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Current Season: First Draft Live
Between economic whiplash, shifting policies and market volatility that changes by the hour, you need industry insights that cut through the noise. That's exactly why we're launching First Draft Live, a new weekly series that breaks down what's happening, why it matters and what you need to know to do better business.
Join us live on Bisnow.com every Friday at 12:30 PM ET / 9:30AM PT for conversations with the industry's sharpest minds discussing the week's most critical stories, or catch the replay right afterwards — here on your podcast app of choice.
Okay. Welcome to First Draft Live. It's Friday, February 20. I'm Mark Bonner, business editor and chief coming to you live from New York. Before we get started, this episode of First Draft Live is presented by Agora.
Mark Bonner:Whether you're managing deals, raising capital, or growing your portfolio, Agora is your trusted platform for seamless real estate investment management. Visit agorareal.com to learn more. That's Agora, real.com. Alright. Let's talk about housing.
Mark Bonner:Because for years, America's housing crisis has lived in this strange state of permanent awareness and permanent inaction. Everyone agrees it's real. Everyone agrees it's getting worse and yet very little has actually changed. Meanwhile, the math has kept deteriorating. As of early twenty twenty six, housing affordability has fallen to its lowest level ever recorded, leaving nearly 75% of Americans unable to afford a median priced new home.
Mark Bonner:At the same time, The US remained short millions of homes after more than a decade of under building. Even with housing starts running at roughly 1,400,000 units annualized, the country still isn't producing nearly enough supply to close that gap. The shortage has reshaped the American economy. It's pushed home homeownership out of reach for millions of Americans. It's driven rents even higher.
Mark Bonner:And it's turned housing into one of the defining economic and political issues of this decade, and it just might help decide the outcome of the midterm elections in November, which is what makes this moment different. Earlier this month, the House passed the Housing for the twenty first Century Act by 390 votes to nine, one of the strongest bipartisan housing votes in recent memory. And this just isn't a funding bill. It's a supply bill. It streamlines federal environmental reviews that slow development.
Mark Bonner:It raises FHA multifamily loan limits to reflect today's construction cost. It expands financing pathways for manufactured housing, and it allows federal housing funds to support new construction more directly. In short, it attempts to make it easier to build housing in America. Now, it's not the law just yet. The bill is headed to the senate where lawmakers will need to reconcile it with their own housing framework.
Mark Bonner:But what happens could shape housing supply and housing economics for years. Because housing isn't just a policy issue. It's the foundation of household wealth. It's the largest expense most Americans will ever take on if given the opportunity, and it's one of the most important asset classes in the global economy and commercial real estate. So the question right now is simple.
Mark Bonner:After years of watching the crisis worsen, is Washington finally prepared to address the supply problem at its core? And if it does, will it actually move the needle? To help us answer that, I'm joined by Jim Schlemer, CEO of Continental Properties, and until very recently, the chairman of the National Multifamily Housing Council. Jim, welcome to First Draft Live. I know you're calling in from Hawaii.
James Schloemer:Thank you, Mark. It's a pleasure to be here.
Mark Bonner:And everyone watching, drop your questions into the chat. We'll get to as many as we can. So, Jim, let's just jump on in. How meaningful is this federal legislation in your eyes?
James Schloemer:Well, Mark, I think the most meaningful part of this legislation is the fact that so many policymakers in Washington are recognizing the critical nature of the the housing shortage, the housing affordability challenge that that we face. As you mentioned, three ninety Congress people voted in favor of the recent bill, which not only is that a record, I think, for housing, it's almost a record on any kind of legislation on a bipartisan basis. So it's clearly recognized. And that awareness and, willingness to act is probably the first step in addressing any problems. But from a federal standpoint, actually making, impactful change in any kind of short period of time to address a very urgent need is a real challenge.
James Schloemer:It's like trying to turn a battleship, in terms of what can be done and the fact that the federal implications and influence on housing is probably much less than more local policy can be. If the federal housing legislation is the battleship, local action is more the PT boats that can turn out on a much faster diameter.
Mark Bonner:So, Jim, in your experience, I mean, obviously, what the federal government does is on another level than the local government, state level, community level. It takes time for that to trickle down. I know you've been around long enough to see other legislation or federal government action in America take hold on the housing issues in the last few decades. In your experience, how long does it take for for that to come down to the local level?
