Market Dynamics for Class A and Class B Assets

Mr. Edward Ring founded New Standard Equities in 2010 and serves as its Chief Executive Officer.  He has ultimate responsibility for NSE’s investment strategy, operations, risk management, and investor relationships.  He has over 25 years of real estate and financial consulting experience, with 16 years of dedicated investing and operating experience in the multifamily sector. 

 

[00:00 - 06:42] Opening Segment 

• Eddie Ring founded New Standard Equities in 2010 and serves as its chief Executive Officer.
• NSE is a leading vertically integrated real estate investment and asset management firm on the West coast.
• Eddie started working as a sitcom writer for Hollywood
• Realizing being unemployed 60% of the year he went back and UCLA and finished his MBA
• And started working as a real estate agent until he founded his own real estate firm.

 

[06:43 - 14:13] Rent Control Hurts West Coast's New Development

• How rent control is a major issue for the California multifamily industry, and how it is difficult to get new development through.
• Rent control affects the way that prices are set for units, and it can be very difficult to get new development done.

 

[14:14 - 21:05] How to Hedge Your Bet on Interest Rates

• The dynamics of pricing in different markets, specifically Silicon Valley and the West Coast.
• how to price a property for sale or purchase, using debt and floating rate products.
• Rates are going up, making it harder to use floating-rate products.

[21:05 - 22:28] Closing Segment

• Reach out to Edward! 
• • Links Below

-----------------------------------------------------------------------------

 

Tweetable Quotes:

“If you're trying to hedge LIBOR today at three and a half? And the Fed is signaling that they might raise rates again. You might end up paying, 500,000 or a million dollars for a hedge like that, if it's threatening to be in the money right away then you're gonna pay more.”
- Edward Ring

 

Connect with Edward Ring by visiting his website at www.newstandardequities.com

Connect with me:

 

I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.  

 

Facebook

 

LinkedIn

 

Like, subscribe, and leave us a review on Apple Podcasts, Spotify, Google Podcasts, or whatever platform you listen on.  Thank you for tuning in!

 

Email me → [email protected]

Want to read the full show notes of the episode? Check it out below:

 

HTSCRE#679

[00:00:00] Edward Ring: If you're trying to hedge Libor today at three and a half, And the Fed is signaling that they might raise rates again.

You might end up paying, 500,000 or a million dollars for a hedge like that , if it's threatening to be in the money right away. Right. Then you're gonna pay more.

[00:00:27] Sam Wilson: Eddie Ring founded new standard equities in 2010 and serves as its chief Executive Officer. N se is a leading vertically integrated real estate investment and asset management firm on the West coast. Eddie, welcome to the show.

[00:00:40] Edward Ring: Yeah, thanks a lot, Sam.

Appreciate you having me

[00:00:42] Sam Wilson: on. The pleasure is absolutely mine. Eddie. There are three questions I ask every guest who comes in the. In 90 seconds or less, you know, Tell me where did you start? Where are you now, and how did you get there?

[00:00:52] Edward Ring: Oh yeah, sure. well, actually, I, started off my adult life as a sitcom writer in Hollywood.

of all things, if you can imagine that , it was a lot of fun , was really super interesting and obviously a barrel of laughs. But being unemploy. Of the year was really not a barrel of laughs and I decided with two little kids, that daddy couldn't be this unemployed. So I actually back to ucla, got my, and jumped into, into the real estate space.

I started off a, , Pretty large company based in Beverly Hills and, , sort of learned the ropes and learned the multifamily industry. And that was back in two and, , in 10 I started my own firm. And here we are today, I've got about under ownership and management and it's all exclusively on the west.

And we do value add apartments. the same thing every single day. I wake up, I, I'm like a fisherman. I go out, catch some fish, I come back next day, do the same thing. So, it's it's been terrific and I'm happy to share my experiences with you and your, your listeners.

[00:02:06] Sam Wilson: That's fantastic. Yeah, It's not every day that we get sitcom rider turned multifamily value out apartment investor.

I know you said that you guys, you know, focus exclusively on the West Coast. The West Coast gets a bad rap, I think, industry wide from the people that don't invest in the West Coast which is, you know, maybe good for you, maybe bad for you. But tell me why do you guys see opportunity where you are right now?

Yeah. Well,

[00:02:34] Edward Ring: you know, first and foremost, I mean, I think that the, the true guiding principle for myself is what I know and ied to that a little bit. But I was born and raised here on the West Coast and understand it. I understand the markets. And when I first started going off on my own, I literally told investors, Look, I'm not gonna put.

