The Multi-Decade Opportunity in U.S. Residential Real Estate

Greg Campion: By all accounts, the housing situation in the United States is nearing crisis levels, if it's not already there based on metrics like housing availability and affordability. Of course, a number of factors have contributed to this, from rising interest rates, to income inequality, to a relative lack of new housing starts. Now, despite this challenging situation, there may actually be a silver lining, a potentially multi- decade long opportunity for investors to provide the capital that's needed to modernize the stock of housing available in the U. S.

Maureen Joyce: I think there are structural forces at play in residential real estate right now. It's going to drive income growth, but also appreciation. You can find opportunities both in debt and equity. Construction lending is really attractive right now, and equity because of repricing in the markets is very attractive. Overall, we are really positive about the opportunity residential real estate today.

Greg Campion: That was Maureen Joyce, head of U. S. Equity Real Estate at Barings. This is Streaming Income, a podcast from Barings. I'm your host, Greg Campion. Coming up on the show, the multi- decade opportunity in U. S. residential real estate. Before we get into the conversation, if you're not already following us and you're interested in hearing our latest thoughts on asset classes like high yield, private credit, real estate, and more, just search Streaming Income on Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts. With that, here's my conversation with Maureen Joyce. All right, Maureen. Welcome to the podcast.

Maureen Joyce: Thank you. Nice to see you. Nice to be here.

Greg Campion: Likewise. Likewise. Excited to have you here in Charlotte. You're usually based in Boston.

Maureen Joyce: I am.

Greg Campion: Which is a city we discussed a little bit the other day. It's very near and dear to my heart. I used to live there, and Big Red Sox fan and all that kind of stuff.

Maureen Joyce: That's a good thing that you're a Red Sox fan.

Greg Campion: Yeah, I think so. Yeah. This is your first time on the podcast, so I'm really excited to have you on. I was thinking maybe if you wouldn't mind just introducing yourself to our listeners who maybe aren't as familiar with you. It would be great to hear just a little bit about your background and your role here at the firm before we dive in and talk all about the residential market.

Maureen Joyce: Sounds good. I came to Barings about just over three years ago. I have a long tenure in the real estate industry. I've been doing real estate or investing in real estate for over 35 years through boom and bust cycles, which gives me a different perspective than a lot of people in the industry right now because there's a lot of younger people who have lived in a very boom period. I think that perspective of things can go wrong and how do you prepare for it and how to manage through it is important here. Over that course of time, I've done virtually everything from construction project management through acquisitions, portfolio management, asset management. John Ockerbloom who heads our group hired me to run asset management for the U. S. platform. Since that time, I've made some changes and right now, I'm head of U. S. equity real estate. In that role, I'm really charged with working with the portfolio managers and the asset managers and Joe Gorin, who's head of investments, coming up with investment strategies, products that meet the needs of our clients and address the opportunities in the market. In an effort to provide those opportunities for clients, it helps us because we continue to grow our business too.

Greg Campion: Awesome. Well, thank you for that. I think we have the right person for the job to have this conversation. I think it's especially interesting to hear your view through the cycle view, because I want to get into talk about views on interest rates and things like that. I know that zooming out and having that wider perspective probably is really helpful trying to navigate markets today. I wanted to frame up this discussion, which I think we're primarily going to talk about U. S. residential real estate. I wanted to put it in the context of we see a lot of headlines all the time about the housing crisis, right? I think there's various ways that people are defining a housing crisis, whether you're talking about availability or affordability, et cetera. I want to just dive in because I think what it would be great to talk about would be, how you and the team are seeing solutions to this crisis and how that may or may not present interesting investment opportunities for the people that can provide capital to increase the stock of housing. Before we get into the solution, maybe let's just make sure we're all clear on the problem. Talk to me a little bit about your view on this" housing crisis," and maybe what are the key factors that have driven it?

