Welcome the the Best Ever midweek news brief, a new series where we will highlight the top headlines CRE investors should be paying attention to this week, followed by a deep dive on a larger news topic or trend alongside a CRE expert.
Today’s Headlines
Six Interest Rate Cuts in 2024? A recent report from ING Economics predicts that federal interest rates will likely be cut six times in 2024. That’s a bold prediction based on what we’ve seen in 2023. The report cites three key factors: a labor market that it intentionally describes as “cooling, not collapsing,” a gradual easing of inflationary pressures, and — even though spending is still strong — the outlook points to financial pressure hitting millions of households, and soon, which should curb spending and slow overall economic activity.
Midwest Corners Market on Apartment Competition: In RentCafe’s 2023 Year-End Report, the company broke down the U.S. rental markets based on competition. And while Miami was the nation’s hottest rental market, the Midwest was the clear winner, with three cities in the top 5 and 10 of the top 30 most competitive rental markets in the U.S. for 2023.
Today’s Guest
Logan Freeman, co-founder and principal at FTW Investments, joins Paul Mueller to discuss two recent bills proposed in Congress targeting institutional investors that would reduce their ability to own single-family homes. The first — called the End Hedge Fund Control of American Homes Act — would impose tax penalties that would force big investors to sell off the single-family homes they own over a 10-year period, effectively banning them from owning them entirely. A second bill titled the American Neighborhoods Protection Act was also introduced, and this bill would require corporate owners of more than 75 single-family homes to pay an annual fee of $10,000 per home into a housing trust fund to be used as down payment assistance for families.
Key Takeaways:
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The title of the first bill may refer to hedge funds, but the definition within the bill says that it would target any applicable entity that “manages funds pooled from investors,” which encompasses a large swath of commercial funds and businesses.
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Should these bills pass, mobile home parks could be significantly impacted by institutional investors shifting their focus. As investors move out of single-family rentals and into multifamily properties and mobile home parks in an attempt to profit from the affordability crisis, rental rates for manufactured and small homes in these parks may rise sharply. This could benefit park owners but exacerbate the affordability crisis for renters living in mobile homes, who may struggle with rising housing costs.
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These Democrat-led bills are unlikely to pass in a Republican-controlled house; however, these bills (and those that have come before them) are an indication of what Congress is thinking about. So even if these bills don’t pass — and if Congress decides not to entertain the myriad of potential alternatives that could help with affordable housing — future attacks on real estate investors, institutional or otherwise, could be in coming down the pike.
Logan Freeman | Real Estate Background
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Co-founder and chief development officer of FTW Investments LLC, where their strategy involves acquiring, operating, and the eventual disposition of large-scale commercial real estate assets in key sectors and markets.
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Previous episodes:
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Portfolio
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GP of 1,500 multifamily units across four states
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600,000 sq. ft. in the office, industrial, and retail sectors
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Based in: Kansas City, MO
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Say hi to him at:
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Transcript
Paul Mueller (00:02.178)
So here to discuss this with me today is Logan Freeman. Logan is a return guest. He's been on the show a few times. We'll put the links to those in the show notes. But he's the co-founder and principal at FTW Investments, where their strategy involves acquiring, operating, and the eventual disposition of large-scale commercial real estate assets. Their portfolio currently consists of general partner on 1,500 multifamily units across four states and also 600,000 square feet in office, industrial, and retail, which is their biggest focus right now. How you doing today, Logan?
Logan Freeman (00:34.063)
Energized, thriving and focus excited to talk about a very trendy and interesting topic today.
Paul Mueller (00:41.13)
Yeah, definitely. So right, there's two pieces of legislation that are proposed that would target institutional investors, force them to sell off their single family portfolios and really make it prohibitive, excuse me, for them to continue to invest in those in the future. So as somebody who raises capital, even though you're not in the single family space, what's your gut reaction to this?
Logan Freeman (00:59.303)
Well, I do have a decent amount of exposure to the single family home space as I spoke to on my previous episodes as a head of acquisitions for a $50 million fund focused on single family homes. So I have a unique perspective, I think, on this. And we were able to acquire and reposition about 265 homes in and around Kansas City. So it was a decent sized portfolio.
