Macroeconomic Trends with Whitney Elkins-Hutten

The housing market that we're already behind on, you know, the rentals that aren't there and they have disposable income to be able to afford that. So now you're creating even more price increase pressures on an already depleted housing supply.

Welcome to the Next Level Income show where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larsen. If you haven't yet, get a copy of our book for free at our website, Next Level Income.com. that's www.nextlife levelincome.com. just click on the book link and I'll even send you a copy if you put your address in. On this week's podcast, we have a special presentation that I did with Whitney Elkins Hutton of the Passive Investing Team. We're going to talk about the macro trends for you to pay attention to in 2023. We're going to talk about things like if apartments, if multifamily is still a good space to invest in. Some of the long term trends that I first talked about in my book that I've been following for the past decade, we're going to dive into and we're going to talk about what you should pay attention to as you put together your investment thesis for the next decade.

What I want to talk about is helping our limited partners understand what's happening in the environment today. And we you teed it up a little bit for us, but just a little bit of backstory. We were at a conference in the beginning of March and we had the opportunity to hear one of the vice presidents of Marcus and Millichamp speak about the five macroeconomic trends that we need to be as all investors, limited partners, general partners together, need to be paying attention to going into 2023 and beyond. Now I really loved it because in his talks he was like if you are reading the headlines, it's clickbait. It's largely negative and you need to pay attention to the negative. But what's not being covered are these, or at least to the depth are these micro macro trends that probably put commercial real estate in a really positive light. Now you and I were speaking before the show that these trends can't apply to the entire United States. Real estate is very still much local market. So what might be happening in one area, like a boom in one area, there might be a decline in another area. But let's talk about those stats that kind of help paint a picture. Chris, I'm going to turn this over to You?

Yeah, no, thank you. And look, I did a podcast last year, which you can find on my website, NextLevelIncome.com, which, by the way, you can also get a free copy of my book there. And the reason I bring the book up isn't just so I can send you a free copy, but I talk about these trends. And I did that webinar or I'm sorry, I did that podcast because I wanted to update the statistics because they went through 2025 when I wrote my book. And I talked about some of the reasons that I got into multifamily in the first place, which was interesting because I was also in the medical device space for almost two decades. And one of the reasons I got in the medical device space was because of the baby boomers. I was a real estate investor before I was in the medical device space. And I wanted a industry that had a steady demographic wave, this nice, steady demographic tailwind, if you will, to support the industry that I was going into. And I figured, hey, baby boomers are the most active, most affluent generation in history. They're going to seek surgery so they can continue their lifestyle, and they're going to have the money to pay for it. So I got into the medical device space. It provided me a good predictable income for a lot of years, and I was able to use that money to invest first passively into the space and create a lot of the freedom and some of the experiences that we. That we talked about. But in the podcast, if you don't want to go back and listen to the whole thing, there's data. And you can also check out, we are apartments.org that has some more of the data that you can really drill into. But the bottom line is, over the next more than decade here, over a decade between now and 2035, we need over 4 million new units in this country. We have a deficit of over 600,000 units. And the reason is, if you go back to 2008, 2009, we basically came to a standstill in term of delivering new apartments in this country. So what happened was it slowed down, delivery slowed down, and we were delivering like between 100 and 200,000 units on an annualized basis. We needed over 300,000, about 350,000, and we were coming up short year after year after year. Now, recently, as rents have increased and returns have increased, we've seen these deliveries catch up, but we still have not made up for that humongous deficit that we had before. So I've heard a lot of talk recently, Whitney, about, oh, we have so many deliveries coming this year. We have like, six or seven hundred thousand new units coming this year. That's just going to make a dent in the amount that we need. And what has happened between last year when I did the podcast, and now these deliveries have slowed way down again because the cost of capital has gone up, deliveries have slowed down, the cost of construction's gone up, and rent growth has slowed. We were seeing phenomenal rent growth, 20%, 30% in some markets. And as rent growth has slowed, mind you, it's come back to orbit. It's come back to where it has been historically, which is, in my opinion, strong and healthy. But a lot of builders have said, hey, we're not going to build right now because it costs a lot to build and it costs a lot for us to borrow. So what's happened is, if you look at where deliveries are going over the next two years, we're going to drop back below that $350,000 a year number. And then another big problem that we have is affordability in this country. So if you want more affordable housing, you need more units. It's. It's Econ 101. Right. Supply and demand. Supply and demand. You have a lot of supply and demand stays the same, prices are going to come down, demand is going to continue to trend up. And I know we're going to talk a lot about these trends, but I think this is really important to understand where we've come kind of where we are today and where we still need to go between now and 2035.