Maureen Joyce: Sure. Sure. I think the biggest thing is that we haven't built enough housing to meet demand. If you look at where we stand today... I'm talking about all housing. I'm talking about multifamily, single family residential. I think we're shy about 7. 2 million housing units as the demand continues to grow and the growth is coming from demographic growth. Population growth, it's coming from immigration to a certain degree. We haven't built housing to stay on top of that. Now, certainly, there are pockets within the United States where there's been overbuilding. Even in those pockets, there continues to be solid demand. Right now, we see even less building. The spigot of new supply has been shut off. Even those markets that are oversupplied today, demand continues and those units are being absorbed. There will be a continued supply demand imbalance, which has partly driven the crisis. We all know from economics, if you have that imbalance, prices can go up and the affordability issue arises. The other part of the affordability problem is interest rates. Post COVID, the interest rate went to almost zero, and that's the same period of time that you saw the run- up in prices. People could afford a more expensive house. They could pay more because their mortgage payment didn't go up materially because interest rates came down. We had a combination of low interest rates and rising prices. Prices just shot through the roof over that period of time. Today where we come to is we have higher interest rates, so the mortgage payment went up. I think if you had a mortgage that you close on in late 2021, you might've gotten a three and a quarter percent interest rate. Today, that's a 7% interest rate. Start there. Your interest payment has doubled. Then, on top of that, prices have gone up materially, so the total cost of owning a home has increased. Therein lies the crisis that we face today. It's a housing affordability crisis and partly led by not keeping up supply just overall.

Greg Campion: Yeah. That makes a lot of sense. Like you and I talked about a couple of days ago when we were prepping for this discussion, I've personally seen this as we locked into a mortgage in the 3% range back in 2017. Probably 18 months ago, we were considering, " Oh, should we move houses or not?" Then, just the pure economics of looking at, " Wow. That would double the mortgage payment." You know it theoretically because you see the rates, but then when you actually see the sticker shock of what that would be, you could see, " Yeah. Okay. Wow. This is a real factor and it's a real thing that a lot of people are dealing with." That affordability issue is huge.

Maureen Joyce: It's also interesting because it's something like 60 or higher percent of people who have mortgages right now have mortgages that are in the three or lower percent range. I might have that 60% wrong, but it is a high percentage of homeowners who have low interest rates. They're not going to sell their homes. That lack of transactional activity has affected the homeownership market too, because people aren't moving up as they built equity in their homes and able to go into the next level of higher priced home and free up entry level housing. That has contributed to the problem as well is that people are staying put. They might be renovating, but they're staying put.

Greg Campion: Yeah. That's what we did. We decided to renovate and stay put. Now, is that primarily a U. S. Phenomenon? I know in the U. S., it's very common to have the 20 or 30- year mortgage, right? I think Canada is quite different. UK is quite different. Is that your perspective?

Maureen Joyce: It is interesting that you bring that up, because we were in a meeting with some Canadian pension plans a couple of weeks ago and we were talking about this affordability crisis and how people are staying put because they have low interest 30- year mortgages. The people we're meeting with wistfully said, " Boy, do I wish I had that issue because we reset every five years." Our issue is you can lock in for a long time. Their issue is affordability is still a problem globally, I think, but the dynamics of the mortgage market are definitely different.

Greg Campion: Yeah. Yeah. That makes sense. Who do you think is being most impacted by these dynamics that you just talked about?

Maureen Joyce: Well, it's certainly Gen Z. I think Gen Z may be the most impacted because they didn't even have a chance to get in at lower home prices. Millennials definitely are being impacted, but mostly, I think it's anybody who's a first time entering into buying a home. It's just become more affordable. You could have a good job, a good salary, but because prices are high, the down payment has increased materially from what it was required 10 years ago. As we said, the mortgage rate is high, so your monthly payment is higher. Folks who've never owned a home and are trying to get into that market right now are most affected, and it's certainly Gen Z. It's certainly millennials because they're younger. Then, I think some lower to middle income folks who just don't have the wherewithal to make that down payment, some of whom too still have student loans that they have to pay. Combination of that existing debt and trying to save for down payment is burdensome to a lot of people.