But you know, one of the proposed bills, tt has a really interesting name, the end hedge fund control of American Homes Act of 2023, right? What a name. But that does require, it would require hedge funds to sell off all their single family home assets over a 10 year period. And, you know, during that phase out, penalties up to $10,000 per home would be assessed on owners with more than 75 single family homes in their portfolio to fund down payment assistance programs. Right.
And so why they, why is this in Congress? Why is this even a question that they're trying to tackle?
Well, I mean, everybody knows that homeownership has become increasingly unattainable for most Americans due to soaring home prices and interest rates. And so this bill is aiming to nip the issue in the bud by reducing competition from hedge funds and increasing supply for individual buyers. But so that that's interesting, right? It's one perspective is trying to eliminate a player in the market. And most institutional investment has focused on modestly priced homes and those properties are frequently converted into rentals, which some may say that exacerbates the affordability crisis.
Now this is something to keep in mind. Institutional investors owned 3% of all single-family rentals nationwide by June of 2022. With 20% this is just one market that I looked at, but with 20% in Charlotte, North Carolina. So advocates are arguing that the real problem lies in the lack of new housing units and estimates that we've all seen that the country needs anywhere between two to six and a half million new housing units.
You know, according to Redfin, you know, hedge fund buying has slowed down drastically by nearly 30% year over year in the third quarter of 2023, yet they still managed to buy 49,000 homes in the quarter. But that's the lowest Q3 figure since 2016. So bringing it, sorry, go ahead, Paul.
Paul Mueller (03:15.754)
Yeah, so that's interesting. If it's slowing down at that rate currently, why propose a bill now that targets hedge funds? Well, it doesn't target hedge funds specifically. I think you could speak a little bit about who this actually targets. It says hedge funds, but it's much deeper than that. But why specifically target hedge funds and institutional investors right now?
Logan Freeman (03:34.451)
You know, I think that there's a lot of potential nimblyism that goes on in real estate investing. And this could be very, which is not in my backyard, right? And so everyone has tried to attack this affordability crisis, you know, one way or the other. There's a lot of advocates on the supply side trying to create new supply and how difficult that can be. But if there is an ability to eliminate a player, then potentially that would increase supply for specific home buyers.
However, I think there's a trend here too that people need to, that's not being spoke about, which is do individuals even want to own homes anymore? Right? I mean, there is a big and a large trend of people wanting to rent homes and or apartment units, which we also know that we have a shortage of those in the United States. And so it's really, if you eliminate one player that is potentially, you know, or not one player, but one asset class of players, right?
Let's just call them that institutional, you know, buyers and, but let's think about what they do. They go in, they purchase, renovate homes and they're professionally managed. And so one might say that, you know, eliminating them could also, you know, on playing devil's advocate could also, you know, decrease the ability for people who want to rent. And so I think that looking at it from one perspective, it is a big shot because, you know, there's big corporations, big institutions that own a decent amount of these single family homes, but let's remember, that's only 3% of the whole market on single-family rentals, which is, I mean, that could be growing, but at the end of the day, 3% is not 30%, it's not 90%.
So what impact is that actually going to have? I think that geographically speaking, it's going to have certain impacts on other specific markets that these institutions have focused on. And so then it's like the actual, you know, avatar that you're trying to create more housing for is very niche focused on where these folks own and very specific markets. And so I think that that's something to keep in mind as well. But I think that Congress is looking at this as saying, like, let's take a big shot at the institutional investors because they do own 3% of the market and see what pushback and or, you know, feedback we might be able to get.
So I think it's an easy way for them to try to, you know, maybe resonate with some of their voters and their jurisdictions. But I think that it needs to be thought through from both perspectives to be really, you know, to have a solid, a solid plan. And I'm not sure removing a market player in this is the right move.
Paul Mueller (06:12.058)
So let's say I think it's pretty unlikely that these bills are going to pass. They're both heavily, if not completely Democrat supported. And obviously, with the Republicans having the majority in the House right now. So it's pretty unlikely that they're going to pass. But let's live in a world for a moment in which they do. What impact would this have on housing prices, rental rates and overall affordability, in your opinion?