Your money at risk for my ignorance and you know, you're not paying me for that. Instead, I, I know the West coast, I know Seattle, Greater Seattle, Portland San Francisco Bay area, all parts in between and Los Angeles and Southern California, Diego, Orange County, and I know all of the little submarkets to to invest in and, and what to avoid.

And with that knowledge, I feel like I can overcome some of the things that most of most investors are worried about, which is the political risks and the the odd temperature out here, especially in the last of years, a lot of issues. But the of the day, The reason that I am still a fan, other than the fact that, you know, I know the markets cold is that on the West Coast we have super high paying jobs and it's where the innovation is, it's where the knowledge economy sort of begins and ends.

And we really think that especially in our space, in the value add multifamily space, we're able to, To that resident and to the demographic that is up incoming is the, incomes high and growing and there's really nothing left to do you know were pretty big in

in silicon valley, not quite in the valley itself, but all of the sort of, you know, two or three rings out, if you think of it as like a set of concentric circles. And that that dynamic Rising wages for the most part, you know, last couple of months. Maybe, maybe an anomaly. But we're, we're very used to it. And, you know, I, I'm gonna stick to that.

And politics are the politics and, you know, I think there's a way around all of that. The end of the day politics are, are a funny, funny animal because the same pressures that are. Preventing large scale development and things that would actually fix the equation are, are just not there politically, there's will to allow development.

So when you have no development,

you can whine all you want about, you know, rent control, et cetera, cetera, but the reality is, You're gonna need more housing. And if you don't build it, then the prices of that housing gonna go up. I'm charging now about 3100 dollars for a B class property in San Jose, California of the areas the entire, That's what. That's what the incomes in that region are dictating.

So naturally then the cap rates are gonna be lower there than other areas.

[00:05:38] Sam Wilson: Right. No, I think that that's absolutely an interesting perspective because yeah, you, you, you can fuss all you want about, like you said about the, the, the political risk. But at the same time that it kind of cuts both ways where it's for somebody like yourself, you understand the market, you understand the dynamics, you understand the political risks.

And yet it kind of builds its own moat. Maybe not necessarily best for the end user, but builds a motor around your business in its own right, Where it's like, Hey, this just prevents other competition from coming in, Which we won't get into the end of the politics of it, but it just is what it is. I mean, that's there's no way around that.

Can you break that down? One of the things that, that I don't have. A firm understanding on, because again, you know, we don't get to talk to a lot of multifamily investors on the west coast here on this show. Can you, can you break down rent control? Does that affect you guys? Does it just kind of a a non-issue because of the, the size and the quality of assets you guys own?

Or talk to me about that a little bit if you can.

[00:06:40] Edward Ring: Yeah, it's, it's a, it's a fascinating topic. And you know, we're you know, it's, it's the way, explain it to folks. Reality is there's a social reality and that is rent is really here. And for working class people, it's very, very challenging to actually, you know, pay half your income in, in rent every month.

So the industry understands that and largely you know, in my, you know, my, me and my peers are all like saying, Yeah, we get it, but there's only one way out. It's new development. And any kind of rent control is going to make matters worse. So in the most highly, you know, in the most strict red control markets in all of California would be San Francisco.

And I'd say Santa Monica would be the, the sort of most restrictive. And there you have when things hit the market on the sale, on the side, you have things going for 50 a unit because it's. They're so rare to actually have a building in that market. And of course, you know, when you're paying that, then when when a unit becomes available that is, is through the, now you one guy paying double the rent and the other, you know, effect subsidizing the, of that community's terrible because that those same people in the rent controlled units or in I'd say the, you know, the legacy units, they're not necessarily.

The ones that need the housing, they're the ones that happen to have the rent control unit at the time. And so there's no idea, there's no like means testing or anything like that, which would make a lot of time, but to difficult it's a lot easier for politicians. , we're gonna cap your rent, so we're. Restrict what you can do, on a go forward basis.

And so, , in the last of years, there was something that multifamily industry West actually support, you. But they came up with the idea of having rent caps. And so everybody said, Well, how about. We do, , 8%. This is at statewide level in California. So I think we started off like plus CPI and the state back, and we settled in on 5% maximum increases every year, plus cpi.