James Schloemer:Well, the two are not highly correlated. Federal desire for action doesn't necessarily translate into local level. And there are a lot of issues at the local level between nimbyism, people not wanting more expansion in their particular area because of their their concern over the impact on infrastructure or quality of life to perhaps issues regarding, building codes and short being short staffed on being able to, expedite, the necessary permitting and inspection. There are a lot of challenges that are really not correlated to things that the federal government influences.
Mark Bonner:But is there another point in history where you saw something happen at the federal level and then it took time months, years, decades. I mean, how I mean, how significant of a moment is this if you're sitting in a state house or a governor's mansion, or you're you're within city government somewhere?
James Schloemer:I think perhaps the the greatest similarity I can think of or similar type of awareness was after World War two and the creation of the GI Bill on the federal level that had a huge influence on the creation of housing nationally. And I would point out that the biggest lever the federal government had at that time, and I believe is still the biggest lever the federal government has, is on the capital market side. And so the federal government has used in the past its ability and uses it today with the role that the agencies play in providing debt, in the role that FHA plays in providing debt. Those are, in my opinion, the biggest levers the federal government has. The local governments have to be of a mindset to wanna facilitate growth.
James Schloemer:And personally, I also think they have to decouple the creation of housing from other objectives. So for example, in the latest bill, there's an incentive for creation of housing close to mass transit facilities. And yet when you look at the population, 10% of The US population lives within a close proximity to mass transit facilities. And one of the reasons is the cost of land and infrastructure so expensive there. So trying to address the desire to utilize mass transit with the desire to provide affordable housing can be at odds.
James Schloemer:So there there are a lot of dynamics going on there, Mark.
Mark Bonner:I mean, bill seems to get into the guts of how housing gets done, right? The plumbing, the mechanics, the math problem, right? I mean, before this bill, and obviously hanging around in the Senate right now, how often are you seeing projects that are economically viable never get built due to the regulatory timelines or some of the other issues that this bill seems seems to want to address?
James Schloemer:Well, I think if they're economically viable, the part of that factor is is the timeline because the longer it takes to get entitlements, the longer it takes to be permitted, the longer it takes for inspections, that takes away from the economic viability. So I don't think we're seeing a case where projects that are economically viable aren't being built. The issue is we're just having a hard time getting projects and developments to be economically viable.
Mark Bonner:So bottom line, will developers behave differently because of this bill moving forward?
James Schloemer:On the on the fringes would be my response. You mentioned the the streamlining of some environmental rules. I don't think that most of the housing that is being developed or that can be developed in The US today is, being hampered by many of those EPA rules. Those are very specific to specific geographies and specific parcels.
Mark Bonner:Okay. So look, as you all know, Jim, nearly half of U. S. Renters are considered cost burdened, meaning they spend more than 30% of their income on housing. Meanwhile, renters earning between 80120% of area median income, the workforce housing segment.
Mark Bonner:They face some of the tightest supply constraints in the entire market. Homeownership has also become less accessible. Monthly mortgage payments on a median price home are now upwards of 80% of what they were even four years ago. From your vantage point, Jim, and I know this is this is a special interest of yours. Why do you think workforce housing has become one of the most undersupplied segments of the market?
James Schloemer:Well, workforce housing, as you mentioned, services, households earning 80 to 120% of area median income, which is about a fifth of the entire population. Households earning below 60% are eligible for housing that is subsidized by federal programs and sometimes local and state programs. And housing for households over a 120% of area median income is really where there remains profitability for builders because it costs more to build the product and the people in that that category can afford higher prices for the product that they're creating.
Mark Bonner:I mean, the the the fact that this is sort of below the radar makes me think that this is less attractive in some ways, depending on what your perspective is from a commercial real estate development perspective. Is that true? Is it is it really is it really, an ROI issue? Like, it's not worth, the juice that's from the squeeze?
