On this episode of Industry Focus: Financials, host Jason Moser sits down with Millionacres Lead Advisor Matt Argersinger. Tune in as they discuss how investors should view the real estate market today, the future of commercial real estate, some of Matt's favorite stocks in the space, and much more!

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This video was recorded on July 26, 2021.

Jason Moser: It's Monday, July 26th. I'm your host, Jason Moser. On today's financial show, we're diving into the world of real estate. To do that, we're going to none other than our lead advisor of Millionacres, Mr. Matt Argersinger. Matty, it's been a while. How's everything going?

Matt Argersinger: Nice, J. Mo. Things are good.

Moser: Good to hear. Well, Matt, let's just jump right in this because real estate has been a hot button topic here over the last year. 2020 really seems to create a unique environment for real estate investors, and that has really, I think, bled into 2021. It seems like this is something that's going to be around for awhile. I noticed on your Twitter feed several weeks back, you tweeted out a link to an article where Blackstone President, Jon Gray was talking more about the opportunities he sees in real estate now. Mr. Gray, he's got a reputation, he's quite a good real estate investor.

Argersinger: Certainly he is.

Moser: You had some interesting takeaways from this article that spoke to the state of real estate today. What were some of those takeaways?

Argersinger: Sure. I think everyone today when they think about real estate, they immediately think about the housing market and how it just seems starting, like you said, 2020 and really going into 2021. We're just in this really unprecedented, historically hot market for home buying. It's really just a pick-up market. It seems the house prices are way up, they're not lasting on the market very long. In fact, I saw a statistic the other day that 50% of the houses that were listed this year in the U.S. have sold in less than a week.

Moser: I believe that.

Argersinger: That's across the country, so imagine that. The inventory levels are extremely low in every market, demand is huge, and of course, you and I as investors, but a lot of people, I'm sure are thinking about back to 2005, '06, what is this looking like? Is this looking like another housing bubble?

Moser: It feels like it rhymes.

Argersinger: It does. If you looked at home prices, I think the latest data in May, they were up 23% year-over-year for existing home prices. That's a huge year-over-year gain. But it's different, I think that one of the points Jon Gray was making in that article, he's a smart guy is, sure it feels a little bit like 2005-2007, but it's not actually a bubble yet at least. It could certainly blow into one. But if you think about today versus back then, the demand is real out there. People that are desperate to get into homes, they are at the right age, the millennial generation, even the Gen-X generation is in those peak homebuying years, and they're desperate to become homeowners and stop being renters. The demand is real, but what you have today is a real, almost supply shock, because we spent the last decade or so under building homes to the tune of several hundred thousand homes a year. You could almost make the argument that there should be five million, if not more, homes in existence today than there otherwise would be. But there wasn't because we underbuilt homes for so many years and so there's just a real lack of supply. Of course now, recently at least, we were talking about construction costs being high, so it's expensive to build homes, it's expensive to renovate homes, people are staying in place because of that, and so that just exacerbates the supply problem. I look at today and I see a real demand and supply issue rather than a bubble that we saw, gosh, 15 years ago now. But one of the other differences too is that if you look at the credit standards, I don't know if you've refinanced a home lately?

Moser: We did, yeah, we did recently. I tell you, we had to jump through a lot of hoops for two people with full-time jobs we've held for a while, and really, I would say, excellent credit. I was surprised at how much work we had to do just to get a home.

Argersinger: Yeah, it was a lot hard. Same thing, my wife and I went through refinancing last fall and it was pretty hard for us. It took months, I feel like I signed over 1,000 documents in my life to get this home refinanced. Same thing, I felt like we have pretty good credit. You can just imagine how tight the lending standards are out there and then homeowner balance sheets are in good shape too. There's a lot of spending in power, a lot of savings, and so it doesn't feel to me, at least like the bubble of 2005, '06 or '07, that lead into, of course, the Great Recession, that crisis that we had 15 years ago. It feels a lot less like that than it did back then.

Moser: Let me ask you, you said earlier that the demand is real, the way I hear that, the way that that translates to me is that's different than what perhaps we saw years ago. Really, it was very speculative. You're thinking that what's going on right now, this is people who are looking for homes to live in as maybe not as much on the speculation side. Is that right?

