especially in the strip center space they backfill those vacancies their occupancies are at peaks even compared to pre-pandemic at higher rents per square foot at higher sales per square foot because they're backfilling weaker tenants with stronger tenants it was a Darwin moment like the short after after gone you know I remember a friend of mine during the pandemic I had this like crazy real estate developer friend I need to check in with him but he bought like a sort of like he bought a mall in like Plano, Texas in like the summer 2020 when it was like no one was paying their rent he's like look all of these all of the ones that in there they all survived like the past downturn and so they're all going to start paying their rent again I got to check in and I know he said he was either going to make him a billionaire go broke so we'll see what happened I'll see where he is you know what I there was something you said at the very beginning that I think we really need to hit on again and yesterday I was reading through the Fed's beige book and by and large there was a lot of comments about you know inflation cooling supply chain turning to normal but the one area that stood out over and over again across districts where they're seeing more inflation is insurance and you said that in the beginning talk to us about why is insurance first of all why isn't insurance surging everywhere what rates have have taken off yeah over the past year it ways that we've never experienced and I've never seen in 20 years and I'm told there's a lot of reasons for that yeah the reinsurance market is drying up people are reluctant to take risk there have been more and more natural disasters making it harder and harder to price insurance appropriately and there's just fewer and fewer risk takers on the other side of the table to meet the demand of folks that need insurance on this side of the table when you say rates are taking off like the way you've never see can you like put some numbers behind it in terms of just like how different how crazy is the market or the move the rate of change in the market in 2023 versus a period that you might be held in most most risk managers would define insurance markets as either hardening or softening okay worse are getting better okay every year they always tell me it's hardening okay and I say one of these days it's going to soften and sometimes it'll soften but they always manage my expectations by saying it's hardening okay so this year they said it's hardening and I kind of rolled my eyes and shrugged and said okay here we go again and we'll suck you know we'll take it we'll take a three to five percent increase yeah it'll be all right and we came back with 25% oh wait maybe it's 40% and then some of our peers and some of those that I've talked to in the industry have seen a 50% increase and it's just there's not as much availability as there used to be and then therefore certain pieces of the insurance stack gets more expensive for a company like Howard Hughes with you know six billion of total insurable value we do what's called the shared and layered program like most people do okay which is think of a CNBS loan or an ABS loan where you take the whole loan and you slice it by risk okay and then you have this Tetris like grid and you fill it up with insurers those that want to take the most risk at the top get the highest rate interestingly and then all of a sudden at the end of the year when you go to get your policy there's a big gap in the middle or you can't fill a couple of layers and then the cost of filling those incremental layers are so pricey that it impacts the pricing of every layer around it and it's just that there's not enough supply to meet the demand this might be a dumb question do you get volume discounts as a big developer on insurance like is there is there a size benefit here there's a diversification discount okay right and there's certain locations that are more susceptible to natural disasters and if you have locations that offset that if I have a Las Vegas to offset a Houston that helps if I have you know Columbia Maryland offset a New York City that helps oh it's a Houston I guess the concern would be hurricanes or floods yes do you have a sense of like when you look at these big increases pretty how much I mean I guess like of the big 30 40 percent increases and I've seen those numbers elsewhere like how much would you say is related to like natural disaster risk versus some sort of diminishment and just sort of capacity overall you mentioned the reinsurance maybe tightening financial market I think your question implies that one didn't create the other okay right and I do think the increase in natural disasters it has negatively impacted the amount of supply on the other side just on the topic of climate change so obviously one thing you can do to mitigate those sorts of disaster risks is not build in areas that are prone to flooding or hurricanes is there anything you can do in terms of the actual property development or structures I've seen a lot of people asking well why doesn't America build more homes out of cement versus plywood things like that absolutely and it's not just how you build as you mitigate potential natural disasters it's how you build to mitigate your carbon footprint and how you build respecting the environment you I mentioned that one of our communities started in the 60s by gentlemen named Jim Rouse who lived in Baltimore and he saw that he thought that people had lost their way they stopped taking care of