Real Estate Trends for Investors to Watch

In this podcast, Motley Fool analyst Deidre Woollard interviews Nick Bailey, president and CEO of RE/MAX (RMAX -1.06%), one of the largest residential real estate brokerages in the world. They discuss the long-term forces driving single-family homebuying and what may cool the surge in multifamily properties.

Motley Fool contributor Marc Rapport speaks with Joel Marcus, CEO and founder of Alexandria Real Estate Equities (ARE -1.57%). They break down why life sciences buildings have proven to be a bright spot in commercial real estate and how Marcus’ company built long-term relationships with Eli Lilly and Merck.

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This video was recorded on May 22, 2022.

Nick Bailey: [MUSIC] I was just talking with someone earlier this week that converting some of these commercial properties is actually more expensive than knocking down a 12-storey building and rebuilding something residential with the exception of right now. I think this is a 18-month type of scenario, with supply and labor constraints, that actually it is less expensive to do some conversions.

Chris Hill: [MUSIC] I’m Chris Hill and that was Nick Bailey, President and CEO of RE/MAX, one of the largest residential real estate brokerages in the world. Today, we’ve got some real estate trends for investors to watch on both the residential and the commercial side. We’ll start with homes. Deidre Woollard talked with Bailey about the long-term forces that drive home buying, the trend toward more multi-family housing, and what it takes to motivate a team of real estate agents when there are more realtors than actual homes for sale.

Deidre Woollard: Hello, Fools. I’m here today with Nick Bailey who is the CEO of RE/MAX. He leads all aspects of RE/MAX brand and business globally, sets the vision for the brand. He leads the assignment of resources throughout the RE/MAX universe. He’s also been a real estate broker for over two decades, so he’s pretty much the perfect person to talk to about the housing market. It’s really great to see you again, Nick. We last talked in 2021. Early in the year the forecast for residential real estate was very bright. It seems a little different now. What are you seeing?

Nick Bailey: Well, let’s start with it’s still great. I know there are a lot of headlines out there, but here’s the reality of what’s happening. Granted there’s inflation, there’s change of interest rates, there’s all these micro type of things that are happening that are levers in the industry that are important, but I think the reality of what people need to know, we are still in a over 10-year catch-up period of a shortage of homes in the US. We’re short four-and-a-half million homes and it’s what’s driving demand, it’s why inventory has been so low. Granted there has been a pull-through because of the pandemic of people saying lifestyle, I want a bigger house, I want a backyard, I want a home office. That pull-through did add a little bit but the reality is when you look at millennial’s, Gen Z directly behind them, we have the largest household formation happening in the country. Even in industry and we’re short of four-and-a-half million homes. Even though interest rates are ticking up and people are saying, oh my gosh, what’s going on? We sold houses when interest rates were 18 percent. These are still record low interest rates. The market, we may not sell 6.112 million homes. It maybe 5.7 or 5.6, but it’ll still go down in 2022 as probably the third or fourth best year in history for real estate.

Deidre Woollard: That’s a really good way to frame things because I think sometimes it gets over-reported. Right now the headlines seem to be inflation, interest rates, and inventory as well. You’ve gone through these markets cycles. How do you advice agents who are maybe just in the business for the last few years, as well as how do you help them message to consumers about interest rates? Because as you said, they have been really high in the past but they haven’t been for the last decade or so.

Nick Bailey: A couple of questions in there. For the most part I was asked yesterday, when is the right time to buy? That’s what investors think. For the vast majority of homeowners, over 90 percent, the time to buy is when you’re ready. When you have a job, it’s when you have a down payment, and interest rates for the three percent or five percent it’s all about do I have the right down payment and can I afford the monthly payment if I’m getting a mortgage? The time to buy is generally if someone’s getting married, having children, household formation. Those things are the number 1 driver of buying a home. For the vast majority of people, you buy a home when it’s right. For agents, however, I just did a video on this last week, I do think they’re going to be a lot of agents. We’re up to 1.6 million, 87 percent of agents fail.