Well, CPI is typically one or so the industry, doing, , we could live with 7% increases every year. That's pretty good. And, that's not gonna really affect us that much. And of course now with, inflation and the ppi went you know through the roof, or

about 10%, , a year, which, it's a non-issue in terms of, , in terms of rent control and how it affects our models. , and , unfortunately that program hasn't anything to solve

are able to move into next new buildings and everybody else has to live in stuff that's kinda quasi rent controlled. Broad brush, , idea of, of CTI to 5%, which really doesn't affect us all that much. Got

[00:10:08] Sam Wilson: it. , that's really interesting. Is there, do you see any opportunity, and I know you said it's very challenging to get any new development through, and that's the one thing that would probably solve the issue, which is probably why it's never gonna get through.

But I mean, is there anybody out there forging into the new development space in, in a meaningful manner?

[00:10:28] Edward Ring: you know, you see, you know, you see cranes all the time. You see folks, you know, building out in Hollywood and building in, in parts of the San Fernando Valley. And, and you definitely see new develop but gets absorbed so quickly that there's just no, there's just no way that, that the units, I mean, to really affect price, they need to be sitting.

Vacant and landlords need to be offering two months concessions or so that you know, then, then, you know, you've really kinda hit the right the point in the market with, with regard to demand. But we don't see that here on, on the west coast. We see the cranes go up, the building doors open and basically it's like a vacuum where you just, people just get sucked right into the units and you know, you're leased up.

Four, five months for a two unit building and you know, we march along to the next. So you know, for developer, if you find the land, get itd by the powers that be county and city that you're in, then it's a almost guaranteed home run now. I'm gonna tell you something that'll shock some of your some of your listeners you know, on the East coast, but new construction is 6 57 a unit.

So you're talking about, you know, building out brand new for six 50 or $700,000 per. Which is you know, it's a function of the cost of the land. It's a function of the cost of construction here and, you know, insurance. So there are a lot of charges and hidden costs that make development very, very difficult, even with rents that.

You know, five a foot which by the way is what leads back Class B value multifamily. If I'm competing against class class A stuff, then dice B find those residents who truly want something a little bit better than the rest, but they don't necessarily wanna spend all that money. For you know, class A Olympic,

[00:12:45] Sam Wilson: that's a, that's a strict or, or, or, or a very different, market dynamic that you have there on the new build side.

I talked to a lot of developers and investors in the Texas markets and a lot of people have gone to development because they're value add class B B minus stuff is costing more than what it costs them to actually just build a new facility. And so it's kind, it's kind of the other way around. It sounds like for you guys where you can still acquire a Class B asset for less than what it would cost to build new.

[00:13:18] Edward Ring: Yep. Yeah, absolutely. We're, we bought a, in Fre is Area Bay. It's, it's laden with tech workers. Former home to Tesla, I guess, before Elon moved, but there's still a Tesla plant there. It's across the bay from headquarters. There's thousand and thousand of tech jobs. And, we bought this thing at 65,000 a unit three 80 units, something like that.

And it was about a three and a half cap, maybe a little bit, a little bit higher. And I had investors asking the question. I privately syndicated that one, and I had investors asking the question, especially folks that weren't with pricing. They said, Why should we buy something in Fre that's three or something like that I buy in Tampa, you know, one a door or whatever.

And the dynamic that I explained was exactly what I, what I just mentioned in terms of new construction. Whereas, you know, I don't picked name Tampa, but never you know, in Tampa, I don't think rents are you for, you know, so, I don't think that family single homes next door to the project or going for 1500 a. So you're, you're talking about a dynamic, a pricing dynamic that's just entirely different on the West Coast and especially in Silicon Valley type markets where you have, you know, people, you know, programmers working at Google that are, and they're stills B apartments.

It's just a weird different dynamic, but one that if you put it in the right perspective, it makes mnt. Right.

[00:15:10] Sam Wilson: No, that, that's absolutely absolutely true. Yeah. I think there's somebody else I'm speaking to today and they, I think they called it Pocket Economi. Where it's like, there's, there's these little areas that once you know about them, once you know what the market dynamics are, even on a block by block basis, such as what you're mentioning, you know, about the tech jobs across the street from the asset you're buying.

It's like, wait, this is a little pocket economy that on a large scale maybe, you know, people just couldn't understand from a macro perspective. Right. So I think that's that's really, really interesting. Tell me about this. Talk to me about the financ. On your guys' properties, is there, how are you guys taking deals down?

What are you see in capitals chasing? What are you guys seeing? Your, your investor sentiments are, things like that.

[00:15:51] Edward Ring: Yeah, so, you know, my typical deal, you know, last couple months is things are a little bit different. Are a lot different. But typically we would use flow, floating rate, debt. We would use agencies, you know, Freddie and Fannie.

