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Welcome to the podcast with your host, Jake Wiley.
JW: Welcome partners. This is your host, Jake Wiley. This week I'm joined by Byron Carlock, he's PwC's national real estate practice leader. Byron, thank you for taking the time to join the show.
BC: Oh, Jake, thank you for having me. This is nice.
JW: I'm really excited, I got a little sneak peek of what we're going to talk about. I know you've been traipsing the country and actually going international talking about real estate trends. But you've got one in particular that you really want to jump into. I think before we get there, I think it would be really helpful if you maybe spend a couple of minutes telling us a little bit about your background, where you started, and how you ended up here over PWC.
BC: Sure. So, I'm a bit of an anomaly. Although I am a CPA, I worked in the industry before coming to the firm. So, I've been with PwC for approximately 10 years having run several REITs and funds after spending the first half of my career with various Trammell Crow-related entities. So, I have the opportunity to bring kind of an industry set of relationships and experiences to the accounting firm as we continue to grow our presence across our lines of service and audit tax and consulting at a time when real estate is a favorite asset class. So, it's a pretty good time for us.
JW: Let's dive in. I'm really interested in hearing a little bit more about the urban renewal that you're saying, obviously, with the pandemic, there's been a big shift in where people are looking at real estate where they want to be jump in and tell us.
BC: Well, Jake, it's not just urban renewal, urban renewal has been going on since World War Two. What we're seeing right now is a very odd circumstance of rural renewal as people that have lived in and around urban areas are choosing to live in more remote locations that are more affordable compared to their urban alternatives. Given that they have the permission to work wherever they want to work. We're seeing it's been termed during the pandemic, the urban Exodus, we're now experiencing the boomerang back to urban areas, but some people are choosing not to go back. And so we're seeing growth in second, third, fourth, and even fifth tier metropolitan statistical areas as folks have migrated inland south, southwest, Midwest, and we're seeing tremendous growth in the second and third-tier cities that frankly, for some is a return home. And for others, it's a quest for affordable quality of life. If you look at the Urban exodus from New York, it was mostly in the Northeast further out into suburbs to cute and quaint towns with access to the city when one needs it. But realizing that with this remote working environment that we have now had access to the urban location when you need it is different than having to commute in there five days a week.
BC: So right now, from the survey from emerging trends in real estate 2022, the magic number appears to be three days in two days out. For some companies, it's still zero-days in five days out. And then for some it's decided how many days you want to come in, or if you want to come in. So, this flexibility is allowing people not only to decide where they live but how they relate to their urban headquarters or office locations. And it's broadening the horizons of real estate investment, which has been concentrated in urban areas literally for the last 50 or 60 years really rethinking suburban and ex-urban living opportunities. Why is that interesting? It's interesting on two levels. Number one technology has enabled us to be able to stay in contact and we're expected to be in contact 24 hours a day, seven days a week. The quid pro quo for that is if we get to live where we want to be while still being connected, then we ought to be able to find places that are affordable, give us space and room to rear a family, have educational opportunities for our children, quality of lifestyle opportunities for our living environment, whether it's live, work, walk, whether it's food, whether it's nature, whether it's typography, whether it's water, you look at the concentration of decision-makers living in the Hamptons, and Palm Beach during the pandemic while our economy frankly began growing almost in a hockey stick recovery prove that people can live wherever they want to live and work still with a headquarters attachment but not to be in the headquarters every day. It's been a very interesting lesson because technology has enabled that. Then you ask what has suffered I think cultural connectedness has suffered. I think the ability to have one on one conversations in person, and eye-to-eye enhances relational value. So, we've lost some of that. We've lost the ability to sit around conference tables with whiteboards to do our business strategy, planning and whiteboarding. We've lost our ability to come together for training and new product introductions. But all in all, when you look at the growth rate of our economy coming out of 2021, going into 2022, I would say that the overall economic outcome of what's happened is probably still very positive. And we are trying to test the balance of how to make remote work and business growth, the simpatico and it's doable, it seems to be working at PwC, we have probably 25,000 People working remotely five days a week in our offices, our density is maybe 35 to 40% of the total occupancy so people have access to the office when they want it but don't have to go in when they don't want it. And it's working.