James Schloemer:Well, it's I I'm more familiar on the on the rental housing side of things. And on the rental housing side of things, it just the deals pencil out with sufficient margin for the developers and builders to justify the risk that they're taking and the capital that they're spending on higher priced housing where the rents are higher and can cover the cost. Know, a two bedroom, two bath apartment, the plumbing for that home, the infrastructure costs for that home really don't change whether it's a an apartment that's running for $4,000 a month or an apartment that's running for $2.00 a month. And so there's less levers that can be pulled to bring the costs in line with the affordability component for households in that space.
Mark Bonner:So what makes workforce housing viable without subsidies when traditional affordable housing often isn't?
James Schloemer:Well, a big factor, and it's the reason that where you see workforce housing being built is at the periphery of metropolitan markets where both the cost of the land is lower, where the infrastructure costs are lower, and very often the regulatory costs and burdens are less than they are, in more dense locations. Now the trade off of that is it means that workforce housing isn't being built in the locations where the work exists? Or are people having to commute an hour to get to their their home? Those are it really varies by geography. But I would also point out that a lot of the jobs that are being created today in The US are being created at the periphery, not in the central business districts of most major metropolitan areas.
Mark Bonner:And why is that?
James Schloemer:Again, I think there's a correlation to regulation and cost and availability of land. A lot of our economy has shifted towards distribution, for example, and distribution facilities take up a lot of land and they're being built at the periphery. The medical field, it was the biggest growth in job creation and the latest job report, and it has been in many job reports. A lot of those facilities are being built more at the periphery than they're being built in the more infill locations. So jobs are not unmatched to where the housing affordable housing is being built.
James Schloemer:But the challenges still remain with project costs, development costs, and regulation on the rental housing side. The National Association of Home Builders and NMHC did a joint study and found that 42% of the cost of a new apartment home is due to regulation.
Mark Bonner:If you're just tuning in, episode of First Draft Live is presented by Agora. We're here with Jim Schlemer, chairman and CEO of Continental Properties and former chairman of the National Multifamily Housing Council. Jim, let's get to a question from the audience. What role do special districts and public infrastructure financing tools play in the age of undersupplied housing? Will innovative public bond programs enable the goal?
James Schloemer:Absolutely. I think that the the more that both federal regulation can facilitate those special districts and the ability for public bonding to be used in coordination with whether it's for sale or for rent housing will make a very large difference in in the ability to build. You talked earlier about how much the cost of a mortgage has increased over the last decade or so. Part of that is the increased cost of building the housing, but a larger portion is the cost of the capital. And we're all aware that we remember just not too long ago when mortgage rates were below 4% and now they are in the mid sixes.
James Schloemer:And so that's more than a 50%, perhaps as much as a 70% increase in the cost of the capital that people need to be able to provide, whether it's to acquire a home or whether it's for an owner operator to own a rental property. So anything that can be done to reduce the cost of capital will have a big impact.
Mark Bonner:Okay. Let's get one more question from the audience, and this is a question I think goes back to the disconnect between what the federal government does and what the local level does. In Illinois, we've just seen Governor Pritzker propose statewide zoning laws to address municipal level restrictions. How do you compare the impact of bills like this versus what's being proposed at the federal level?
James Schloemer:Well, the federal legislation is encouraging a review or reconsideration of zoning laws. I think one of the components of the the House bill talks about creating model zoning laws for municipalities to be able to adopt. I think the the timeline for that model zoning law to be created and promulgated is about three years. So. If it takes three years to get the the model zoning laws in place or promulgated and then put in place, it'll take a while beyond that.
James Schloemer:It's really pushing the issue far down the road. The sooner that states and local governments can enact more encompassing zoning, more less restrictive zoning, the sooner we can address this. Minneapolis is a great example where they adopted in the last couple of years zoning that permits accelerate accessory dwellings on any single family zone property. It allowed people to build an additional dwelling unit on their property. And I think Minneapolis has shown has demonstrated that housing costs have at least stabilized in that market and in some cases come down.
James Schloemer:And there is a greater supply of housing going on in the Minneapolis market.
Mark Bonner:You know, historically, The US built roughly one and a half million to 1,700,000 housing units annually, and that was to keep up with population growth and and replacement needs. But in the decade following the great financial crisis, housing production fell well below that level, which is why we're in a housing crisis today. But even today, while starts are recovering and production remains uneven across a lot of markets in The US, Development timelines have lengthened significantly and costs have risen dramatically. I mean, Jim, in your in your decades of experience, what do you think is the single biggest constraint preventing housing supply from scaling again?