Greg Campion: Yeah. Yeah. It's really, really challenging. Okay. That's interesting. You hear this term forever renter. Do you feel like that's going to become more of a widespread phenomena overtime? You mentioned Gen Z. Do you feel like... Obviously, they're renting their first apartment. Maybe they move on to renting a standalone home. Do you think that that's a phenomenon you and the team expect to see over time?

Maureen Joyce: We've certainly seen homeownership decline. If you look at the peak homeownership percentage, 69% in 2004. Today... I just talked to our research folks about it. Today, it's 65.6% to be exact.

Greg Campion: Okay. Okay.

Maureen Joyce: That's even-

Greg Campion: Was that DAGs giving you the call on that?

Maureen Joyce: Yes, exactly. Lincoln, actually.

Greg Campion: Okay.

Maureen Joyce: Even at that, it was 66 last year, so it came down 40 basis points in just a year period of time. That's because people are priced out of the market. I do think there is that forever renter phenomenon. What that means from an investment or an investor opportunity is those people will be renting and there's an opportunity for rental housing, whether it's rental single family or rental multifamily. One interesting tidbit or data point, for every 100 basis points of decline in the homeownership rate, that's about 1. 3 million people who are likely to be renters. That's strong demand just coming out of the fact that homeownership has declined a little bit.

Greg Campion: Yeah. That makes a ton of sense. That's what I was thinking when you mentioned that 69 to 65 and a half, is that that might not seem that big, but if you think about the absolute numbers, you're talking about millions. Right?

Maureen Joyce: Yeah. Over that period of time, it's almost four and a half million people who became renters. Now, the 69% was higher than ever. As I said, it was peak. Part of that were home prices were cheaper, mortgage rates are cheaper. Candidly, I think you could say there were lax lending standards too. Hence, a GFC.

Greg Campion: Yeah. We all saw the big short-

Maureen Joyce: Exactly.

Greg Campion: ...and lived through that in various ways. Okay. Now, before we get to talking about what some of the solutions may be to this problem, I just want to get your view, especially as we zoom out, and you mentioned your tenure in the industry. As we zoom out, how much of this problem do you think is based on short- term dynamics where interest rates are currently? How much do you think of it as more longer term structural trends in place?

Maureen Joyce: I'm going answer that a little differently and think about the opportunity. There is a short- term issue, and a lot of that is related to interest rates. As interest rates have increased, it has been repricing in the market. From an investor standpoint, you can acquire good quality multifamily at lower prices than you could four years ago. That's a good opportunity in higher yields. The issue really is a long- term structural issue. We need housing. We do have a growing population. Demographics matter, and with population growth, we have to meet it with new supply. We haven't been consistent doing that. Certainly, coming out of the GFC supply dried up materially. Then, it started to pick up the last few years. Then, what happened is interest rates got higher, so construction costs increased and it became harder to build and to add new supply. That supply issue contributes to the long- term phenomenon. The other part of the long- term structural phenomenon is we still have population growth. It's not as great as it was in the'60s, but we still have population growth, organic growth in immigration. We need housing. People need a place to live. They don't always need an office to go to, but they need a place to live. Long term, we have to meet that demand with supply.

Greg Campion: Yep. That's a really good point too. It leads to the discussion as well about what is that Gen Z or millennials, what does that buyer really need? I'm sure that's really changing materially too, like you mentioned you might not need to go to an office. Well, there's still demand for places for people to have Zoom calls and things like that.

Maureen Joyce: Yeah. Exactly.

Greg Campion: I know that you and the team do a lot of work on what are those amenities that the tenants are looking for, et cetera. That's a super interesting part of the discussion as well. Let's talk a little bit about that. Let's talk about what some of these solutions can be. Obviously, we need to add more stock to the U. S. housing market. I think that's the kind of baseline understanding, but then there's a lot of nuance in terms of what type of stock, what that should look like, et cetera. Then, of course, whoever is financing this... Barings invest capital on behalf of institutional investors, many different types of investors, and they're going to want to earn a sufficient and attractive return on the capital that they put forth. Right? As you think about all those different factors at play, what looks attractive to you and the team in terms of market segments to put capital to work in today?