JW: I think that's fascinating. You talked about New York, I actually worked in New York for several years. And I found that it was cheaper or more economical for me to commute from South Carolina to New York than it was to move there and have any semblance of quality of life that I was used to. And you think about fast forward to today, I wouldn't have to do that anymore, which is really interesting. As a matter of fact, we're seeing a lot of people coming into our community from the Northeast, and from California that are trying to get out and they're coming down here in going the opposite direction. I've seen firsthand kind of what you're talking about. I don't necessarily live in a rural area. But I think what you're seeing are really what really fascinating to me is that, you know, there are small towns that like you said, could be home, this is where you came from that were never an option. So, for example, I grew up in Atlanta, and everybody in the state of Georgia, essentially, like went to school, and then they moved to Atlanta, (right), everybody left home. And then eventually, maybe one day they move back and took over the family business. But now we're seeing an opportunity for people to actually move home, quote, unquote, and still work for the big companies, I guess, maybe enlighten us on some of the trends and or maybe some of the things we should be looking at in terms of real estate investment opportunities. As we think about that transition.
BC: Well, the head of Fannie Mae was recently quoted saying we have a tremendous housing shortage in and around our major urban areas, we do not have a housing shortage nationally, when you consider the number of houses that are available, they just happen to be in the wrong places. So yes, we need to be building more communities closer to our urban areas, because that's where the growth has been and looks to continue to be Atlanta is a great example of a city that's a gathering place. It's, you know, the New York of the southeast. But at the same time, we've seen the growth in Charleston, where you live, we've seen the growth in Nashville, we've even seen growth in Jacksonville, Florida, and Little Rock, Arkansas, in Birmingham, Alabama, whereas all that growth would have been concentrated in Atlanta previously, but those other cities have spent tremendous time, energy and money investing in the quality of life components of living in those cities, which fall down into the second and third, and even fourth tier categories among urban MSAs. But the quality of life has drawn people there. And now the permission to work remotely gives everyone license to choose where they want to live. And if they want to go further remote and still have access when they need to get into the city, whether it's by rail or car or train that's available too. If you look at the urbanization of America, starting at the turn of the 19th to the 20th century, when people were coming to cities off of farms, there are hundreds of thousands of small communities and villages around the country that have infrastructure that is underutilized. If that infrastructure were to be utilized through development and redevelopment still knowing that you've got access by roads and trains and airplanes when needed to get to larger places, then it gives us an opportunity to enjoy what I'm calling right now rural renewal and rural renewal is just that taking unused infrastructure or underused infrastructure in some of our smaller towns that allow access to urban city centers when needed, but offer affordable housing and livable communities to those who are like you, tired of paying the freight to live in a major city.
JW: So, let's maybe dive back in and some of the details because I think this could be fascinating. You alluded to underutilized infrastructure. So, at some point in time, these rural communities were probably booming or popping a little bit more than they are now. Right. And as the world grew up, they started funneling into these larger cities. And you also alluded that there isn't a housing shortage, but there's houses back in some of these rural communities that are available. So basically, they were kind of going backwards in time and utilizing assets that already exist, and therefore it's not a big infrastructure upgrade.
BC: Well, so I think this next cycle is going to be all about the development and redevelopment of places that warrant that investment. Look at the growth in Atlanta and in another example Dallas, it's all been downtown northward, but now in Atlanta, you see this big growth southward, cottonwood village and sarin V and places in the outer suburbs of Atlanta that are very attractive, little communities that offer more pastoral scenic smaller-scale living, but you still can get into the city if you need to. That's already happened in New York all the way up into the Hudson Valley in Boston all the way up into New Hampshire and Philadelphia, southward from New York enjoyed a tremendous resurgence during the pandemic is basically in a sealed bedroom community to New York, we can look at La extending out to Palm Springs, which is a longer distance. But a lot of California has made Exodus Out of the urban area out into the suburban area, the Bay Area moved to Boise, Idaho, Phoenix and Scottsdale, Salt Lake City, and a huge exodus to Texas. And Texas is seeing growth in all of its major cities, but also in its suburban markets that seemed to emanate further and further from the city cores of Dallas, Austin, Houston, and San Antonio about big resurgence into the hill country, which is that area between Austin and San Antonio, and I think this cycle is a breather for us all to say we're two years into this business has done well, it continues to grow. I have not been in the office every day like I used to be, is this a new business model?