Logan Freeman (06:32.647)
Yeah, I think the ban could have a significant impact on the housing market, both positive and negative. And, you know, if it does work, right, I mean, if they're what they're trying to accomplish doesn't necessarily work by limiting, you know, Wall Street investment, then there might be more increased housing affordability. So prices could potentially decline, making homeownership more attainable for first time buyers. You know, there could be reduced competition for renters with fewer investors competing in the rental market. Rents could stabilize or even decrease, providing relief for renters.
One metric that I always like to look at is, is it more affordable to own a house or rent a house? Well, we know that affordability on the purchasing has gone way up, but the last two or three years, rental rates have also gone up quite substantially. So that's something to think about. Now there also could be reduced access to financing. So tightening regulations could make it more difficult for some buyers and investors to secure financing, impacting the market liquidity.
And then I also think this is a big one to think through, but the disruption in the housing supply chain. So if Wall Street, because Wall Street plays a big role in building and renovating homes, so that ban could lead to a slowdown in new housing construction and could even impact certain markets and trends that we have been seeing, like build for rent type of communities that have been popping up across the country.
Paul Mueller (07:51.274)
Right, and when you're facing a housing shortage of two million or six and a half million, depending on where you're reading and where you're getting your information, that's obviously a big deal.
Logan Freeman (08:01.159)
Absolutely. And I also think that investors have a lot of perspectives on this. You know, Wall Street investors are obviously naturally concerned about a potential ban and its impact on their businesses. But you know, why? Well, I mean, you have loss of investment opportunities. That ban is going to prevent those investors from participating in a lucrative market, which could potentially impact their bottom lines. I think there is a lot of uncertainty and regulatory burden here as well.
So the proposed legislation creates uncertainty for investors and could impose additional compliance costs. You know, we're talking about large corporations that own hundreds of thousands of units of houses, right? And so that's a lot of compliance that could be focused. And then this could have a, let's say it does pass, it could have a massive shift on investment focus, right? Investors may be forced to explore other asset classes, potentially driving up prices in those sectors. You know, I mean, if you study economics, one decision, the ripple effect of that is going to have other impacts in other areas of the market. And so I think it also opens up the potential potentiality for a lot of litigation.
Paul, I think that investors could challenge the ban in court, potentially delaying its implementation or even overturning it. I also think that legislation, these investors are very smart. They know the tax code. They know that they know a lot of different legislation in certain markets and they likely will find loopholes as well.
Paul Mueller (09:23.794)
Yeah, you mentioned something in there that I think is really smart, something that I was going to touch on is the impact that this is going to have in other asset classes. I mean, our audience is commercial real estate investors, largely multifamily syndicators, things like that. So obviously, what this would do is then take a whole group of institutional investors and push them out of single family and further into the multifamily space, capitalizing on retail. I know you guys are really focused on retail right now, institutional competition in retail and in an office market that's been really sketchy for the last however long, but looks like it could have a little bit of a resurgence here with a lot of that, with a lot of those buildings coming on the market at high value right now.
So what does that look like for you in terms of you looking at your competition, right, as an investor, someone who's raising capital, and then having a slew of institutional investors suddenly coming into your market over the next decade?
Logan Freeman (10:16.799)
Well, I have always taken the approach on our investment thesis is looking for a moat around what we do. And that means simply what is something that we can control, a choke point in our investment thesis that other people maybe have too high of a barrier of entry to get into. And we are starting to see some trends from Kimco and Blackstone and some other big players, institutions that also own single-family homes to start to really look at neighborhood retail.
Now, it's been difficult for those institutions to do that at scale because you're talking about a 30 to 50,000 square foot shopping center displaced all across a market. It's very difficult to get that at scale and you have to deal with mom and pop owners. They're looking for scale fast and they want to be able to work with a company that owns $250 million worth of one specific asset class. And so they have to look at that and say, look, I mean, to go buy a new asset class that might, you know, be harder to scale up, that might not be worth their time, you know, and that's difficult to kind of think through.
Another asset class that I think could be impacted, you know, greatly here is mobile home parks, right? I mean, you know, that's been one that has been, you know, applauded as an ability to attack this affordability crisis. And so how does that impact mobile home parks and the prices there and the rental rates there? So if institutions move out of single-family home rentals, and they move into either multifamily, mobile home parks, you know, these manufactured homes or homes that they can literally, the small homes, you know, whatever it is, that could have a big impact on rental rates in those specific asset classes, increasing those rental rates, which would also be a double-edged sword and in the sense that it's great for the owners potentially, but now renters are again, stuck in an affordability crisis with that.
