Episode 2: What Everyone's Missing in Real Estate Right Now | Willy Walker, CEO of Walker & Dunlop

So first of all it's great to be here this morning. I started my day in the Hollywood Hills and drove down here and it took me about two hours and I realized that I can get here almost as quickly from Denver, Colorado. And I'm quickly getting used to traffic patterns in Southern California. Which aren't great. But it's really fun to be here and great to be here with my son Charlie who was up in LA yesterday and we went to see a doctor about his knee and we ended up having lunch. And to everyone in the room who has kids who moved out of the nest, the opportunity to see your kids on a frequent basis is a real joy. I got one in Boulder and one in Dallas and one here and I fortunately because of work get to see all three of them on a very consistent basis and so that's a real joy and it's great to be back at Chapman. Chapman has been an incredible experience for Charlie. It's a phenomenal university and it's great to see what's going on both in the real estate program as well as more broadly at the entire school. To your question, John, about W&D, I mean, when I joined the firm, it was one office, 46 employees, and we were really a regional debt brokerage firm in the Mid-Atlantic, one office in McLean, Virginia. So, we would work with local developers in the DC area who own commercial real estate to go out and broker loans to life insurance companies, to the agencies, to CMBS providers. And over the last 20 plus years, we just sort of expanded out and expanded out and expanded out. So the Mortgage Bankers Association rankings came out day before yesterday. We were the sixth largest provider of capital to commercial real estate in the United States and that includes JP Morgan, Wells Fargo, CBRE, JLL, and us in sixth place. So we were the second largest provider of capital to the multifamily industry. We're the number one Fannie Mae DUS in the country. We're the number three Freddie Mac seller servicer in the country. We're the fourth largest multifamily investment sales platform in the country. So we've just added scale and continued to grow. I will say that when I joined the firm and we were one office of 46 employees, the concept that we would compete for deals on a day-to-day basis with the likes of those four companies I just talked about, JP Morgan, Wells Fargo, CBRE, JLL was sort of a dream. It was like wow what it would be like to be that big and now we're kind of that big. And so that's a real both joy as well as a privilege. I think one of the interesting things is to see how when I first joined the firm, how hard it was for a banker or broker at Walker & Dunlop to win against those firms. Like we'd go in and meeting with some big owner operator in the DC area and they'd be like, you know, CBRE was just in here with 20 bankers and brokers and they do the leasing in our building and this and that and you want us to like work with you? Like who are you and why would I work with you? I'll never forget when we did our first acquisition. We bought a company in 2009 called Column Guarantee from Credit Suisse and I went down to Dallas to meet with one of the Column bankers who was coming across to Walker & Dunlop and he had no idea who we were and he sat there and he said and Column was owned by Credit Suisse. So he had a Credit Suisse business card and he said do you have any idea how much business I get from this business card? Says is Walker & Dunlop a banking company or a law firm? Right? No, it was my favorite. Glad that I did. And but to be honest with you, I looked at that banker and sort of said, if your business card is what sells you, you're not going to be around here that long. And to be blunt about it, he wasn't around that long because he did rely on the brand rather than his own capabilities to sell what he did. So, anyway, it's been a fun journey.