I'm here to say it's worth discussing because the trends would suggest it is a new business model. It's a new way of business life. And if it's a new way of business life, then that's giving us implicit permission to live where we want to live. On top of that, we have the great resignation that's taken place where people said Darn it, I'm going to live how I want to live. And if my employer doesn't jive with that, I will go ahead and leave or find someone who will. And so, we've seen a total is over 15 million people who have exited the workforce during the last six months of this pandemic, either because of early retirement or lifestyle decision-making.
JW: I think that's fascinating, isn't it, though? It is so fascinating. And I mean, all the things that you've touched on totally resonate with me. I would say a year ago, we were considering moving back to Georgia to Atlanta or working in Atlanta. A t no point where we're going to live in Atlanta, like we were talking about moving to Athens, right, you know, Go Dawgs. We just finally won the national championship. But I think, you know, the idea was like, that's the community that we would want to live in knowing that if I needed to commute to Atlanta, like yeah, maybe once or twice a week, I could do that. And it would be an hour and a half, one way. (Not so bad.) That's okay, if it's once or twice a week, as long as it wasn't every day. And that was a real option.
BC: 100% Listen, you've got folks in Memphis, Tennessee, living in Oxford, Mississippi, because they went to Ole Miss Love Oxford, you see the same thing in Charlottesville, Virginia, and people going into DC when they need to. They love UVA, college towns are a perfect example of how this is lived out just like Athens, Georgia, because you have an affinity and emotion attached to that town. But you still have access to an urban area or an airport when you need it.
JW: That's exactly right. And I think that is we looked at the lifestyle that we were willing to put up with. Yeah, my wife said, absolutely. We're not going to Atlanta, right. Like, that's not the place. But if we're gonna go to Georgia, Athens would work, and can we make that work? And it's like, absolutely, that's a real option now.
BC: Well, college towns have, they have it all they have the memories that we enjoyed when we were there, they have an infrastructure that is available for enhancing the quality of life. And a lot of it is free, or not very much money to go to on-campus ballgame or theater experience or musical experience literally most any night of the week. And we're seeing a lot of aging grads return to their college towns just because of that, they realized that some of the happiest days of their lives, and many of them may be found their lifemate or their soulmate. They're returning to a place that both people love, like you just mentioned that Athens is now doable. It's a goal that is achievable if you have an employer that doesn't mind your distance away.
JW: Yeah. And I mean, I think that opens up a whole different can of worms in terms of I don't think employers really have much of a choice, especially in this great resignation that we're dealing with.
BC: Well, employers are certainly being tolerant of employee requests. And that is certainly the theme of the day, and the employee has more leverage than the employee has historically had. And employers have less leverage, but they still control the payroll. And so, at some point, if employers were to require a return to the office, folks would have to make a decision. And that will either be, "Yes, we'll return." or "No, we'll resign." And that's probably yet to be seen. But right now we're seeing the technology and the technology platforms available to us today are allowing it to work not in an either-or way, but in a both-hand way.
JW: Yeah. And I think both-hand is what still needs to be figured out, right? Because we're still in such a limbo period where dating this podcast, we're in the middle of January of 2022. And we're going through a huge resurgence of Omicron. And everybody's still trying to figure out what we're supposed to do. And admittedly let's say in late November, I was in New York City for the first time in two years, and it felt like it was back you had to show you're clear or you know, whatever the vaccine card to get in everywhere. That was new, but every place was packed. People were out. It felt like the city was really back. (Sure.) And you know, we're going through another wave of that. So, I guess what's your take on that? Right? Because since in time where they're like, oh man, New York, San Francisco, LA, these big cities, they're dead.
BC: Well, I think everyone's saying the science, the reality of viruses, as we're seeing is they continue to mutate until they either get stronger or weaker. Omicron thankfully, seems to be more contagious, but less virulent, but it may very easily migrate and morph into yet another variant. And just like we saw in the Spanish Flu era of 1918, that flu never went away after the Spanish flu, it just mutated into different forms for which we began doing annual vaccinations for that flu. And now we're in the same, I guess, situation, looking at boosters that address the variant components that need to be challenged medicinally I think that's probably where we're going to head for a while. This is probably something we're going to be living for a while.