Maureen Joyce: Certainly, we're bullish on the build to rent category, which it's an important distinction. It's single family rentals, but what we don't invest in is the scattered site single family rentals. Because what's happening there is you're actually taking stock, you're taking inventory out of the homeownership inventory by going in and buying homes and neighborhoods. What we're looking at and what we're investing in are purpose- built communities. We're actually adding supply. We're adding inventory. When we make that decision, we're going into markets that have really good growth dynamics, but also good school systems that are safe. You talk about what kind of amenities, what people are looking for? Space is an amenity now. You have that extra space, that den or space in your house or your apartment to do the call or to work from home. Also, with build for rent, you have a yard. It's not a big yard, but you have a yard. You have a community. There's often a clubhouse and a pool, so you create community as well. The build for rent category, I think meets a lot of needs of the forever renter. It's new. It's good quality. It's in good neighborhoods, and you can stay there for a long time. What we see is the residents tends to stay four years, whereas a multifamily community, you tend to have more frequent rollover because they're moving somewhere else, but build to rent, there's more stability there because you have a home.

Greg Campion: Yeah. That's really interesting. Just thinking from the perspective of a homeowner, I think there's some attraction to not having to have all those home maintenance costs yourself as the renter. Right?

Maureen Joyce: Well, it's interesting that you mentioned that, because a lot of our focus is on what Gen Z and what millennial's like. The other end of the barbell is baby boomers. There are a lot of baby boomers who say, " You know what? I'm tired of worrying about landscaping. I'm tired of worrying about the maintenance of my house. I wouldn't mind moving somewhere and having someone else take care of that."

Greg Campion: Somebody else's problem.

Maureen Joyce: It's still a nice home. One of the things we focus on in some of these build for rent communities are making sure that the primary bedroom's on the first floor, so the baby boomer can age in place. They have bedrooms on the second floor that their kids and grandchildren can come to. We have one operating partner that referred to some of those people who are moving into these communities as baby chasers because they're chasing their kids who move from the northeast to the south.

Greg Campion: I can see that.

Maureen Joyce: It's easier to rent for them. There's real demand there from both ends of the demographic spectrum.

Greg Campion: Yeah. Yeah. Perhaps that is a way to get the boomers to open up some of their housing capacity for the next generation who wants that full home to buy as well. Yeah. It's really interesting to see these trends taking shape. Are there any examples that you can think of? Any projects that you and the team have done in that build to rent space that are worth highlighting?

Maureen Joyce: Yeah. For one of our separate account clients, we invested in a build to rent community outside of Raleigh. One of the things we do from a research standpoint is number one, market selection is obviously very important. We want to go into growth markets, but we also have filters that we look at for the micro market. Are the school systems good? Is it safe? Is the commute reasonable? One of the things we also look at with whether it's multifamily or build to rent single family is, is there a premium to own? Again, getting back to that forever renter, are people more inclined to rent because the premium to own is just too high to make that decision to go to own? We make sure that we have some cushion there between what it costs someone who owns a property between mortgage taxes, insurance upkeep, and what it costs for them to rent? That makes us feel comfortable that it's an affordable option, but also that we have the ability to continue to see rent growth and net operating income growth. Because ultimately, that's what drives returns to our investor clients.

Greg Campion: That makes sense. Thinking about some of those geographies, so you just mentioned Raleigh. Let's talk a little bit about some of these geographies, cities, locations that you and the team are seeing attractive value. I'd be curious to hear a little bit more about the criteria and the filters that you put these places through. Then, maybe if there's any specific examples, that would be really interesting to hear too.