So you think about the competitive landscape and who we go up against. They all have bigger brands. They all have bigger balance sheets. They all have tens and in some instances hundreds of thousands more employees than we do. So to be as big as we are from a capital deployment standpoint and as relatively small as we are of only having 1500 employees is quite something right. We've acquired 18 companies since 2009 to today. We haven't acquired a company in the last three years, but we've been a very acquisitive company. And when we've been acquiring other companies, it's been acquiring human capital. And that's I think one of the things that we realized very early on was that this business is all about the people and it's all about the human capital that we're bringing into Walker & Dunlop. So, we would go and acquire a company by we've written checks for as little as $25 million and as big as $700 million for acquiring these companies. You write a $700 million check and you think you're just buying assets and not the people, those assets aren't going to have the value that you bought them for. So, we've been very good at bringing people in and making W&D. We were just yesterday, actually, we just made the big list, which is the 100 best workplaces in the United States by Fortune magazine. We'd never made that list before. We made small company, we made medium company, and now we just made the big company list. And so to be a company of only 1500 people and make the Fortune top 100 workplaces in the country and it's not really top 100 workplace in the country, it's top 100 companies to work for in the world because there are lots of international companies that are on there. They're listed on the New York Stock Exchange. And so to make that, it really goes to kind of the culture we've tried to create at the company. And I got a lot of notes yesterday that said to me that's the most important award we could ever get. Period. Like we can be the you know Alex named a couple things that I have won and the company has won all sorts of different rankings and this and that. But to be a great company means that your people think you're doing the right things. You're listening to them. You're trying to improve every single year. When we first applied for that honor in 2009, I turned to our head of HR and remember we were a company of 150 people back then and I said, let's apply. And she said, oh, we'll never make that. And I was like, well, okay, but why do you say that? She's like, oh, the companies that make that are like so good and they've got like huge benefit programs and they do all these great things for their employees. And I said, well, let's apply. Do we get feedback from them? And she's like, oh, yeah. You apply and then they give you the feedback on like how you don't break out. I'm like, well, let's apply. Let's get the feedback and let's improve. And so we applied in 2009, didn't make it. She walked in my office, I told you so. And I was like, okay, well, let's apply again. So we applied again in 2010. Again, we didn't make it. And then in 2011, we made it. And then we made it for six consecutive years as a small company. And then we graduated up to medium-sized companies and then we couldn't break through with the big-sized company. And so it took us seven years to continue to apply as a big company. But think about it. I mean the companies that Salesforce and Hilton and Google are all companies that are on that list of the top 100.

I just think that there is a friction between that kind of grow it at any speed and at any cost to what makes you successful in maintaining that success formula. I definitely learned in my career that, you know, one bad scene can metastasize and really pollute the rest of the culture.

So there's clearly some stress in the market. I think the thing John to it is that many people who have been around at least through the pandemic but also through the GFC sort of view crisis as these absolutely cataclysmic events, the pandemic, the GFC and sort of view that as their pain meter if you will. There's been plenty of distress over the past couple years. Go talk to an office building owner in Denver Colorado who had a tower in downtown Denver that was worth $100 million in 2017 and is now worth 20. It's pain. I mean, they've lost massive value. So, there's plenty of distress. What we're not seeing is the distress goes into the banking system, banks fail, etc., etc., right? So, but I mean, think about it. When you had the run on Silicon Valley Bank that bled into PAC West Bank that was then acquired by Bank of California. That almost became a run on the banks. That could have turned into a massive contagion throughout the banking system. We were really lucky that the banking system got showed up there and they didn't have that run. But that was a pretty strong test of the banking system there. You have lots of redemptions going on right now in the private credit space. That's, you know, the derivative effects of redemptions in private credit, I think, will be that a lot of the capital that goes to some of the high growth companies is going to pull back. Software companies is one that a lot of people are kind of stressing as it relates to AI and the impact on the software companies. If you get big defaults in private credit portfolios, that will have a big impact on a lot of the capital that's going to these high growth companies. I think commercial real estate is a net beneficiary of that because the people who are in those private credit funds need the yield that they're getting from the private credit funds and by de facto we move over to something like commercial real estate. But I think what's really different today is that from spending a ton of time with our clients, at least having fun right now. And I mean that everybody here who's an alum who's in the business is sitting there. I just heard that. They all Yeah. It's not a lot of fun being in the business right now. And I think there's also I met with a client yesterday who's out there and said, God, I'm just not having fun. And I asked him, I said, but are you doing what you want to do? And he said, oh, yeah, 100%. I said, are you in the industry you want to be in? He said, 100%. I said, do you control everything in your company? He said, 100%. I said, then what are you complaining about? Like, you're living your dream. Yeah, it comes with ups and downs, but this is what you designed. This is your fun. You built it. And while your returns might not be what you had designed them to be or your own personal net worth might not be at the level that you wanted it to be by 2026, you're doing what you want to do. And I think, you know, it's sort of the whole to the students who are thinking about this brave new world of graduating from Chapman and going out into the, you know, a lot of people aren't getting the job offers that they thought they were going to get. Unfortunately, it's like, so what are you going to do about it? Complaining about it isn't going to get it any better. You got to figure out about what are the tools that you have that are going to allow you to get a job that allows you to learn and grow and then earn. And so the consulting job with McKinsey might not be there. What are you going to do? The thing that I think that we're all kind of caught on right now is it feels like AI is a zero sum game. Like AI takes and it doesn't give. That's what we're seeing. AI just like takes. And at the end of the day, AI is going to start to give. Not exactly sure where it's going to give. I'm not exactly sure who's figuring out how you create some business that just spools up off of AI that does actually create jobs. But AI is either going to create new industries or it's going to make all of our lives so simple and easy to make money off of the AI that you got to go on vacation. Well, if you go on vacation, you're still staying at a hotel. You're still having someone clean that room every day. You're still buying the food in the hotel. You're still going out and playing golf. And there is humans that are needed throughout that supply chain. So then you say, well, yeah, but a student graduating from Chapman doesn't want to go clean rooms at the hotel. Understood. But there's something in that value chain of people spending more time on the golf course that has the opportunity to make money. And that's the challenge right now because I think we're in this sort of transition period where people can't see the direct opportunity. They don't see the dollars coming back. You see some startup company that has 10 college grads who have created a billion-dollar enterprise with 10 of them sitting around. You're like, wow, there's no employment there, but there are investors there who are benefiting from the billion-dollar startup who are going to take that money out of the billion dollar startup and go do other things. They're going to build their second home. They're going to go somewhere. So, I think that we're just sitting there saying it's zero sum right now and it clearly is going to add to the economy. Economic theory would tell you it's going to add to the economy. We just don't know where it's going to be right now.