JW: Yeah, I totally agree. And then I guess what about these large markets that everybody said were dead? They seem like they're coming back. I mean, we're seeing record real estate transactions happening in some of these large markets that we thought everybody was vacating from?
BC: Well, Jake, I think our transaction volume when the year-end numbers come in, will exceed the pre-pandemic level, I don't think we've had transaction volume this great since probably 2016. And we may have exceeded that I'm eager to see how the year-end numbers come in, there was a huge rush, especially in the fourth quarter, and a lot of sales because people were afraid the capital gains taxes were going to be taken away from them on realized gains. So, they wanted to get transactions closed before year-end. Looks like now in the proposed tax reform that's off the table that did create a big fourth-quarter push.
JW: Admittedly, I'm guilty of that I sold a couple of properties to kind of take advantage of what may have been the end of some of the capital gains. But yeah, I'm also not disappointed in the way the market treated me on the sales.
BC: Of course, the market was robust. I will tell you I've been it'll be challenging to redeploy that cap prices have gone up even more replacement cost if you're developing has gone up dramatically as we look at inputs around concrete, steel, and lumber, even component parts associated with the kitchen, plumbing, bathroom, and fixtures because of the supply chain disruption. So even those high-priced sales that people thought were frothy and expensive compared to replacement costs may not be so expensive, after all.
JW: I mean, without a doubt. I mean, it's funny, we spoke with our agent about looking to redeploy our capital, I mean several times he's like, look, by the time you put this property under contract, and the time you actually close on it, you will have equity in your property simply because the market keeps going up. And I was like, Man, that is a scary thought. Right? That's the way it feels.
BC: We're probably six and a half million units under-produced for our current demand. But we still have millennials and Gen Z's that would be candidates for household formation, living at home with their parents and not yet having made the decision to form their own household which would make that number much larger. And so, we are clearly in need of new home production and new types of homes, and new preferences for living in the 80s and 90s. The McMansion was the chosen abode of preference and I'd say today it's higher density townhomes, loft spaces, unique architecture, sustainable communities, and resilient communities, and we are way undersupplied on that new type of product to meet current demand.
JW: That leads into kind of an interesting segue. I know we're going down a different rabbit hole here. But I see a lot of potential in the ESG space as we think about deploying capital in the future. But admittedly, there's a ton of money moving around in the market, there's a lot of institutional money, even in single-family homes alike. I've looked at some statistics on how much single-family property is owned by companies simply with the intention of renting, right? You're no longer just competing with somebody else that wants to buy this house, you know, to live in it. There are institutional funds sources that are buying properties. But I think the next wave kind of to your point is what does it look like? What are these next investments and I think there's, you know, an ESG component, you know, sustainability, high density, different ways of looking at things. What's your take on that?
BC: I think it's very relevant. It's not just the E, it's the S and the G as well. I think on the east side, you have a whole body of buyers that want to see more ecologically sensitive communities, construction techniques, less waste on-site, the ability to convert to generated power when the grid fails, solar panels on the roofs for solar energy where you as the homeowner decide if that extra energy is sold to the grid or used for your own consumption. We may see, that this is early trend data, but there appears to be a desire to control at your local home owning level major decisions that have historically been controlled by your utility and being your own utility with your own generator or your own solar panels is attractive. The resilience of being able to know that you can power yourself when the grid fails if the grid fails has been a big thing to wrestle with, especially after last year's ERCOT failures in Texas. The desire to return to wooden structures is a new theme that's early on. But a major institutional investor is building a wood structure office building to prove that it can be done again, Walmart is building its new headquarters out of largely reclaimed wood. And I think that's a statement toward the ESG phenomena that you're referencing. On the S side, people are really sensitive to their carbon footprint and the community of their carbon usage. So, planting more trees, creating green space, changing the gated community from being centered by a clubhouse and a pool with instead a community garden that is adding, you know, green space to the community, as opposed to pouring more concrete, the construction industry through concrete and steel, other than the airline industry, or that those are the two biggest industries that produce carbon. So, this quest for carbon neutrality is a real one. So, I think you're onto something with the ESG side.