Argersinger: Yeah, exactly. I think if you go back to the old housing bubble, you had a lot. You had speculators, you had home flippers, you had people with very low credit buying multiple houses. There was just a lot more speculation going on. You don't see that as much today. You do see a lot of cash buying and you do see a lot of institutional buying of rentals. That's in the headlines as well. But no, to me, this is real demand. The data that I'm seeing is you have people who are moving to cities, moving to places, especially places like Texas and Florida, other top destinations, they want to live in a home, and because of the pandemic also, people are also flocking to single-family homes versus your traditional condos or apartments. So that also is creating a huge demand that is not, of course, being met by the supply.

Moser: You noted Texas and Florida, very understandable, and that's certainly something we've seen throughout the headlines there. Another thing we saw throughout the headlines that certainly was a major theme, I would say in 2020. But I'm not so sure. I feel like it was maybe a little bit knee-jerk. But what is the state of the major real estate markets? The major markets like New York City, San Francisco, places like that, that have historically held up, have had valuations that are absurd to some, maybe. But is that exodus really materializing? Because it doesn't feel like it is.

Argersinger: No, I think that's been way over-exaggerated as well. You read headlines, people are flocking away from San Francisco, leaving New York City, leaving Los Angeles, everyone's moving to Austin, Texas it seems, or Miami, Florida. There is a certain extent to that. There is certainly a net migration going on in a lot of Southern states, Sunbelt states. But places like New York, San Francisco, they're always going to have a lot of demand, especially from younger people, younger workers who want to live in really dynamic markets with all the amenities and all the culture and entertainment and educational opportunities that those cities have. I think that's way overdone. I think there probably might be a little stagnation and maybe home prices or apartment prices in those markets have to come down a little bit, but that's OK. I think there's going to be no problem there in the longer term. I think that's been over-exaggerated. Now, what is interesting is you will look at things like U-Haul data, which puts out some interesting reports about where people are moving, and there is no doubt that the southern states, Texas, Southwest, Arizona, there's definitely a magnet for people to move there. Part of it is there are attractive job opportunities, taxes are lower, home prices are lower, so it's cheaper to live there, definitely reasons why people are moving there and will probably continue to move there, but don't sell places like New York, San Francisco, Boston, or Washington, DC, even where you and I live, they don't sell them short because these are still pretty big destinations as well.

Moser: I think up here in Northern Virginia, I can tell you real estate has held its own up here. It's done OK.

Argersinger: It sure has.

Moser: What about frequent listeners to the show who know that we talk a lot about REITs, real estate investment trusts? How do you feel about real estate investment trusts today? Is that an opportunity out there for investors today or is that something that's still more uncertainty than it's worth taking a chance on?

Argersinger: No, I thought coming into 2021, I was really enthusiastic about REITs. Coming into 2021, REITs had underperformed for the last five years. That's just unusual. REITs have historically been really great performers, held their own against the stock market with much less risks, I'd say, than your average stock. The fact that it had underperformed so much especially late 2020, you looked at some of the valuations in the REIT market and either on the retail side or hospitality side, but office as well, it's just there were a lot of "bargains" I saw in the REIT space. I think I've been treated this coming into the year that I thought REITs or the real estate sector of the stock market was going to be a top performer, and it certainly has been, at least through the first half of the year. If you look at the Vanguard Real Estate ETF, VNQ. Last I checked it was up 25%, I think year-to-date, which is outperforming the rest of the market. I still think there's plenty of opportunities in REITs. I think they are well overdue to have some nice outperformance. You get great dividend yields, you got a situation where in 2020, a lot of REITs either paused their dividend, cut their dividend, they're bringing those back, and rent collections are coming back on the office side and on the apartment side. There's concerns about higher vacancies or people not paying rent because of eviction moratoriums, those things are being phased out. A lot of the income that was lost by REITs in 2020 is coming back in 2021 with a vengeance. Especially if you look at the industrial data center side, they never fell off in 2020 and they're just doing better in 2021. Across the board, I think with REITs, you can find a lot of opportunities even today going forward.

Moser: Let's talk a little bit about the dilemma with office real estate because this has been a conversation that's been going on now for the better part of 14, 16 months as the nature of the workforce continues to evolve. For all of the certainty, I would say, we see in residential, it feels like commercial is just the polar opposite. How did you feel this work-from-home trend, it feels like most companies are going back to work and they're incorporating the hybrid models, which is, you've got an office you can work out, when you need to work at home, you can work at home, but they're trying to go with that hybrid model, which has been so successful for so long. It does afford some freedom there. But how big do you think that trend is going to be and how does that play out on the commercial market?