The worst. Yeah. No, I lean in. And you're right on it. You look at we do a quarterly buy, sell, build sentiment sort of with our clients. And you look at the sentiment in 2021 and every single person was a seller. Why? Because cap rates were low, values were high, and it was like, I will sell everything I have right now at these prices. Incredible market. Guess what? There was a buyer on the other end to go, I'll suck all that stuff up. Today, the sentiment index is the complete inverse. There's nobody right now who's a seller. Last survey, end of Q4 of last year, 4% of our survey days said, I am a seller today. Why? Cap rates are too high. Values are too low. They don't want to be selling into this market. But there are all these buyers sitting there saying, I'd love to buy. I'd love to buy. Well, guess what? You can't buy because the seller's not going to put it on the market. You want to be a buyer when nobody wants to sell and you want to be a seller when everybody wants to buy, right? And so, yes, you're exactly right. Not, believe me, I'm not trying to poke at any of our clients who did big buys in 2021, but that's a tough vintage to have made any money off of right now. Cap rates were too low. Leverage was too easy to get. And if you happen to put the wrong capital structure on it, that's an asset that has problems. So, you know, I have a very dear friend of mine down in San Diego named Danny Gabriel, who runs a company called Cridge, and we were at the National Multifamily Housing Council meetings up in Las Vegas 2 months ago together, and the mood at NMHC was awful. Everybody was walking around hand in hand just going, man, this market's terrible and my fundamentals are terrible. Danny was like, this is the greatest opportunity ever. And Danny's been buying. You know, there is what's amazing to me is the amount of institutional capital and to anyone in the room who is a big institutional investor, please, I'm not poking fun at you, but the institutional capital, the lending effect in institutional capital is unbelievable. The roadblocks come up on commercial real estate. Government's like, I won't look at anything. And all the core capital flows away and there's no capital to do deals. Everyone's out and then all of a sudden it's like, hey, party's on, let's go. Everyone comes flying in. There's more institutional capital than they had to deal with. And that's not when you want to be in I mean, if you're a seller, that's when you want to be in the market, but that's and so right now is not a lot of fun, but there's no doubt there will be huge money to be made.