That is statistically correct, that 87 percent of agents to get a real estate license don’t have it five years later. It’s because they don’t sell enough houses. In any type of seller’s market, it’s easy to be an order taker, which is just lead flow is coming in and you’re chasing the business. The video I did last week I have agents saying I’m burned out, but I think there are a lot of agents that are going to go from burn out to broke very quickly. It’s not because of the market, it’s because they’re not used to hunting for the business. You’ve got to utilize your database, your sphere of influence. You got to on and hunt for the business and find people that want to buy and sell. That is the basis of this business but when we have a red hot market like we’ve had the last couple of years. It’s easy to sit back and be an order taker. For the ones that expect that to continue, I think that they’re going to struggle.

Deidre Woollard: Really good point there. RE/MAX is an established brand in real estate. Agent retention is always part of the game. How are you positioning the brand both for consumers as well as for agents?

Nick Bailey: We’re pretty fortunate. We turn 50-years-old this coming January and our brand is built on productivity. The average RE/MAX agent outsells the next closest competitor two to one. We’re really about the agent that’s full-time in the business and dedicated. I’d like to say we’re similar to healthcare. If you’re going to have open heart surgery, do you want to work with some that’s done it once or someone that’s done at it 100 times? We’re about the 100 times. Whether the market is like this on a seller’s market or buyer’s market, the good news is we’ve been through eight recessions. How many presidencies, interest rates going up, down, and at the end of the day, they’re always going to be people who need or want to sell, or need or want to buy. People that are full-time in the business are going to be best suited to be there and that’s what our brand is.

Deidre Woollard: But how do you position yourself against some of the flash year stuff out there, the iBuyers? Just that there’s so much marketing out there. How do you cut through some of that?

Nick Bailey: Well, first of all, you’ve got to know the foundation of the business, and I look at iBuyer as a fancy word for cash. By the way, we’ve always had cash buyers. Remember the We Buy Ugly Houses billboards? There have always been investment groups. There have always been a big formation of folks that are either buying to flip or buy-to-rent. You’re right on some of these marketing terms are getting headlines and getting agent’s attention, but when you really look at the foundation of the market, it is no different today than it was 30 years ago. We have a flow on a few 100,000 houses a year on what we sell as an industry, but I think we’re pretty insulated. Food, clothing, shelter, the three necessities of what we need, and shelter is one of them and so we will always have people that want to buy.

Deidre Woollard: Definitely. We saw that with the millennials and people thought that they weren’t going to buy and now they’re the biggest component of the housing market.

Nick Bailey: They are 43 percent of home buyers last year and five years ago, I’m on [inaudible] of people who said, these crazy millennials. They are going to rent and ride an Uber the rest of their lives. Wrong. They’re buying houses at a bigger rate than even the boomers, they are buying cars, they’re having kids, they’re getting married granted a little few years later in life, but they’re doing the same thing as their parents did and their grandparents did.

Deidre Woollard: What are you thinking about the future of housing? Before the pandemic, we saw some changes in zoning to bring multi-family to certain cities. Certainly, you mentioned at the start of this conversation, we’re dealing with this chronic lack of inventory. We’re not building enough and what we are building tends to fall into a couple of categories; either single-family communities, or tends to be luxury apartment. There’s this real need for workforce housing. What are you thinking about that and what does it mean for your business going forward?

Nick Bailey: I will tell you what, this is one that I don’t have the perfect answer. I do know it’s a chronic issue. Yes, there are in high-density metropolitan areas. Re-zoning is happening. There are commercial spaces that because of this hybrid model and the desire for not as much office space that they’re trying to figure out, how do we convert some of these properties into residential? But just think of plumbing is a big issue. I was just talking with someone earlier this week that converting some of these commercial properties is actually more expensive than knocking down a 12-storey building and rebuilding something residential with the exception of right now. I think this is a 18-month type of scenario with supply and labor constraints that actually, it is less expensive to do some conversions.