So I think that the ripple effect would be hard to think through, but it would definitely impact more, I think, residential type of investments more than maybe the other asset classes, only for so that typically those institutions have specific arms that focus on different asset classes already. So if it's something they're already going into, then that fund has been allocated for single-family homes. Well, that fund's mandate can't just go invest into neighborhood retail shopping centers.
So that may not have the bigger impact there, you know, they may, you know, be able to send the investors money back from that fund and say this new regulation is really impacting us to here are two or three other funds that you can get into where we're going to go focus on.
Paul Mueller (13:28.61)
So when you look at these bills and instead of looking at it from an investor's perspective, which obviously you do, what's the community impact of something like this?
Logan Freeman (13:39.091)
Yeah, I think that there's a case to be had on both sides here, right? So if it's successful, then reduced displacement and gentrification could happen, which would limit investor ownership. That could help stabilize neighborhoods and protect residents from displacement. Now that is going to take the ability for certain financing modules to be implemented, because if someone is not able to qualify for a loan regardless, then they're not going to be able to own these homes. And so there may need to be some sort of subsidy in regards to a certain level of single family homes. So that's one thing to think about.
The other is increased community control. So local governments and residents, they may have more say in how housing is developed and managed in their neighborhoods. There could be reduced access to rental housing like we've spoken about before. With fewer investors in the market, rental options may become scarce, making it harder for some individuals to find affordable housing. And frankly, in at least the markets that I'm involved in, most people target specific neighborhoods based on the school districts that their children would be going to, right? And so that is a big impact here.
And I think that this could, you know, this could, I'm gonna say could with a capital C, create some market stagnation. You know, a lack of investment could lead to a decline in housing quality and a shortage of new housing options, which, you know, I mean, you look at the transaction volumes from last year to this year and what's forecasted going into the next year, you know, this could be a really big impact to just the residential real estate and commercial real estate markets at a whole, right?
When you look at the GDP of transaction, what drives those industries? Well, it's transaction volumes because once a property is sold, the broker gets paid, there's a new property manager, there's construction going on, a lender has a new loan. There's all those different ripple effects from when a transaction is consummated to the actual impact that it has from the GDP standpoint for the United States.
I do believe that the United States GDP based on just real estate alone is a very large figure and that can have a big impact on the economy as a whole.
Paul Mueller (15:58.682)
Logan, when you look at this from a legal and regulatory standpoint, and you think about what it would take to implement something like this, what are your thoughts?
Logan Freeman (16:07.091)
Yeah, I mean, that's complex and pretty uncertain. I think it's got some constitutional challenges and I think it's gonna be challenged as a violation of property rights or other constitutional protections. Additionally, I think it might have some implementational hurdles, right? Defining and enforcing that ban could be really difficult, leading to confusion and again, the potential loopholes that we spoke about.
And then we've talked about some unintentional consequences but I think it could have unintentional consequences such as increased regulation in other areas of the housing markets. And then it has potential for federal preemption. Federal law may preempt state and local regulations on housing, making implementation the ban challenging.
Take for example, recreational marijuana. That's something that at the federal level, you know, is not legal or maybe it is now, I can't remember, but at certain, at one point, it was not legal on the federal level, but at the local level and the state level, it was in multiple states. So I think that's all the things that you need to be thinking about when doing this. And then you have to have funding for an organization to, you know, in the government to actually be able to enforce this, right? And so, you know, that could be something that the Congress is looking at to say, well, how many jobs does this actually create, you know, because that could be a new, you know, entity and or a new team that has to go implement this on an ongoing basis in the United States, which, you know, frankly, I don't know if they have, you know, the capacity to do so. So they probably would have to hire a decent amount of individuals to do that.
Paul Mueller (17:37.73)
Yeah, that's interesting. I hadn't considered the job creation standpoint, the job creation standpoint of creating a new arm that needs to police this and regulate it.