JW: Hey, this is Jake Wiley's personal opinion, it doesn't represent anything else. But there has been a push generally at the local level to control density and continue to push it out with the intent of keeping property values high. I think that is ESG sustainability, environmental impacts become more and more real, that trend is going to turn around and urban density and new ways of looking at you know, townhomes, lofts, things like that they're coming because the commutes and the long drives that impact the environment and living in big houses somewhere far away that impacts the environment, I think that there's going to be a lot more density, it's going to impact housing affordability. And I think that there's a lot of thought that like, oh, these areas are protected, right that the local government and the citizens don't want density. But I think that that's going to have to change. And I don't know when that is, but I think it's going to have to change. And I think that people that are on the forefront of either helping nudge that along or being ready to go when it does change, you're going to be a highly well impact.
BC: I think that's well said. I do. I think that's well said. I think that part of the issue relates to local municipality education. So most of our zoning laws were put in place after World War Two to deal with rebuilding our cities in changing the trajectory of ring roads that took us further and further out in suburban sprawl, lot size minimums, all that has to be now collapsed in favor of more density, but also density that works for the community with respect to transit, road grids, I'm impressed with something that I've heard Detroit has done, where you can now tear down one single-family house and put three or four townhouses on that same law, that's not permissible in most of our cities. On the West Coast, it takes up to 10 or 12 years to get entitlement to build a new structure in that time period is money last for developers and housing last for the community. So, there's a group of developers that have come together in DC with a policy group called "Up for Growth" that is educating local municipalities on the importance of reevaluating their zoning laws and their restrictions so that new techniques can be deployed, new densities can be deployed. And it's a very important educational initiative. Many cities still don't allow modular construction. And that's one of the most environmentally appropriate responses that the industry is offering to be able to truck in completed components reduce on site construction waste, and put houses together on a more expedited basis. But many cities don't allow that. And so that education process is going to be very important at the municipal level to change some of that in favor of progress.
JW: Yeah, I mean, you think about modular housing, people assume that that is a house on wheels. And in the New World, you're right, it is prefab components. And I've actually done a lot of research on a guy like modular construction, I like sips panels, they're factory-engineered, they're straighter, they're more airtight, all of the things that people are doing in the field, you know, running pipes, electrical, and all these things, field cuts in the weather, it could be raining, it could be five degrees, they're doing that in factory-controlled conditions. Everything is straight, everything's produced perfectly. It's a really fascinating construction technique that is so underutilized.
JW: Well Byron, this has been an amazing conversation. Thank you so much for being here. But I always like to end the show with a bit of gratitude. None of us got to where we are without a leg up from somebody along the way. And I'd love to give you the opportunity to give maybe somebody or a couple people shout out that have been there for you or helped you along the way.
BC: Well, thank you. I had the great privilege of starting my career in real estate with the Trammell Crow organization. And I encourage anyone who's not read it to read the biography of Trammell Crow, and what he did for the industry. And it was basically create a culture of love and partnership that bound us all together. And so, I had the privilege of learning first as a leasing agent then as a Development Associate and then working in the capital markets area at that firm thanks to a group of partners that believed in me and brought me in out of grad school. I'll be forever grateful to that family and the organization and frankly, the many organizations that spun out of CRO because it's one big real estate fraternity around the world that I'm still grateful for and I think that was a great way to start in the industry and I never like to miss the opportunity to thank the crow family for those early years. And they're still friends today.
JW: I love that. It's amazing when you find yourself in a great organization that has all the right concepts, ideas, and the way they think about growth, it really works out well. So I love your story.
BC: And thankfully, I get to in my career with a firm like PWC, where we have many of those same attributes and great people and great command of the trends that are affecting our future and thrilled to get, I'll retire next year, so I got to start with a great organization, I'm ending with a great organization. So that's a blessing of life.
JW: That it is. Well, Byron, thanks again for being on the show.
JW: I hope you've enjoyed this episode of the limited partner podcast, please subscribe and leave a review. If there's any reason you would leave us a five-star review, please email me directly at JW at Jake wiley.com. Your feedback is always appreciated. Now the show is just the tip of the iceberg in terms of the limited partner community. It's a community where limited partners can come together. Learn about what best in class looks like opportunities, and most importantly, a place to connect. There is nothing out there like this. So, head over to limited partner.com and sign up. We'll see you next time.
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