Maureen Joyce: Sure. As you know, and I'm sure a lot of the folks who listen to this podcast know, we have a really strong research team. What research looked at were factors that drive alpha, that drive outperformance, and they came up with quantitative and qualitative factors. Some of the quantitative factors were median incomes in a market, were single family home permits in a market. Some of the qualitative markets were STEM employment, educational attainment, crime, environmental risk. We looked at those and came up with criteria that based on what the market stood in terms of the impact in that market of those criteria where we saw outperformance, and the research team backtested that in the NCREIF Property Index to determine markets. We started out with 100 markets, brought it down to 30 markets, and 30 markets might seem broad and big. I know on our Barings innovation and growth office fund, we have the 12 best markets. Office is a different property type, so you have to be more focused, I think in office, because of where demand drivers are. With multifamily, we can have growth markets as well as traditional institutional markets. That's what we looked at. From an institutional market, we're looking at markets like Boston and Seattle where there's strong educational entertainment. There's technology employment and barriers to entry, so there's long term growth. From a more growth market, which is really important in investing to get into a market, I never want to be on the bleeding edge of entering a market, but certainly on the leading edge to be in the market because we see something that someone else hasn't seen. Some of those markets are Boulder, Charleston, Savannah. They're markets that have good educational attainment in the markets. They're driven by strong employment growth. In Boulder, there's a lot of life science. There's a lot of technology because of the university there. In Charleston, you have the port, but you also have advanced manufacturing. In both markets, the quality of life is really good. It's an attractive lifestyle. People are immigrating because that immigration that I talked to, immigration within the U. S., finding where people are moving from to where they're moving to is important in market selection too. We like those kinds of markets where we have the stable, long- term institutional markets, but also those growth markets that should outperform from an alpha standpoint.

Greg Campion: Yeah. That makes sense. One of the things, I think I've discussed with you and probably the research team as well before is this idea of... This is probably my words, not yours, but some of these opportunities in real estate being a second derivative of what's going on in other industries. For instance, we all see what's happening with artificial intelligence. We know that there's going to be massive needs for things like data centers, power, et cetera. There's going to be people running all these things and they're going to need to live somewhere. Then, you can look at other big trends like cybersecurity, aerospace, and defense. There's places where you're likely going to see a lot of growth, a lot of spending, and a lot of employment growth. Again, these people are going to need some places to live. Am I characterizing that right? Wwould you agree with that's somewhat how you and the team are looking at things?

Maureen Joyce: Absolutely. That perfectly describes particularly the growth markets that we've identified as places to invest. Some of that is driven by AI. When you look at what happened with the Chips Act and where money is flowing, now, that's federal dollars, but private capital is flowing into those markets too. We have the battery belt that we've started to look at. A lot of people didn't look in those markets for a long time, but now...

Greg Campion: What would the battery belt be inaudible?

Maureen Joyce: It's in the Midwest.

Greg Campion: Okay. Yeah.

Maureen Joyce: Do you see that opportunity as jobs are created? The lifestyle is good. It's cheaper than living. I live in Boston. It's cheaper than living in Boston. We're a culture and a society that people tend to move. People are moving into those markets and we're going to take advantage of that movement into markets and invest in those markets.

Greg Campion: Okay. That makes a lot of sense, especially for those growth markets. Now, I have a question around some of these markets that are maybe not growth stage yet. This is a quick aside, but I've personally spent a lot of this summer driving around different parts of the country. Most of it is driving my kids to different things they need to go to like summer camps and such.

Maureen Joyce: Enjoy those long car rides with kids.

Greg Campion: Yeah. We drove up from Charlotte to Cooperstown, New York for a baseball tournament. If anybody listening, ever has any a boy nearing the age of 12, definitely do that. inaudible lifetime. Very cool. We stopped in Baltimore, for instance. We went to a ball game there, saw the Orioles play.

Maureen Joyce: Great ballpark.

Greg Campion: Really cool ballpark. It was on my bucket list one to visit. On these trips, I always try to get up early before my family and go for a run or for a walk or something and check out the city. There was parts of it that I was like, " Oh, this is nice and gentrified and such." Then, there's other parts where it was like, " Okay. I don't feel super safe walking around here." That's one example. Another one was I was driving my son. This is a big theme this summer, apparently. Driving my son out to summer camp in Tennessee near Chattanooga, like five- and- a- half- hour drive from here. We spent a night in Chattanooga and we did the tourist thing. We did a duck tour, which you know well, being from Boston.