James Schloemer:I would have to say it's the the cost of regulation. And it that is not to critique regulation in general and say that there isn't a need for sound regulation, but there needs to be a cost benefit analysis of regulation. And far too often, regulation becomes burdensome without having sufficient benefit to come with that. And that includes the timeline that the more regulation that exists, the longer it takes to go through the entitlement process, the longer it takes to get inspections completed. We've recently done a study to say, Okay, which which are the factors that have had the greatest influence on our apartment developments being successful and timeline getting to prompt permitting and then prompt construction, which is influenced by how quickly inspectors visit the sites.
James Schloemer:Many municipalities have found that they have a shortage of building inspectors and they aren't getting properties inspected. So you might have a home or an apartment building that is ready for the next stage of construction and it waits for weeks, sometimes months because of delays in permitting. Another area that I think is not focused on enough is the backlog and the delays that are caused by public utilities. And I think that states have an influence on that through their public service commissions, and they could hold public utilities much more accountable for delivering service in a timely manner, which will speed up the delivery of housing and reduce the cost.
Mark Bonner:Right, mean, hindsight is twenty twenty, right? I mean, you could understand on a certain perspective why there was a correction amongst all levels of government after the great financial crisis. Some people would say it was an overcorrection, right? Like in Jim, in your opinion, like what needs to happen in order for us to get closer to the track we were on pre 2007?
James Schloemer:Well, you're absolutely right that housing is a big market, perhaps the biggest single. If you lump housing together, the biggest single component of the economy. It's the biggest component of the consumer price index, and it's hard to move something like that very quickly. So when it responds to a shortage and the response when there is a shortage is the prices go up sufficiently to justify more entrants and, more participation. That brings in more supply.
James Schloemer:But unfortunately, it moves and we're in a position right now in the country in rental housing where the supply that was created in 2122, '23 and into '24 record number of starts. I don't think there had been that many new apartment starts since the 1980s. And and the result was we have a a big immediate supply of housing. It's still at a price point that a lot of people can't afford, but those prices have come down. If you look at markets like Austin, Phoenix, Denver, rents have actually declined in those markets related to the supply.
James Schloemer:Now what's the response? There's been a big drop in the number of starts and almost undoubtedly, rents will increase to to justify new starts when supply gets absorbed in 2728, '29, and we'll be swinging this pendulum too dramatically. So I think that those kind of curbs on the big swings are a place where the federal government can have influence. And again, I think the biggest place is on the cost and availability of capital.
Mark Bonner:Skip to one more question from the audience. When will missing middle housing start to take off again, such as the type of housing that was around before the post World War two era when suburbanization was pushed?
James Schloemer:Great great question.
Mark Bonner:You brought this up earlier, right?
James Schloemer:And you know, there a number of factors that go into play. The number of the people per household on average in The US has declined dramatically over the last fifty years. I think we've gone from about 2.7 people per household to around 1.5 people per household. So household size has shrunk. And at the same time, the average size of a home in The United States has gone up by 50 to 100%.
James Schloemer:So if you talk about that postwar housing, the GI Bill housing, that was probably three bedroom, one bath houses that were 13 to 1,500 square feet today. That is what's being built. That's not where the market demands. So that is a component. Our expectation for what is satisfactory housing.
James Schloemer:At the same time, the household size has gotten smaller. So will we return to true post war housing? I don't think so. But there are things that can be done. Think one of the interesting programs that's being considered in Washington is what sometimes referred to as Mitek, middle income housing tax credits.
James Schloemer:That is a program that could really create a lot more supply and therefore keep the prices in the right place for that missing middle. But the other thing I want to point out, Mark, is that I don't think in general we want the value of housing to fall. You know, 5% of the American public owns the home that they live in. 40% of those people don't even have a mortgage on those properties. We don't want to see their equity in those homes fall by housing prices dropping.
James Schloemer:What we really need to see is an increase in incomes that rises faster than the cost of housing so we can get back to affordability.
Mark Bonner:Yeah, I mean, look, you talk about the population growth in the country slowing. The White House has said over the last nine months or so that somehow their immigration policy is going to help in this regard on on the housing crisis, right? Does that carry water with you? Does that? Do you think that moves the needle in any way?