We’re going to see some of that, but I think that’s short-term, not long-term, in conversions of commercial space into residential, but over 50 percent in the last three years of new construction, builders have moved from single-family into multi-units just to try to keep up with the demand. I know personally, just a mile away for me, this whole area that was going to be developed a few years ago was all single-family residences. There’s not one single-family. They are two and thee-storey and this wide with a one car garage and four storeys and a million-and-a-half bucks. The builders are just doing this, they are squeezing and going up instead of out and trying to figure out how do we take care of the demand problem. We’re seeing a lot of multi-family. I think two years from now, we’re going to see a lot more single-family start to come out of the ground.

Deidre Woollard: You’ve got an interesting role as a CEO of a real estate brokerage because you have to motivate employees, but you also have this large pool of agents. As you mentioned earlier, 87 percent agents fail. We have 1.6 million of realtors now. We have more realtors than we have the homes for sale. [laughs] How do you manage balancing, how you speak to agents and employees?

Nick Bailey: That’s a really good question. It’s on my mind a lot, but I don’t think anyone’s ever asked you that. Having over 142,000 people and in 118 countries and then also having over 700 employees. It is a balance and I think in our business, it comes down to it’s relationship-driven. From an employee standpoint, it’s all about how do we give the employees a wonderful environment to do what they’re great at, continue to give them more opportunity but on the influence side, when you look at networks size it’s I think the most powerful thing that is a machine that runs itself. Which is the best ideas have always come from our network for this business and as competitive as the network is, you and I can go into listing presentation.

We’re trying to get the same listing and we’ll slice each other’s throat to get the listing but what I love about this business is doesn’t matter if you get the listing or if I get the listing. We put our arms around each other and say, do you have a buyer? This co-operative nature of this business is so good for buyers and sellers and regardless of 118 countries, it is the same, and the pandemic has proven that I don’t care where you live in any corner of the globe. Home has never been more important or on people’s mind the most. It’s really brought people together and they share ideas and say, here’s what I’m doing in this market. Right now I have people in Facebook groups sharing. Here’s what I’m doing to get new buyers and sellers and they’re sharing ideas with each other to help each other be more successful. I think that’s really a cool part of our business.

Deidre Woollard: I love what you said there about the listing presentation. I used to do marketing at a brokerage in Los Angeles and that was very much the case, is that you’re in this position where you’re both competing and then you really have to work together on either side of the transaction.

Nick Bailey: We’re going to repeat by slit your throat, come in. Little dramatic, I know.

Deidre Woollard: Looked pretty cut throat. Leading to that, I like investing in brokerages but one of the analysts on our team challenged me, is why invest in publicly traded brokerages? I wanted to know how you would answer that question.

Nick Bailey: Here’s what I looked at is, if you’re going to get into Wall Street, that’s a personal decision or you have a financial advisor. I don’t care if it’s crypto or real estate or tech. If you decide to be an investor real estate, do your homework and invest in what you’re passionate about and what you think is going to give you a great return. Certainly, Wall Street is looking at the entire vertical of real estate right now and they’re not very optimistic about it. Even though 2022 will still go down as the third or fourth best year in the history of real estate in this country but the reality is when you look at how Wall Street measures things, they only loves to give a thumbs-up to anything that’s going up.

Whether or not it’s the third or fourth best year doesn’t matter. It’s going to be a little bit less than last year and so they do that. I saw one of the coolest articles a couple of years ago from the retired CEO of Panera. If you’re familiar with Panera, and talked about 30 years ago that if Wall Street was then what it is today, Panera wouldn’t exist because they did two or three acquisitions and even acquired a competitor $50 million, told investors, we’re not getting a return like zero return on 50 million bucks, but it was just part of how we’re going to long-term bill-to-business. It makes me shake my head, but I read this article and he speaks quite a bit about it on the road and it’s interesting that there’s a long-term investor. Then there’s the quarter-over-quarter investor. Always been two different groups, but I think that those that are investing long-term, just like home owners and buyers and Wall Street, pay off, real estate has always paid off. If you’re thinking about it in the long term.