And we would buy properties that are, because they require such a heavy lift that, you know, generally speaking we put as much debt as the agencies will allow us, or if we have to use debt fund or something like that, we go to where is you know, what's most prudent. But because we're adding value we, we can use a lot of leverage on the front end.

We use floating rate debt even in, even when rent, even when interest rates are so low because we wanna be able to buy, renovate, operate, and sell when the market dictates not when. Our debt matures or not when you know, not driven by debt costs. We wanted to really focus our business plan on, on adding value to the asset and raising rents according to market demand.

And usually that's worked out pretty well for us. You know, if you put a fixed rate loan on something, you got a huge prepayment penalty and. Know, I've been in deals in the past where the lender makes more money than the than the equity of the prepayment penalties or, you know, the maintenance. So never, it's by and large we use floating rate debt.

And we are seeing today that that floating rate product is largely. Gone from the debt funds, least the run here. Freddie and Fannie have come back little bit. They're bit te lower leverage

range ltv. And, you know, you, you kinda sort of have to raise a little bit more equity maybe than you would've. Put a little bit more in to make the deal work, but I'd rather have something that pencils for the lender and pencils for everyone than stretch that calculus too far. I've seen groups that just get way, way out in front of their skis using some of the floating rate stuff and, and right now their portfolios.

Bit of a, wouldn't say they're necessarily in trouble per se, but they're definitely losing a lot of sleep at night.

[00:18:19] Sam Wilson: That was gonna be one of my questions was when you guys use floating rate debt, how do you, how do you cap your exposure on that?

[00:18:26] Edward Ring: Yeah, so we use we have rate caps on everything. We're, you know, we buy a year or two years of of a cap at the front end when we close the deal.

So we know where our rates can raise, can rise to. And you know, frankly, right now we're still, we're still producing cash flow at most of our assets, but it's, we've cut our dividends a little bit to be prudent, and we're building up a cash reserve to pay debt service. In, in case rates keep going up.

But for the most part, we've capped our exposure with with interest rate caps that you buy at the front end of the.

[00:19:04] Sam Wilson: That, that's absolutely awesome. I love that. And you know, one of the things that, and, and I don't, and this, this is my ignorance speaking here, so maybe you can, you can clarify for our listeners a lot better than I can, but what I've heard kind of in the, in the industry chatter, is that the policies, those rate caps that people bought, and let's say they paid 70 grand for 'em, they're now rerating it like 700,000.

So 10 times what they paid for those rate. Can you, can you break that, that comment down a little bit? Cause I, I don't even know how to say that in a clarified manner, so, so people can understand it. Yeah.

[00:19:40] Edward Ring: So, what's gone on in the in the world is it's like everything else, Wall Street. Everybody's just betting on what's gonna happen in the future.

And everybody's crystal ball is somewhat more accurate than the next guys, I guess. But the reality is, If if you're trying to hedge your your bet on interest rates that say say Libo of three and a half, four, four and a half or whatever then the market comes back with pricing for that particular interest rate.

So if you're trying to hedge it at one per 1%, libo, well, I don't, you probably can't even get that today. But let's say it's a libo of two. The market thinks that Libo is heading to, to five. Well, you're gonna pay a lot of money for that Libo two cap. That hedge if you're trying to hedge libo, Seven and the market thinks Libo is gonna stick around four.

And that seven lior hedge is gonna be super cheap. Right. So you, you'll be able to pick up a hedge. It won't do much good in the real world cause you've hedged it at that's like, you know, 81, you know? Right. Or, or beyond that. But if you're trying to hedge Libor today at three and a half, And the Fed is signaling that they might raise rates again.

You might end up paying, 500,000 or a million dollars for a hedge like that , if it's threatening to be in the money right away. Right. Then you're gonna pay more.

[00:21:14] Sam Wilson: Right. I got it. Okay. That's absolutely interesting. Eddie, thank you for taking the time to come on the show today and tell us why you see value and opportunity there on the West Coast, how you guys are taking deals.

And just your general approach to the market. And yeah, I've just certainly enjoyed it. Thanks for breaking down some of these more nuanced topics such as rate caps. Yeah, I certainly appreciate that. If our listeners wanna get in touch with you and learn more about you, what is the best way to do that?

[00:21:42] Edward Ring: I would say go to our website, new standard equities.com. You can click right on the Contact us tab. There's a, we pull down menu. You can go right to register as an investor. Just info at, and I think that's how you, of me, the investor I, there's link right Embedded in that for investors. Anybody take project.

[00:22:09] Sam Wilson: Awesome. Thank you for your time. I certainly

[00:22:11] Edward Ring: appreciate it. All righty, Sam. Take care.