Argersinger: Yeah, I think you're exactly right, Jason, that is probably the model. I think the hybrid model where employers are more flexible, employees embrace more flexible scheduling. You have an office destination where maybe you'd go a few days a week, but you can also do some work at home or in other destinations. That I think is going to be the predominant model. Now, there's concern there. Let's assume that's the model and what does that mean for office demand? Because there's millions and millions of square feet of office that's empty right now. These are leased by companies with the intention of well their employees, they eventually going to come back to these offices. Well, not so much, certainly, probably not on a 100% basis. What does that mean for the demand for office space? I have some serious concerns. I don't think it's completely one-sided where the work from home trend just takes over and most corporations are letting 90% of their office workers do whatever they want, work full-time from home or just to come in for one day a week. I think it's definitely not that, but it's also not where you have people like Jamie Dimon from JPMorgan saying I want everyone back, that's playing out the model too.

Moser: Right.

Argersinger: It's definitely somewhere in between, just like you laid out. My question is I'm still trying to figure it out, and I hope they are smarter people than me that can have an answer, I'd love to know. But what is the ultimate fact? Because I think you can look at the office REITs or office real estate opportunities and you can see some really great opportunities. You're talking class A property in places like New York City or San Francisco, the two cities we talked about or other places, and you're saying to yourself, "Wow, that's some really incredible, unique, one-of-a-kind real estate, but wait, are employees going to come back to that? Or are there different things that can be done with that office real estate? Can it be converted into apartments," which is also happening. There are so many questions about that, and it makes you want to be interested in office, but also just want to stand back and say, I need to let this marinate, so to speak, for the next six to nine months and really get us past this pandemic. Hopefully this Delta variant is not as severe as the overall pandemic was last year. But once we get past all that, what's left? That's a big question. I think the office is one of those ones where you just stand back and see what happens.

Moser: Yeah, I think that makes sense. Traditionally, of course, real estate, it's been seen, I think by most people, as an investment available for the few. There's plenty of barriers to entry. You needed all sources of capital to really be able to participate in investing in real estate. As time has gone on that has really changed, we see more and more vehicles come to market that open up the windows of opportunity for investors to jump in on real estate investments, whether that's crowdsourcing, whatever it may be. But we're also seeing clearly in the public markets, there are all sorts of opportunities. Listen, at the end of the day, we're stock investors. I know you're working in Millionacres and Mogul and [...], but I know in your heart, Matty, I know you're a stock guy, we work together long enough.

Argersinger: You know my soul. You know it, you've seen it.

Moser: I do. I wonder, what are some of the opportunities in the stock market today that you see for investors? Because some look at home builders or home supply companies. You're looking at something like a Home Depot and think that's going to be a way to participate. But there are all sorts of different options for investors interested in real estate space today to take place in the public markets. What stocks have you got your eye on these days?

Argersinger: Sure. Let's stick with REITs because I do think there's some great opportunities and it's where I spent a lot of my time these days. I think there are three in particular that stand out to me as they've had really great 2021s, but I see plenty of opportunity ahead for each of these. The first one is Invitation Homes (INVH -0.14%), the ticker is INVH. I'm sure it's something that Matt Frankel, your partner in crime has talked about before. There is a ground swell of demand for single-family rentals on the retail side, on the institutional side. The market is so fragmented still, there's something like 17 million single-family rentals in the United States and most are managed by idiot landlords like me, my wife and I. We have a few rental properties and you've had rental properties in the past.

Moser: Yeah.

Argersinger: That is really 99% of the market, but the institutionalization of it has just started getting on. Invitation Homes is the first publicly traded "SFR" REIT that's really gained scale in the market and I just feel like they have so much upside. Operationally, they're so efficient. What's exciting to me is if you look at their business over the years, each new property that they added to their portfolio is incrementally more profitable to the company, and I love when companies can scale like that. I look at Invitation Homes, they've got 80,000 single-family rentals in the portfolio that could easily go to two or 300,000, 500,000. What that's going to do is it's going to 5X or 6X their net operating income over the coming years I think. That's my first opportunity in the residential space would be Invitation Homes. 