Maureen Joyce: Our duck tour is usually associated with championships.

Greg Campion: Oh, she's got to get that knock in there. That's funny. Anyways, we did a little touristy stuff, got some history. I'd never been to Chattanooga before. I learned that it was a really bustling manufacturing center, super important hub in the Civil War for both the union and confederate. That city to me, it seemed like it's... No offense to anybody who's from Chattanooga or lives there, but it seemed like it's a bit run down. Again, walking around there and wondering, " Is this safe?" That sort of thing. I guess I'm meandering my way to a question here, which is basically some of these markets, some of these older industrial type markets in the U. S., I'm curious; given all your experience, do you see potential for revival in these markets, especially if a lot of this political rhetoric that we hear around brain manufacturing back to the U. S. actually materializes?

Maureen Joyce: Well, I think the reshoring aspect is real, and that's what you see in the Midwest in what was before often referred to as the rust belt is now becoming the battery belt, and it is becoming very dynamic. One of the things that we do look at in terms of market filter is crime safety, because people want to live in neighborhoods that they feel safe in.

Greg Campion: Sure.

Maureen Joyce: The quality of life is really important when we look at markets. Yes, I think that the resurgence and the reinvigoration of manufacturing will open up market opportunities, but as I said before, I don't want to be on the bleeding edge of being the first one in the market. I'll let a couple other people go in first and see how the market transitions.

Greg Campion: Would you consider that a little too speculative?

Maureen Joyce: I think it is for us. That's definitely speculative.

Greg Campion: Yeah. Yeah. Okay. Yeah. That makes sense. Yeah. Because it is just very interesting, because it's very common theme across this country. You have so many of these older, beautiful cities that you could see so much potential in, and it would be really cool to see them.

Maureen Joyce: It's interesting because last year, we had an operating partner come to us and was talking about mobile. We dug in. One of the other parts of making a sound investment is knowing what your exit is. If you're too early and the change hasn't happened and capital doesn't flow in behind you, then you might have a nice asset, but you don't have the valuation. You don't have the appreciation. While income and residential is great from a durable income standpoint, we have to have solid, really attractive returns to deliver to our investors. A lot of that is appreciation. Capital has to flow there too. You don't want to be too early because if you don't have an exit, then you don't have the ability to realize a profit or a gain for your clients.

Greg Campion: Yeah. Makes sense. I guess that's why they always say it's location, location, location in real estate. You don't want to be...

Maureen Joyce: Right now, there's a timing, timing, timing aspect to it too. I think if people are ready to invest today, they should. Because I think there's really good opportunity generally in residential investing today, but also in the long run, which is great. That's a great dynamic to have, to have both short- term opportunity to take advantage of some lower case distress in the market, but also to know that the long- term fundamentals are really strong. You have the wind at your back.

Greg Campion: Well, let me ask you just a little bit about that, because talking a little bit about the amount of risk that you would or would not want to take. I think when you think about real estate markets, you have everything from them more speculative development side of things and then all the way up to your core assets, trophy assets, et cetera. When you think about U. S. residential, where are you and the team on that spectrum today in terms of where do you see the best risk reward, I guess?