each other and they stopped taking care of their environment some of the other new developments around Baltimore were just grazing the landscape flattening the land sticking up homes and he said I'm going to build a better community he said I'm going to build a garden for growing people where we're going to respect the community respect each other allow everybody to come in there will be no red lining allowed in our new construction we're going to embrace the environment and we're going to build that ideal a community and that's really the roots of the Howard use corporation how do you hold things and that's what we embrace today and it's not we're green or inclusive because we check a box on a scorecard and get a better rating somewhere it's because we create a better community when we do it more people want to live there it's a better quality of life for our residents when we do it and therefore our land values are higher our returns are higher and it's about just doing the right thing when hurricane Harvey came into Houston one of our largest master plan communities in northwest Houston known as bridgeland it's about 11,000 acres about halfway done so far and I was at home on the computer looking at YouTube constantly just typing in bridgeland flooding what's going on and there was a lot of videos posted by some folks and very big trucks and they would scan around on their phones and go oh my god the roads have flooded oh my god the lakes have flooded and I'm watching in between as they're scanning and I'm like thank god the homes are dry everything worked the way it's supposed to we built bridgeland to the 500 year floodplain when code said you only had to build to 100 and as a result we didn't have a single home in bridgeland take water darn Harvey wow because there weren't many places like that I mean no David O'Reilly CEO Howard Hughes holdings thank you so much for coming out I feel like we could actually probably ask you questions for like four or five hours because they're just so much here in you know construction and utility costs in Texas and all that stuff but this was great I learned a lot and I really appreciate you're coming out of my life thanks so much for having me Tracy I thought that was great I feel like we really needed that sort of pretty close to 360 degree view on the real estate market and that was really good it was pretty holistic given that we hit residential commercial and retail as well retail utilities labor climate change insurance yeah we hit a lot in that conversation yeah one thing that stood out to me was David describing the sort of reaction in early 2020 to the pandemic and I think this partly explains why a lot of the economy has proven to be more rate insensitive than perhaps expected but you know he was talking about how they rushed out and termed out their debt and they've been using a lot of debt swaps as well on floating rate loans like if you think that every company in early 2020 basically said we need to do this right now like that is a big big force yeah sort of holding back some of that tightening and then the question is right are we going to hit the wall right I mean we you mentioned you know the maturity wall and maybe the maturity wall is Joe when you say maturity wall you always have to say looming maturity wall that's the rule the journalist role so you mentioned for people talk about that looming and maybe it's not quite as like steep as it's not literally wall maybe it's a hill but when we think about the sort of potential lag defect rate hikes and it's you know one factor might be you know there's clearly some slung already in terms of new development in certain areas but one reason maybe we haven't been had harder is because of that aggressive terming out no absolutely and then the other thing that stood out to me was the discussion of insurance yes and this seems to be really like a growing headwind not just for individual owners in certain parts of the world but also for property developers as David laid out and I think we really need to do an insurance episode soon we definitely need to do but it was great to hear from like a big buyer of insurance that like yes this is not like anything we've seen in the past I mean that's like okay you expect a hardening market which is a good I didn't know that phrase a hardening market typically four or five percent maybe and it's like 30 to 50 percent or 30 to 40 percent pretty well also the description of how insurance risk is kind of divvied up but yeah you know very similar I guess to a CLO sorry my frame of reference is all structured finance but and the idea that you can build this deal but if you can't sell certain trenches because the buyers of that specific risk aren't there anymore then the whole thing becomes pricier I hadn't heard that description before that's really interesting me neither but that was great all right shall we leave it there let's leave it there this has been another episode of the odd lots podcast I'm Tracy Alloway you can follow me at Tracy Alloway and I'm Jill Wyzenthal you can follow me at the stalwart follow our guest David O'Reilly he's at David O'Reilly HHC follow our producers Carmen Rodriguez at Carmen Arman and Dashel Bennett at Dashbot and check out all of the podcasts at Bloomberg under the handle at podcasts and for more odd lots content go to Bloomberg dot com slash odd lots where we have transcripts a blog and a newsletter and I know there's going to be a lot of talk about this one 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