It's a lot in that question and it's very insightful in a lot of different things in the market. One thing I would take issue with is sale price versus valuation price. I don't think there's as big a delta but not a ton of money. Those valuations better be market valuations. But to your point, in many instances, there isn't a whole lot of transaction data points to sit there and say, okay, great. My 5.2 cap on that valuation is an actual market-based 5.2. I was just on the way down here this morning on the phone with one of our investment sales brokers. We lost a mandate to sell an asset in Charlottesville, Virginia this morning. I was just told by the CEO of the company that we came in second, that we had killed it, blah blah blah, but they're going with the competition. And I was talking to my team about it right after I got the news and I said, you know, where was our BOV on a per door basis? And they were like, we were at 320 a door, 320,000 a door. And I said, where do you think the competition was? And they said, we heard 350 a door. And I said, well then do you think that they're going to actually be able to sell it at 350 a door? They're like, not a chance in the world. And I said, well, then should we go back to them and say, Brian, sorry we lost on the sale, but when you don't get the proceeds at 350 a door and the market's actually closer to 320, we'll refinance it for you. And they said, we've done it twice with them in the last year, we'll do it three times here. In other words, they went to sell, they didn't get the proceeds they wanted, they backed off, and then let it similar to a data point on that that's been impacting our financials at W&D. If you look at our 2020 lending volumes, which was a record year for us, with Fannie and Freddie in 2020, we did 20 billion of lending. In that 20 billion of lending with Fannie and Freddie, we did not do a single 5-year loan. Not one. All of our loans were 7-year and 10-year and 95% were 10-year loans. Okay? 2025, we did $17 billion of lending with Fannie and Freddie. 63% were 5-year loans. Why? Because a ton of our clients are coming to us. They're going to market. They're saying, I want to sell this asset. The market isn't there for them to sell at the price they want. They then turn around and say, my financing is maturing. I need a loan, not a bridge loan. I just need new financing, but I don't want to do a 10-year loan that has prepayment penalty up to 9 and a half years. I want to go shorter duration of 5 years. That gives me kind of a stub financing to get to my window to go sell the asset in the next 2 to 3 years. And so that's why we're doing so much shorter term financing right now. At the same time, nobody wants to float quite yet because everyone still has PTSD from what happened to interest rates in 2022-23. So it's interesting because we're doing so much more 5-year financing right now. But at the end of the day, that is what's making the debt markets run is that people are willing to put out 5-year money at relatively low rate and people don't want to sell right now at the current cap rates. The problem that's happening for many of the owner operators is that their LPs want their money back. So, you're getting this pressure on operators that they had a fund that was supposed to have a 7-year fund life. They've now extended for two years and they've got to go sell an asset to return the capital because the LPs are saying I won't go into your next fund until I get paid off on my previous investment. And so that pressure is very much there. So when we're seeing sales today, there are some because it's a great asset and a great market that's getting a great cap rate, but there's a lot of forced selling right now where someone's sitting there saying, I was hoping the market would get better. I was hoping that cap rate would come down. It hasn't, but I've got to go. And oh by the way, the promote in this fund is done. I'm not going to get into my promote, but I need to raise my next fund to keep this firm moving forward. So sell those assets, recycle the capital, and let's go live for another day. There's a ton of that happening in the market.

The one in February, Blackstone's BREIT actually had its best month in I think it's 5 years. And so as money was being pulled out of their private credit fund, there was actually inflows in the BREIT in February. I haven't seen much numbers because we're only two days into April but you are seeing the tide turn I think on things like the BREIT. Don't know about the Starwood SREIT. I know for February the SREIT had not turned the corner to your question about the Odyssey funds I would think that in many instances there are going to be forced sellers of some assets. Core has been a tough place to be in, it's all been value-add money. And at the same time, you know there's 6 to 7 trillion dollars sitting in money market accounts. If the short end of the curve comes down and that's a big if right now I think that was pretty much there until the war in Iraq. I think everyone sat there and said Wars is going to come in he's going to cut. If you had three cuts in the short end of the curve all those people in those money market funds would sit there and say I need yield. Where am I going? I think commercial real estate would have been a cool great play. You would have seen fund flows 6 to 7 trillion you get a trillion, two trillion that moves out of that. One interesting thing on those money market funds even when interest rates were at zero in the mid teens you still have $3 trillion of money parked in money market funds. So the idea that that 6 to 7 drains to zero if rates come down well a bunch of the market just wants to be parked in money market funds and you'll get three or four trillion parked there. But you got, you know, when you're talking trillions, it used to be billions, now it's trillions. When you're talking trillions of dollars, that's real money. That can really affect a market and it can certainly affect the commercial real estate market.