Yeah. So just to kind of put a little bow on it for everybody to, to. To understand what I hear you saying, Chris, is even though everybody might be seeing, you know, construction around them booming and get concerned that, oh, wow. That we might be oversupplied here pretty quickly, we actually are in some so big of a hole that we won't be because we're so far behind of what we actually need to be delivered today. 4.3 million apartments need to magically appear today to meet the need.

Yeah. And look, obviously if you deliver a massive number to one market within a week or a month or a year, it's going to impact the market. Right. You're going to see some concessions, you're going to see some rent growth slow.

But.

But, you know, personally, I'm not investing for this year, I'm investing for the next decade. And that gives me comfort. And another thing to mention is one and a half million of these units need to be delivered in California, Texas and Florida. So, you know, really Texas and Florida, I know, are two of our favorite markets when it comes to, you know, where we're, where we're looking for new opportunities. So a lot of this is located in those markets and you know, not as much as needed in some of those markets that are, that are not growing. Right. So, and we can talk a lot about that. But you know, if, if people are moving out of a state like Illinois, like New York, like frankly like California as well, then they're not going to need as many deliveries. Right. As places like the Carolinas, Georgia, Florida, Texas, Tennessee, for instance.

Well, let's talk about why these areas need the delivery. Right. I think this is a perfect segue into one of the, the first macro trend that, you know, Johnny Chang asked Everybody GPs and LPs to keep their eye on is this onshoring reshoring of jobs to the United States. And so I did some research on this and you know, really, you know, due to increased labor in China and more favorable government policies here, we're able to, you know, for trade and immigration, we're able to move a lot of these jobs back to the United States despite the economy, despite raising interest rates. But like what the trends that we're seeing with not being able to keep up with the supply and housing that needs to happen, we can't reshore these jobs fast enough. We have, you know, if we maxed out all the office and industrial labor markets, okay, we would be reshoring 250 to $500,000 annually or not dollars, but you know, jobs annually and that wouldn't keep up with the demand. So we're seeing a lot of competitive pressures here. And if you're moving that many jobs back over here, they're going to need an office space, they're going to need industrial space, they're going to need housing and we're already undersupplied on all three of those areas.

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All right, let's talk about the second macro trend, behavior trends and millennials and boomers. So I put all the different generations up here. Now, you know, depending on where you look on the Internet, you know, you might see, you know, different year cutoffs for each generation. But, you know, pretty much we're kind of putting most people in some sort of container. And you and I are both Gen Xers, so we were talking about that. But, you know, so millennials, essentially you have the largest, previously largest generation, you know, retiring, they're downsizing, they have increased housing needs different from the housing that they've currently been in. And it's colliding with the next largest genre or the, actually the now largest generation in history, which are the millennials. A lot of times Their kids are their grandkids and they're entering their prime working years and they're more apt to start up businesses. So they not only need a home, but they also need office space at the same time. And what I find really fascinating, when I was digging in on the slide, doing some of my own research, both of these groups are more likely to rent. So again, putting increased pressure on those already. The housing market that we're already behind on, you know, the rentals that aren't there, and they have disposable income to be able to afford that. So now you're creating even more price increase pressures on an already depleted housing supply.