Logan Freeman (17:47.571)
Yeah, and you know, job creation is obviously one thing that many congressmen and women are always focused on. So I mean, the first time that I went to, I believe it was Oregon. Paul, I'm a Midwestern boy and I had a rental car and I could not, maybe it was Washington, it was either Washington or Oregon, which, you know, coincidentally, I think the congressmen from both of those states are the ones that are pushing this legislation, but I couldn't pump my own gas. I had no idea, right? And that was a way that they created jobs was that at gas stations, you know, somebody had to come out and pump your gas. That was a, that was a new one for me.
Paul Mueller (18:23.158)
Yeah, spent a few years in Jersey and experienced the same thing.
Logan Freeman (18:25.915)
Yeah, absolutely.
Paul Mueller (18:29.834)
You know, we both mentioned already that it's unlikely that these will pass given the current state of the house.
But with that in mind, here, I think I want to spin this forward to alternatives before we get into that bit about intention. So we both mentioned that this is unlikely to pass given the current state of the House. And if they don't, that doesn't mean the Congress is going to stop. This is obviously something that's on Congress's mind, something that they want to tackle. So what would be the alternatives in your mind that if these bills didn't pass, we might be able to see coming forward.
Logan Freeman (19:11.027)
Yeah, I think policymakers can consider alternative measures to address concerns about Wall Street being investment in the housing market. First one being taxes and fees. Imposing higher taxes or fees on investment properties could discourage speculation, encourage long-term ownership for owner users. You have zoning regulations. So, zoning regulations could be used to limit the number of investment properties in certain areas. How about the right of first refusal? Local governments or community land trusts could be given the right of first refusal to purchase homes before they're sold to investors.
Then there's also increased funding for affordable housing, you know, increased government spending on affordable housing programs could help address concerns about housing affordability without restricting private investment. I think there's many, you know, examples of when government has restricted private investment and gone not so great. Right. But there are good examples of when, you know, for example, I think there's a there's a certain precious metal that needs to be mined to create chips that we need for all of the different things in the United States.
The government's stepping in to help subsidize the ability to mine that special metal or, you know, whatever that's called. I can't remember. It's one of the special metals out there to help that industry get started. Right. And so I think that's there is there's been some benefits to that on some examples. But, you know, when you usually, you know, bar out a specific market player and restrict private investment.
Typically prices go up, not down.
So I think that exploring those different perspectives and talking points, you know, what we're looking to try to accomplish here is an alternative that's comprehensive and balanced and have a discussion about this proposed ban on the Wall Street investment on single family homes, because, you know, I follow quite a few folks on LinkedIn that have attacked this idea, mostly in the multifamily space, right? But I think that it does have some, you know, issues and it's not a silver bullet solution. I mean, it has a limited scope, right?
Again, we've only talked about single family homes. This does not talk about multifamily homes or mobile home parks or anything like that, right? We have to address the demand and supply. You know, while the ban might reduce demand from Wall Street investors, it doesn't directly invest, you know, doesn't directly to the groups that I represented, right? I mean, there's large groups that are buying 250, 300 homes and in the Kansas City market, that's a decent amount, right?
So it doesn't necessarily address all of those different market players. I think that has maybe some market distortions, right? I mean, by restricting investor participation, the ban could lead to some distortions, which again, we've talked about impacting liquidity and potentially discouraging other types of investment in the housing market. And so I think that what I would like to see is a comprehensive strategy that prioritizes increasing housing supply that I think is essential.
And how you do that is by streamlining, you know, zoning regulations and permitting processes to facilitate faster and more affordable construction. I've talked to a lot of developers of single-family homes and multifamily homes and zoning regulations and the permitting process can take years in specific, you know, specific markets. We've seen this work really well, but providing incentives for developers to build affordable housing units such as tax breaks and or density bonuses.
Investing in infrastructure and public transportation to make it easier for residents to access jobs and amenities without relying heavily on cars. You know, this is that suburban, which is suburban urban type of development that we're starting to see. We have some areas like this in Kansas City. It's a live, work, play type of location. I think that's a really interesting way to attack affordable housing. You could promote inclusionary zoning policies that require developers to include a certain percentage of affordable units in new projects.
We've seen that play out here in Kansas City as well on the multifamily home side. And then, you know, again, supporting community land trusts that acquire and manage land for affordable housing purposes, I think is a big opportunity because, you know, everybody hears about the land banks in your cities, but who's actually acquiring, you know, real estate from land banks and how effective has that process been? I think that's a really big opportunity for, you know, jurisdictions and local municipalities to really come together and figure out with certain developers on how to use that land that's just sitting vacant and or dilapidated properties to create more affordable housing opportunities for folks.