Well, if you get the short end of the curve down significantly, it gives someone who has a refi the opportunity to go and refi it without having to do a cash-in refi because they can go. You might say that's stupid because they're taking the risk of floating rate debt, but you know you're going to be forced to buy a cap and if the short end of the curve gets down low enough, I mean, we just did a very large transaction. We haven't been able to publish on it, but a trade publication pointed it out two weeks ago. Commercial Mortgage Alert announced it, but we haven't been able to because we haven't delivered the securities yet to Freddie Mac. But that was a 10-year floating rate transaction. It has a cap on it and they got a very very attractive rate and that's one of the being sponsor groups. One of the main reasons that was a floating rate deal is because they needed all the proceeds. They needed to go with floating rate debt to be able to stay level on their proceeds on the financing. So short end of the curve comes down and gives people the option to go and refi and float. The other issue which you're getting on right here is obviously the spread between short-term floating rate and long-term 5, 7, 10. You'll see the steepening or the flattening of the yield curve and we've been in a relatively flat yield curve. One of the things that and as that steepens it will make it more attractive for people to go on shorter durations and that's what we've been seeing. That's why so many people are doing 5-year financing right now. They sit there and they say there's a 50 basis point difference between a 5-year Treasury and the 10-year Treasury. I'm going 5 because I need every dollar of proceeds I possibly can. The issue there in the market today is because spreads on 10-year paper are so much tighter than 5-year paper because there's so much 5-year paper going out there. You can actually borrow 10 years from the agencies right now and the all-in coupon is only between 10 and 20 basis points higher on a 10-year instrument than on a 5-year instrument. And a lot of people don't know that. And so we're trying to educate our borrowers a little bit to that because what you're going to see in 2030 is you've got all the 2020 maturities that are maturing in 2030 and then you've got 2025 maturities that are going to mature in 2030 and you're going to get a huge wall in 2030. And so one of the things we're trying to advise our clients is if you don't have to go short, think about that 7 or 10 year maturity that put you into 32 or 35 to be able to avoid that refinancing wave or wall that's going to come up at 2030.

Yeah. And it's interesting. I mean, for a long time, I would sit there and say to people, at some point the debt's going to be the asset. Hasn't really happened. I mean, yes, there are assets that we've been able to sell at exceedingly low cap rates because they've got a 3.25 fixed rate loan on them and they've got seven more years of term left on it. They did it. That's one of those ones where you did a really really, you know, you bought an asset in 21, you put in 3.25 10-year financing on it. Now you're going out to sell it. It's performed well. And you've got that 7 years of duration left at 3.25. That's going to get a great cap rate. That there the debt becomes the asset to some degree. But, you know, we do a lot of HUD financing and I've always said like these long duration HUD loans, people just come in and buy them. We have one client who did a HUD D4 in probably 2018 at a 2.2% interest rate for 40 years. And I turned to him and I said, Tim, you have got an incredible deal there. He says, well, my great grandkids are going to be thankful for that. But you know, yeah, sometimes the debt becomes the asset, but not as much as I would think.

Well, that's actually a kind of a good segue, John, into single family versus multifamily and why multifamily isn't operating as it should right now. If you look at the cost of home ownership, there's relatively low there's almost no existing inventory on the market because everyone's got a locked in low interest. I've got a 2.2% mortgage on my home in Sun Valley, Idaho, and I've got a 2.6% interest rate loan on my home in Denver. And I got five more years of term on both of them. I'm not selling. I mean, you know, as Charlie knows, my home in Denver was big enough for Charlie and all of his brothers. I don't need that house to be that big today. And at the same time, I'm going to go sell it and get rid of a 2.6% mortgage to go get like a 5.8% mortgage. How much smaller home am I going to buy? And how much more financing cost is it going to be to go do that swap? So, I'm one of those trapped owners, right? I'm going to keep holding it. One thing to keep in mind there is when all that starts to burn off, how much is that 30-year mortgages versus 10-year mortgages versus 7-year mortgages? That's super interesting. If all of a sudden everyone start to come to market at the same time because they got these mortgages that are expiring, that could have a big downward pressure on values in the single family. But right now, multi should be performing exceptionally well because the supply curve went like this. But then at the end of 25, the demand curve also went like that. And that has to do, I think, with immigration policy and the fact that we don't have as many legal immigrants coming into the United States and the illegal immigrant pool has been cut off. And as a result of that, when you've gone from you can pick whatever number you want as it relates to total immigration to the United States during the Biden administration and the Trump administration. I've heard as big as four million inbound during every year during the Biden administration to the Bureau of Labor Statistics has it at about 2.6 million in the final year of the Biden administration. Okay, that dropped down to 1.3 last year. So you got 1.3 million people, that's probably a conservative view, but 1.3 million people, legal and illegal, coming into the United States. That has a direct impact on people needing to live somewhere, single family, multifamily. And so I think one of the big questions that I have is when does the Trump administration focus on increasing legal immigration and making it so that we're getting that flow of new household formation in the United States because right now with our birth rates where they are and with our immigration policies where they are, we're not going to grow. And that's super concerning.