Deidre Woollard: That is really true. You’ve had a strong quarter, revenue was up. You’re looking forward to the future. What do you want investors or potential investors to know about the company, about your vision, maybe sounds a little bit about Motto Mortgage and that growth as well.

Nick Bailey: Thanks for asking about Motto. It’s the only brand in real estate start-up for us just over five-years ago of a franchise mortgage company. First of its kind and wildly successful. We’re adding 7080 locations every year, but what’s important about it, I think you know we are already headlines about the mortgage business and layoffs with some of the big national companies because they chased the shiny objects and that’s, I think, something that our business that happens, people run for the shiny object of whatever the market is today, and a couple of years ago was refi. A lot of these mortgage companies were 80 percent refi, 90 percent refi and the didn’t have relationships with agents, consumers to be on the purchase side.

When we look at Motto, not only are we investing in entrepreneurship that we believe real estate happens at the local level and I mean, hyper-local. I’ve been South Denver, it’s different than North Denver even though it’s the same market. When you see entrepreneurs, whether they’re real estate agents or mortgage loan officers that are involved in the hyper-local market with their buyers and sellers it’s success, and the vast majority of Motto’s business is purchase and it always was even during the refi index, 60-40. Now, we’re going to be 80-20 on the purchase side, [MUSIC] but it’s because of the relationship with the agent and some of these companies that are now scrambling and say, oh my gosh, what are we going to do with the mortgage business? All they did was refi and applications online and they didn’t have relationships and consumers are agents in the local market and so we believe in the long-term play of relationships and purchase.

Chris Hill: Let’s move to the commercial side. As many companies are dealing with questions about returning to offices, there’s one industry that hasn’t really left. Life sciences, because among other things, it’s difficult to test medications over Zoom. Motley Fool contributor Mark Prvulovic work recently caught up with Joel Marcus, CEO and founder of Alexandria Real Estate Equities. A real estate investment trust that focuses on science and technology campuses. Big dig into what it takes to build laboratories for companies like Merck and Eli Lilly and why competitors may have trouble copying Alexandria’s strategy. [MUSIC]

Marc Rapport: What makes life sciences such a resilient sector in today’s troubled marketplace for office properties, and why do you see that as a continuing strength?

Joel Marcus: The reality is, as I said, biology is the science together with the intersection of technology is really where it’s out in the 21st century. If you think about humankind has about 10,000 known diseases and to date, there have only been about 500 addressable therapies, very few cures, if you think about that, that’s about five percent of the diseases out there have only been addressed to date. We’re still in the early innings of this effort to cure disease, to fight disease, to manage disease, and ultimately, to prevent disease. Obviously, the last two years have given us a bit of dose. A dose of what serious things are out there, whether they be created by humankind or natural in the environment.

I think the life science industry has grown up and certainly over the last two years catapulted to become in a sense almost the savior of the planet with all the testing and the diagnostics. Ultimately, the therapies and the vaccines really done in record time. I think it’s fair to say you ask about real estate, you can’t do laboratory work from your home. We can’t dial in biology labs, we can’t dial in chemistry labs, we can’t dial in testing labs and all those things. I think that’s why the life science industry has been very resilient. In fact, our own experience during 2020 and 2021, Alexandria was up by total return of more than 45 percent, while the office indices was down about 4.5 percent. That’s a pretty huge Delta over two years. The reason is people realize that people couldn’t work in office because of all the shutdowns and the virulence of the virus, but laboratory work was essential and had to go on and it did 24/7.

Marc Rapport: You have more than a thousand tenants and it’s really a who’s who of the leading biopharma companies and vaccine makers in that group. Please describe your collaboration with these major players and how that benefits Alexandria and the shareholders going forward. I mean, it’s not like you own warehouses or provide a convenient store roof. How do you invest in them beyond what’s typical for a property owner?