Maureen Joyce: First, I'd like to say we have different clients who invest along that risk and return spectrum, which is really good because then we see everything in the market. We have clients who want nothing but core and because they like the durable income that you get from multifamily. That durable income is long- term. I'm sort of a data nerd. I went back and several months ago and looked at how multifamily in the NCREIF Property Index performed, and it's the second highest performer after industrial. I'll say industrial is a caveat. After COVID returns, were like 40% one year. Returns for multifamily core have been very strong. When you look at core plus to value add to opportunistic, we have different clients that are willing to invest across the board. Today, I think core plus two development offers a big opportunity. I'm going to start with the most risky. Development, because the spigot of new supply has shut off in a lot of markets and it's shut off in part because of the fact that a lot of construction lenders are out of the market because of the banks' challenges. We can come in. We have patient capital. We have capital that can invest, and because of the strength of our capital, we can get construction loans. I think development, if you started development this year or early next and you deliver it 18, 24 months from then, I think you're going to deliver into a period of time where there's going to be a trough in new deliveries. You will have pricing power. From a core plus and value added standpoint with the repricing in the market for multifamily, for instance, the Reid index for apartments is down 24% from its peak. There's some opportunity to buy good quality real estate at good current yields with, as I said, this wind at your back in terms of property fundamentals to get to attractive returns. Then, from a core plus value add, you also have the opportunity to renovate units to drive higher rents and drive appreciation that way. I think it's a good time to do a little bit of it all.

Greg Campion: Any deals? Any recent transactions stand out to you, whether it's on a development side or core plus side that illustrate what you're talking about?

Maureen Joyce: Yes. There's a couple. One, we're looking at right now, so I won't get into too much detail. We haven't been awarded the investment yet, but from a market standpoint, it's in a market that has strong growth prospects, advanced manufacturing, lots of growth, high educational attainment, so we like the market. From a property standpoint, there's this... I keep calling it lowercase D, distress. It's an operator who needs liquidity. He developed the assets. He has an extended business plan because of impacts from COVID with supply chain issues, cost increasing, interest rates increasing, and there's a loan maturity coming up. There's a lot of opportunity because of impending loan maturities, but he needs to sell.

Greg Campion: Got it.

Maureen Joyce: We could go in, acquire the asset that's just coming out of development and finish the lease up. We're not taking development risk. We'll just take the lease up risk. I call that core plus, and achieve attractive returns. Another... Again, it gets back to the build to rent strategy that we're quite bullish, on is a property that we're underwriting right now as well. On that one, we will purchase the homes upon completion. Again, we're not taking development risk. We're taking lease up risks. It goes back into this core plus category, but you're getting returns that approach value added returns. Those are two live investments that we're underwriting that I hope we move forward with, but those are the opportunities I see today. Some of the opportunities I see today.

Greg Campion: Yeah. Yeah. Now, one of the big trends that we've seen in the last couple of years is that the opportunity to deploy debt capital has been really attractive.

Maureen Joyce: Really attractive.

Greg Campion: Nasir has been on the podcast a couple of times. We've talked about that. Talked a little bit about construction lending specifically, but as you think about the... Well, I guess I'm curious how you think about that interplay between debt and equity and the relative value between them. Curious what your thoughts are as we sit here today on that relative attractiveness from an investor standpoint between debt and equity.

Maureen Joyce: There's a bias here. I'm an equity person. Having said that, there's no question debt has been the better investment from a relative value standpoint the last few years. We have seen this start of repricing, as I mentioned, over the past nine months with private real estate from an equity standpoint. It's come into a place now where equity is also attractive, which is interesting. You don't see that very often. You see debt because the base rate's high. The credit spreads are high, and total return is really attractive without taking a whole lot of risk because where you are in the capital stack. Equity obviously is riskier, but with repricing, four or five years ago or not even that long ago, multifamily properties were selling four cap rates. That made sense. Interest rates where you could get a mortgage for below four. You had positive leverage, you had a creative debt. Today, that's not the case. Interest rates have increased. Cap rates have increased. Now, you can buy that similar same property at a cap rate that's 5. 5 to 6%. The yield is attractive now and with growth prospects in multifamily overall because of these structural long- term fundamental changes that we've seen or support for it that we've seen, total returns look really attractive too. I think we're moving into a situation with a late 24, 25 will be really good vintage years for investing in equity part of it. Having said that, one debt product that I think is really... Or program that I think is really attractive is construction lending. There's a dearth of capital for construction lending right now. To be able to go out and invest or provide construction financing, you pretty much dictate terms, which is great. Again, you're in the capital stack up to 65... You have 35% equity ahead of you, so it's a pretty safe investment.