Charlie's brother who's graduating from Colorado last night we were talking about what he's doing and where his first job's going to be and he's got some interviews coming up next week and I said when's your rent when's your student housing through at CU? And he goes August 15th. And I said, well, I know a nice house in Denver that you can come live at if all of a sudden you don't have a place to live because you don't have your job when you first come out of college.

I'm really pleased and somewhat puzzled to say no. I just looked at our pipeline for Q2 and I would have thought the last month would have done more damage to it than it has. The sales market sales volumes have taken a hit but not on the financing side. And so it's interesting because obviously we added almost 50 basis points to the 10-year and you would think that that would make a lot of people back away from the financing markets. But they haven't. Spreads have stayed extremely tight. Spreads have not gapped out at all since the Iran conflict. And so your base rate is up but your spreads have stayed in. They haven't gapped out which you would think that they would gap out to your point about the VIX and other things influencing cap costs. The question I think everybody is trying to look through and say, okay, we're not going to be in this for that long. I got to kind of keep moving forward with the president's speech last night. We obviously I got a thing from somebody that said the market sold off $520 billion of value within five minutes when the president came out and said we're going to be in this for a while longer. The thing that I take some solace in is that the president clearly watches the markets. He watches them like a hawk and he's probably more influenced by the markets than any president we've ever had. And as a result of that, he's not going to keep running into the midterms with inflation high, gas prices high, and everything else. He's just not. There's just too much to risk there. So, I would think that at some point he backs away. The only thing that would happen is if I just saw somebody last night on Bloomberg who basically said he's going to lose the House, he's going to lose the Senate, and hopefully he realizes he's going to lose both and he's just going to put his head down to do what needs to get done.

I was with a significantly Walker & Dunlop client who's an Orthodox Jew up in LA two days ago and he was, you know, had his head in his hands basically saying, we can't back out of this early. We've got to finish the job. We've got to go. And I said, I don't think that's happening. I don't think from a foreign policy standpoint they're going to do what it needs to do to finish this. Which says that a lot of people are sitting there saying, oil's going to come back down, rates are going to come back down. Got to keep moving forward. But you know it's a really difficult time right now to have huge confidence about the next sort of 3 months and that's hard. But if you listen like Peter Linneman, Linneman's always like buy good real estate, put low leverage on it, hold it for a long period of time.

You're going to make money and that's a, you know, yeah, that and go to a good college and get out and you'll get a great job. You know, in normal times, that's what happens, except for the fact that things go like this.

Exactly. But I think we get out of this sooner rather than later, which means that things will normalize. And look, to your point previously about where the equity markets are and how they run so hard, commercial real estate is dependent upon the health of the economy. Multifamily is 50% of the commercial real estate market. If you can deal with the demand side of things, if you got good multifamily and a growing job market, you're going to do well. The problem is some of the oversupplied markets over the last several years have still yet to burn off the supply. So, I would go to Austin rather than going to Cleveland. But boy oh boy, if you own in Austin right now, you're still sucking wind. And if you're owning in Cleveland, you're loving life. You're loving life. So, that's the, you know, supply and demand equation right now doesn't quite work for those high growth markets. But that's where the jobs are going. And at the end of the day, jobs are what create renters and renters are what create great multifamily properties. Office is obviously the big question mark as it relates to returned office usage. Boy, oh boy. If you made a bet on San Francisco office 18 months ago, you were loving life today. Loving life. Like that market is going like that. Denver office, not so much.

DC office, not so much.

Retail has been incredible. The US consumer has held up. Retail sales are somewhere like 560 to 580 billion on a quarterly basis right now. Crank it.