Yeah, so I'll give some anecdotal and also some, you know, more data driven information here. So again, I wrote about this in my book, so my book's a few years old now, but baby boomers are, at the time, are the fastest growing renter demographic. And the reason is, is they downside. You know, you hear this term, oh, your house is your biggest asset. And there's a lot of liquidity or capital tied up in that. So if you want to retire and move, I have a friend, he lives in Memphis, Tennessee. He, he just left his job. His wife's a consultant. She is no longer in her corporate job. They have kids and he was, he was right here in Asheville, North Carolina, and they're looking for a home to buy. So they're going to sell their place in Memphis and they want a home here to buy. So you look at somebody like that, that same couple is competing with the millennial couple that is forming their first household. Maybe they just got married, maybe they're about to have their first kid. So what's happened is you have these select areas of the country where people are moving. You have baby boomers retiring and saying, hey, I want to live in a cool place like Bentonville, Arkansas. And then you have millennials that are saying, hey, I want to. I want to start a family and I want to. And I can work from home. I have more flexibility than I used to. Or maybe Bentonville, which has actually really strong job growth and it has a really strong employment base there. Maybe they want to move there, too. We're seeing it. We're seeing. I have friends, a lot of friends that are realtors are saying, Chris, you know, these millennial couples, they're doing really well. They got money, they got great credit, but they're coming in, they're getting beat out by baby boomers that are throwing all cash down because they Sold their house in New York or California or some other area of the country. Seeing it in terms of that was kind of talking about housing, like actual housing. We're also seeing in the apartment space. When I was down in Florida, when we were doing due diligence on a property down there, and I walked around, I was like, wow, it's two o' clock in the afternoon. I was surprised at how many people are out at the pool, because you usually don't see a lot of people at the pool. What I noticed was, if you look on this chart, it was a lot of baby boomers. Yeah. I could tell how old they were. They were older than I was. A lot of gray hair around the pool. And I talked to management, they said, yeah, over half of our renters are retired. So it's wild, because you have these renters, they retire and they say, look, I don't want to mow my lawn anymore. I don't want to deal with the cost of a house, which typically costs about 30% more to own a house than it does to rent. It does cost more to own a house on average than it does to rent. And I want the amenities as well. And, hey, I want to be able to lock the door, walk out, go visit my grandkids, hop on a cruise ship, go visit another country and not have to worry about things. So it's pretty incredible that you have the two largest generations in history both competing for the same housing stock today.

Well, that leads us very nicely into the trends. Right. So it's not. It's not just that they're competing. Where are they competing? They're competing in the suburbs. Right. So Mr. Chang was quick to point out that, you know, you take a. Pay attention to where, you know, where the competition is actually happening. It's not in the urban core, especially with millennials. For the next 10 years or so, they're going to be moving at higher clip to the suburbs again, putting increased pressure on those 4.3 million apartments that need to be delivered. But they're going to put upward pressure on suburban growth and on the convenience sector. So they're not going to be. They want to walk to their retail, to their office, to their stores, to their home. They want a very compact community, maybe a short drive time. They're not going to drive, you know, across town. So really, we're seeing this big shift into, you know, the suburbs, but all these other industries, retail, office storage, is going to be moving there as well to support that move.

Yeah, I think it's a Great point. And look, we've seen this with other generations. I mean, I grew up in Maryland. Columbia, Maryland is one of the largest planned communities in the country. You have, you have these all over the country. What, Drew, what? I'm sorry, what drove a place like Columbia, Maryland? It was the baby boomers, when they were forming their households at the time, and they wanted to live in the suburbs. Why? Because they want a house, they want a yard, they want convenience. You know, they're in their car driving their kids to practices and different things. And this is a trend that it happens with every generation and we are there with millennials. So I think that, you know, I've been a fan for the last 10 years of suburban garden style apartments, and I think that, you know, again, with the fact that millennials are more likely to rent than other generations, this trend is going to continue. As John was saying, as you just talked about here, Whitney.

Well, and why? Because they're going to be able to afford it. So there's a massive wealth transfer coming from.

It's massive.

Yeah, massive. So there's an expected 84 trillion or trillion dollar wealth transfer from boomers to millennials. Now I'm in the process of writing a book on multi generational wealth with bigger pockets. And when I initially started writing the book, the research, I think there was $68 trillion. And that has been revised upward because a lot of people are pulling their money out of the market and they locked in those high gains before the market started. Kind of having some volatility issues now, you know, now with the continued growth, you know, increase, you know, profits and stuff like that, we're expected to see 84 trillion. That's immense and amazing. You're going to need millennials when that wealth transfer happens. They're going to need a place to invest this wealth. Now what? In my research, I question if all 84 million is going to make it from boomer to millennial, because a lot of these boomers are going to go, you know what, Millennial child grandchild, you need to go work as hard as I did to build your wealth. But still, even if a fraction of that or half of that went, that's still a massive wealth transfer. And so that's going to continue to put a positive impact on pricing and competition. What are your thoughts, Chris?