Mark Bonner:And I'm not trying to get political here, but just from in terms of economic theory, like does that work?
James Schloemer:Yeah, well, from a pure theory standpoint, the people that are leaving the country no longer have need for housing. And so what even if that is at the lower end of the housing spectrum, frees up supply. So in theory, that's the case. In theory, we have fewer, less immigration, there's less demand for housing in The United States. But there's a corresponding side to that, and that is that many of those people, the immigrant labor force is what drives a lot of the the labor supply for building housing and perhaps at a lower cost than it can be supplied without that immigrant labor force in the country.
James Schloemer:So it's a very complex question that I don't think can be answered with a simple, gee, there could be fewer people, therefore the cost of housing will go down because there's less demand.
Mark Bonner:The US is building again. Housing starts are rising slowly. Capital is returning cautiously, right? Yet affordability remains near historic lows and the housing deficit persists. Jim, again, tapping into your vast experience going back decades, what is your best forecast for what this housing market looks like in five years time?
James Schloemer:Well, it's a great question, and I wish I had that that crystal ball with a lot of clarity to it, Mark. I I do think that when you talked about housing supply rising, it's it's sort of a combination because new housing starts in the for rent side have declined pretty dramatically over the last eighteen to twenty four months and are projected to continue to be below their pre pandemic start rate for at least the next two years time. And so even if single family housing starts start to grow, the combined starts on new housing and therefore the supply is really not going to be growing for the next at least twenty four months. So I think supply will actually tighten a bit. I think demand is likely to stay pretty constant.
James Schloemer:I don't expect it to grow because The US population isn't growing, but demand is likely to stay constant. And as you mentioned, we have a pent up demand. Reference to kids staying in their living in their parents basement after college is a very real phenomenon. The age at which people are forming new households is dramatically higher than it was. And I don't think that's entirely by choice.
James Schloemer:I think a lot of that is economic driven and their ability to have jobs that can support starting a household at the cost of household. But I think demand is likely to stay pretty constant. I think new investment will occur as long as capital can be made available right now. Mortgage capital, debt capital, both in the single family and the rental housing market is is pretty strong. But it's that equity capital, whether it's down payments that people need to have or whether it is the equity that developers need in multifamily housing to create more units is still not back in the market.
Mark Bonner:Now, look, a lot of those kids that are in the basement, they're in their 30s now, right? Mom and dad are getting older. We've all heard about the silver tsunami, Jim, right? We're going to have this the greatest transfer of wealth in this country, at least in one hundred years. And look, not to be macabre, but these people are going to die, right?
Mark Bonner:Asymmetrically, right? Will those children then inherit those homes and will that have an impact and may have have some ease to the burdens that we have here in terms of being able to acquire housing? Do you think that inheritance is going to be a part of the solution here over the longer term here?
James Schloemer:You know, I can't answer that very well, Mark, because I don't know how distributed that is. There is the greatest wealth transfer that's being forecast to occur over the next twenty years or so. But how how broadly distributed is that? And if those kids are in their 30s and 40s and wealth transfer occurs when they're in their 50s and 60s, is that really addressing the housing crisis? Certainly there will be more single family housing as baby boomers, which is really the generation we're talking about, no longer needs, wants or can maintain single family homes.
James Schloemer:But you know, the longevity is also increasing and the need for housing units to accommodate those people as they age still adds to the demand. So I don't think we're gonna see a change in housing demand and in that availability from the the mortality of the baby boom anytime in the near future. And right now is when we have the housing need right now in the next several years, We need to address this problem.
Mark Bonner:Okay, that's all the time we have today, Jim, thank you so much for being here. I hope you enjoy the rest of your time in Hawaii. Good luck on the links. Wear suntan lotion on the beach. We really appreciate your insight.
James Schloemer:Thank you, Mark. It's been a pleasure to be with you.
Mark Bonner:And a big thank you to Agore for presenting this episode of First Draft Live. We'll be back with another episode of First Draft Live in the next couple weeks. You can also find today's episode in all of our past conversations on your favorite podcast app. This is First Draft Live. Have a great weekend y'all.