Joel Marcus: Well, I think we have a particular view of people passion, purpose, and that’s why we get up every day. Great science is being done in our spaces that isn’t a storage unit or as you say, just the logistics unit or just in the office that may or may not be occupied. These are places where science is being done and really being translated into critical therapies for human life and hopefully, to save a lot of lives. Two recent examples of companies that we’ve had long-term relationships with, one, Bristol-Myers Squibb, our top tenant. We’ve had relationships with Bristol-Myers, for now several decades. They’re in multiple jurisdictions, multiple clusters of ours. We announced in the first quarter that we had signed a lease with them for their new very advanced technology research hub in San Diego.

Approximately 400 plus thousand square feet and just a beautiful building on Torrey Pines, and we will be delivering that to them over the coming year or two. Same thing with Eli Lilly. We’ve had a long history with Lilly over the last couple of decades. They’re in multiple clusters of ours and we also lease to them a major, which will be their genetic medicine institute in Boston. We leased about a 340,000 square foot building to them, again, ready within about a year or two. That’s two good examples of companies that have done so much to help humankind and really address the melodies, these 10,000 diseases where we partnered with them for many years, and then recently did new leases with them on new research hubs in critical clusters that will allow them, most importantly, to retain talent, attract talent. Then discover new therapies.

Marc Rapport: To go back to the more basic like logistics types buildings, we’re beginning to see spec buildings being built in that sector, which we had for a while because there’s some obviously so confident in releasing their space. The property you build are so specialized, so company-specific, do you build on spec?

Joel Marcus: While they’re not company-specific, they are industry-specific. In other words, the mechanical infrastructure that you put in are designed for laboratories, whether it’d biology laboratories or chemistry laboratories, a variety of other ancillary uses, but they’re generic to many. If Bristol-Myers moved out, Eli Lilly could move in and not have to cut the heart event. We definitely don’t build on spec. We haven’t had to after the Great Recession in ’08 and ’09. We haven’t really done spec buildings since then because we’ve had such a strong pipeline of demand, we haven’t really needed to do that and haven’t really felt comfortable. Certainly in today’s world, where you have the increasing costs, increasing interest rates, the macro-environment that looks like it may dip into recession potentially next year, and just political disconnect with the reality of the lives of everybody on the ground. Washington seems just disconnected in so many ways. For anybody to build on spec with sophisticated laboratories would be a foolish thing to be doing.

Marc Rapport: There are a lot of large private equity investors and other reach for that matter, moving aggressively into your space. What do you see as your competitive advantage in this regard? Now and moving forward, how do you view that competition?

Joel Marcus: Yeah. I think we always call competition imposters because nobody can really claim that they identified this niche and brought it from niche to mainstream asset class but as an impostor, those people who have chosen to go into main clusters. You could walk in today to Cambridge, for example, and have a billion dollars in your pocket. You can’t buy anything and you probably can’t develop anything very quickly. We’re in high barrier to entry markets. We’ve been in these markets for now more than two decades, so we’ve solidified a very strong presence in each of this great cluster of biotech cluster markets. It’s really hard to get great locations when the incumbent we own operate and having our pipeline 75 million square feet in these clusters. It’s hard to do that.

We feel very good about first-mover advantage here is huge result. Just imagine a unique company doing this for more than two decades. We’ve developed these long-term trusted relationships. This is an area that if you’re just a developer and there are some people that they say buy it, fix it, sell it. That’s a typical developer mentality. That’s not what this industry wants. I will give you a great example. We won an RFP against several other imitators of ours back several years ago to build Merck’s West Coast Research headquarters in South San Francisco. The head of Merck’s research personally oversaw this RFP process and at the end of the day, they awarded it to us. We didn’t even have the best location. One other group had a better location but our reliability, our consistency, our ability to deliver on time and on budget was unparalleled. They said we understood from the interactions and just the RFP process, none of the other people who were competing for this RFP, they could care less if we were a spent uranium [MUSIC] pellet manufacture or Merck. You guys carried about us, knew about us, and had a long-term relationship with us. That’s maybe a great example of imitation.

Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.