Yeah, look, when I wrote my book and I started our podcast, a big reason, you know, some people ask me, they're like, well, why? Like, who are you catering to? It looks like you're talking a lot to people that don't really have money or can't invest. I'm like, well, yeah, we're trying to help people who want to get to that point. At the time, the wealth transfer estimate was 60 trillion. So you're talking about five years ago. And look at it now, 80, 90 trillion, almost 50% higher. And look, basic supply and demand. If we look at the stock market and we can go into all these statistics, but the bottom line is it's supply and demand. If there's more money chasing, the same types of investments, whether it's housing, you know, homes, rental homes, apartments, self storage, you know, a lot of the past investments we talk about, it's going to drive the price of these assets up. And what we've seen is we have seen that these asset classes have outperformed the stock market. And now that information isn't such a secret as it was a generation ago. You know, we can, we can get on a podcast, we can go on Bigger Pockets, we can read your book, Whitney. We can read a blog or hop on a webinar like this, and we can learn about these alternative asset classes that used to only be the playground of the rich, of the pension funds, of the family offices. So what's going to happen is. I agree. I think there's going to be more access through the platforms that we see out there. There's going to be more dollars chasing these assets. And also, whether it's a millennial or it's a baby boomer, they're going to want predictable income streams. They're going to want yield. And we've seen, obviously, rates come up and you can get some yield. There's. But typically, commercial real estate is a wonderful place to not only get yield, but also appreciation and tax benefits.

Absolutely. And if there's more dollars chasing these type of investments, I would expect to see the transaction rate to go up, not down. So that is Another trend that Mr. Chang made sure everybody had their eye on, is that there's going to be an increase in transaction rate over the next 10 years, increase capital, looking for their first home or their first investment. You know, and part of this is because the access and funds, but, you know, they're, you know, people are becoming a little bit more wary about the stock market. Now. They may not completely pull all the funds out of the stock market, but they're. They see the need to diversify their portfolio, despite the increasing interest rates and the cost of capital, which historically is really low. I'm in the process of trying to secure another investment and you know, yeah, I got quoted 7.2%. Not happy about that, considering if a year ago I probably could have, you know, locked in cost of capital for closer to four and a half percent. But when we look at, you know, from like, you know, 75 to like 82, that's still incredibly low cost of capital. And we're just, you know, kind of circling back to what we opened up the webinar with is that there's a growing need because we have that, you know, just a massive under built, you know, need here. And again, you know, if we continue to underserve that need, it's just going to continue to push up value on the existing assets as well as the existing rents, you know, contributing more to our affordability problem.

Yeah, look what everything you said is really, it's the same theme that we started with, which is we have a problem to solve in this country, right? We need more housing units, transactions need to get done and there's money to be made. If you look at where inflation is and where the cost of capital is, inflation is still at or above what cost of capital is in most circumstances. So you're being paid to borrow. There's still a great return on your investment that's coming out there when you do that. The other thing is, I don't know when the next stock market crash is going to happen. I would say it's probably going to be later than what most think. Probably over the next 2ish years there's probably going to be a slowdown in the economy and there's probably going to be a pullback. And asset prices, I would say probably three or four years out, maybe closer to three years. And so there'll be some opportunities out there. So I think it's, look, you have to be more careful than you were over the last two years when you choose your investments. You have to work with proven operators in those circumstances. And look, if you want to have a little dry powder on the sideline to take advantage of opportunities, I don't think that's a bad place. Whitney, you and I have talked about different ways in prior webinars. Kind of where we love to store our capital in the sidelines while still getting a return. But you know, a lot of the money is made at this point in the cycle if, if you were investing in the right places. And again, as we talked about before, there's, there's a long term trend here that are going to benefit commercial assets or commercial real estate assets. But you have to be in the right market with the right operator, with the right strategy.

Absolutely. Couldn't have said it better myself. So, Chris, thank you so much for being on the show today where I'll pop up my information. You know, if you're here joining live and see it on video, be sure to join me at passiveinvestingwithwhitney.com Chris, how can people find out more about you?

Yeah, I'll put it in the chat here. Go to nextlevelincome.com Episode 117 of my podcast was the one I was talking about when I talked about the fact that we need over 4 million apartments and some of those trends, which I think would be a good prelude to this webinar. Also, if you go to that link that I just put in, you put your address in, I'll send you a free copy of my book and hopefully you find some value there on the website. If there's anything else that we talked about today or any questions that popped up, feel free to reach out to me@chrisxtlevelincome.com Happy to help you on your journey towards financial independence.

Guys, thank you so much for joining us here today. We look forward to continuing the conversation with you guys and doing regular updates to help you navigate this interesting time that we're in.

Hey Chris, here again. I hope you found this episode valuable. Now I have one more thing to give to you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also, please like share and take just 90 seconds to give us a rating on Apple Podcasts.