Greg Campion: Yeah. I don't think Nasir will be mad at you for that answer. No. It is interesting with the repricing that you've seen on the equity side that...

Maureen Joyce: It's taking a while. I think when you look at the NPI, the first negative appreciation occurred in the fourth quarter of'22. All of'23, you saw little bits. In this year, we've seen negative appreciation. It's flattening out now, it seems, or it's slowing. I don't know if it's flattening, but it takes a while for private real estate to adjust to, because the lack of appraisals. We're adjusting because we're starting to see transactions finally and the transactions are showing that yields have increased-

Greg Campion: Makes sense.

Maureen Joyce: ...quite a bit since the go- go years after COVID.

Greg Campion: Okay. Yeah. I would imagine that this asset class is not one that you're really trying to market time it, so to speak. It takes a bit longer for some of these trends to develop.

Maureen Joyce: This whole idea of market timing, there is a market opportunity today with some distress, but we keep talking about the long- term fundamentals are really favorable for residential.

Greg Campion: Okay. Good to hear. Okay. Just thinking ahead and where we're going next, the most obvious thing that we've got on the near term horizon is the U. S. election.

Maureen Joyce: Yes.

Greg Campion: It's beyond the scope of this podcast to dive too deeply into that, but it's obviously something that we're all paying attention to. My question for you on that front is, do you think does one outcome... There's a Democrat in the White House versus a Republican in the White House, come January, is one outcome better or worse for the investment opportunity in U. S. residential real estate?

Maureen Joyce: I don't think it is. The reason I don't think it is, is because, again, we're talking about long- term fundamentals. Whoever's in the White House for four or eight years is not going to be as impactful to residential as the supply and demand fundamentals are. Sure, tax law will tweak it one way or the other. Regulations will tweak it one way or the other, but long- term, you have to look at market fundamentals and economic fundamentals to determine what is a good investment opportunity. I think market and supply and demand fundamentals in particular are favorable to residential regardless who's in the White House.

Greg Campion: Yeah. Okay. Very diplomatic with both of these last two answers, I have to say. Okay. We've covered a ton of ground here, so I feel like I'm much smarter on the subject than I began with. Hopefully, our listeners feel that way as well. Anything you want to leave our listeners with? Maybe they have investments in this area. Maybe they're considering investments in this area. Anything you want to leave them with, just as final parting words?

Maureen Joyce: I sound like a broken record, but what I want to leave them with is this idea that long- term, the tailwind support multifamily investing. Importantly, what's really nice today is short term from a trade and a market timing standpoint. I do think location, location, location is important, but timing, timing, timing has mattered too. If you look back coming out of the GFC, some of the best investments people made, some of the best vintage years for funds, for instance, were those 2009, 2010 funds where I think in that period of time where investing in real estate, particularly multifamily or residential real estate, the late '24, 2025 vintage year will be a really attractive vintage year to invest in multifamily. On top of that, you have the long- term fundamentals, which support long- term investing in it.

Greg Campion: Yeah. Great. Well, thank you so much. This has been great. I appreciate you being here in Charlotte at the HQ for this today. I'm looking forward to getting back to Boston in the near term for our Barings 360 Conference in November.

Maureen Joyce: Yes. I'm looking forward to that too. I think it's going to be great.

Greg Campion: It's going to be really good. I know we have some great speakers lined up, and I don't think I'm allowed to spoil that yet.

Maureen Joyce: You tell me, and I'm really excited.

Greg Campion: It's going to be great. This has been awesome. I hope to get you on the podcast again sometime soon. Thank you.

Maureen Joyce: Thank you. It's great being here with you.

Greg Campion: Thanks for listening to or watching this episode of Streaming Income. If you'd like to stay up to date on our latest thoughts on asset classes ranging from high yield and private credit, to real estate debt and equity, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, YouTube, and more. If you have specific feedback, you can email us at podcast @ barings.com. That's podcast @ barings. com. Thanks again for listening and see you next time.