Paul Mueller (23:36.234)
Yeah, it sounds like there's a variety of ways in which this could be tackled without proposing these kinds of bills. And like we said, it's unlikely that these are going to pass. And I think that maybe it's not getting as much attention as it probably should in CRE circles because it's being dismissed because they're unlikely to pass. But what would you tell what advice would you give to investors about these kinds of topics and about these kinds of issues? Given that even though they may not pass, it's still an indication of what's on Congress's mind and might be an indication of the kind of legislation or the kind of things that we could see coming down the pike in the coming years.
Logan Freeman (24:12.955)
Yeah, I mean, I think it's important to remember that the housing market's complex and there's no single solution to solve all the problems. And I also want to make sure that investors remember that real estate commercial real estate is hyper local. And it is very important to understand the ins and outs of your local municipality. This is a federal level type of legislation, but, you know, it's likely to be really battled against, especially in specific states. And so similar to what we have seen with the covid trends of people moving to specific states.
I think that investment dollars could be directed, and let's say this does pass, but it could be directed to certain states that they would feel more safe for their investment dollars to not have to maybe come up against something like that. So I think that is the biggest thing that investors need to be thinking about is where are you investing geographically and what are the ins and outs of the local municipalities that you're investing in at the state level and at the city level.
But similar to the 1031 exchange always being, you know, up on the chopping block. I think that, you know, it is a talking point. It is a way to grab some high fives and, or some votes in regards to what people are thinking about. But I think the 1031 exchange has been up almost every single election year, right? And it was just previously as well. And that got shot down really quickly. And why?
Well, it takes, you know, working across party lines, but you also have to think about the implications that something like that and this would have not just on the institutions that you're trying to target, but what about all of the local businesses that serve those institutions that are helping to do the construction or the property management or the real estate agent or broker that's working on those? That's a huge ripple effect. And I think that if maybe KPMG or one of the large consulting firms did a study on this.
I think that and the implications of what that would look like for the real estate market as a whole and GDP, it'd be really interesting to see that. They've done that on the 1031 exchange side and that has really silenced a lot of the folks that have tried to bring that to the 1031 exchange investors to really target them. Alongside that, it's what are the unintended consequences that this legislation might have not just on institutional investors?
Because the 10th, for example, comparing this to the 1031 exchange argument. Most 1031 exchange investors do not own massive portfolios and have huge properties that they are deferring capital gains tax on. I think that 60 to 70%, and it could be higher, are the mom and pop that own a single family home that are trying to sell it because they've gotten too old and they're trying to give that to an inheritance for somebody else. And so I think that's something to keep in mind.
But look, I mean, people are going to be talking about specific things like this. And technology is also going to be a big player in regards to a lot of different components that Congress has on their agendas here in the near future. I think this is another one that people need to keep in mind. And just recently in Kansas City, I saw a local landlords group kind of getting together because they're trying to combat some new bills that are coming up that's going to make it easier for you know, unfortunately, felons to be able to rent, you know, a house and you can't, you know, not rent to somebody who has a violent crime, you know, stuff like that, that is going to potentially trickle down. And even if they don't get it at the federal level, they very well might get it at some state levels and some local levels that you need to keep in mind.
Paul Mueller (27:47.302)
Yeah, it sounds like you've got a lot of thoughts on this and that you've put a lot of thought into this. Logan, I really appreciate you joining me today. Is there anything that we didn't discuss that you think we should touch on?
Logan Freeman (27:57.319)
Now, I just think focusing on those strategies, you know, alongside exploring various regulatory approaches like the proposed ban that we've talked about, we can develop a more effective and multi-pronged approach to addressing the affordability crisis and ensuring that housing is all accessible to all. But, you know, it's a fun thought experiment. It's really interesting that this is on people's minds and in Congress. And I'm interested to see what the pushback and door adoption might be here going forward.
Paul Mueller (28:25.046)
Yeah, I am as well. Thank you once again, Logan, for joining me today. I really appreciate all the perspective you're able to provide.
Logan Freeman (28:30.995)
Thanks for having me, Paul.