My next one is EastGroup Properties (EGP 0.58%), the ticker's EGP, that one might be less familiar to your listeners. But industrial is a fantastic place to be investing. I'm sure you guys have talked about a purchase, the rise of e-commerce, especially since the pandemic, and the need for warehouse space, more fulfillment space, especially in places like the Sunbelt, where EastGroup tends to concentrate. 60% of their income, I think, is derived from Texas and Florida, where huge population increases, people are moving there. They're going to be doing shopping more online. Especially the people supposedly fleeing from San Francisco and New York, they're going to go down there, order things online, order fresh food and take out and things like that. Then you need a supply chain and the logistics and the warehouses and the cold storage to do that, and that's EastGroup Properties right there. 

The last one is probably one definitely a lot of listeners have not heard, but if you want to play office, here would be one of my ways to do it. It's called Easterly Government Properties (DEA 1.36%). The ticker, it's a really appropriate ticker, it's DEA, and the reason is 99% of the properties are federally leased properties, so the DEA is one of their big tenants, FBI, FDA, the Veterans Affairs, basically your alphabet soup of government agencies. Their focus is on federal government buildings. Obviously, uncle Sam doesn't really default on his lease, he's always going to pay his rent.

Moser: I can vouch.

Argersinger: You've got a steady tenant base, of course, AAA. What I love is Easterly focuses on what they call mission-critical agencies, so they're not just going after any government agency who needs office space or building, they are really focused on DHS, FBI, where these agencies need real estate. They can't work from home. They have to have places to go to do things like forensics, labs or investigative work and the treatment like at a VA hospital. It's all essential mission-critical work, and so that's where Easterly Government Properties focuses. Their dividend yields almost 5%. This is probably the sleepiest REIT I know, it's definitely not going to multi-bagger, but it's one of those ones where you can probably earn a nice high-single digit return and sleep well at night and it's a nice way to play office, if you want to do that.

Moser: I love it. I've not heard of that one. Certainly living up in this area, you and I know the presence of the federal government and you said it is mission-critical, so much of that stuff, those aren't folks that are working from home, that's not an option and that's going to be very reliable. Yes, there's that a little bit of a trade-off there. It's almost as reliable as the sun coming up. You're not going to get the same return, but you're going to be able to sleep at night, and then it sounds like it could hold a nice spot in a well-diversified portfolio. Matt Frankel, you work with Matt all the time. How come Matt is not bringing that to the show?

Argersinger: Frankel is a genius, but he misses some good ones here.

Moser: Well, speaking of working with Matt, and in speaking of everything you've been doing there with Millionacres, it wasn't that long ago when you and I were actually talking about the build-out of Millionacres. I think we did a show on it when you got things going, it was your building out real estate business here at The Motley Fool from the ground up. I knew when you started, they had the right guy for the job because I know your enthusiasm for the real estate space and to see what you built up with the services, really just been fun to watch because you have so much to offer now. It's not just Millionacres, you've got Mogul, you've got Real Estate Winners, all stuff. Remind us, remind our listeners, let's talk just a little bit about the services that you have going on with Millionacres today, what you guys are doing there in anything in particular that really has your attention?

Argersinger: Sure, thanks for those kind of words. Yeah, it's definitely been a labor of love over the last roughly two and a half, three years now. We have millionacres.com, which is a free site. It's very much like fool.com. You can go there if you're interested in reading investing articles on real estate or home renovation articles, it really covers the gamut of real estate. It's all free, and there's even a great e-book that we have there that you can get. I think it's 50 pages. It introduces you to real estate investing, it's a great resource. We have millionacres.com, but then yeah, we've got now three premium services that members can subscribe to if they'd like. It's Mogul, which is the one we first started with. That recommends publicly traded real estate stocks and securities, but it also recommends private commercial crowdfunded deals, and so if you're an accredited investor and you're interested in investing in private real estate directly, we got you covered in Mogul. We've got real estate winners, which is on the opposite spectrum. I'd like to call it the stock advisor of real estate, but I worked directly with Matt Frankel, your partner on that one, and we come out with at least one new recommendation per month in the public markets, either REIT or real estate stock. It's off to a great start, it's coming up on its one year anniversary in September. Just recently we launched Real Estate Trailblazers. I don't work directly on it, but it's another service that we have under the Millionacres umbrella where it's really about the merits of technology and real estate. Some of the big trends that we're seeing, whether it's e-commerce like we talked about, or Sunbelt migration, just some of the big, big trends in real estate. What are the companies that are driving those big trends and leading them, that's what you'll find in Real Estate Trailblazers. We'd like to say we got people covered when it comes to real estate investing, but I'm sure there's always more ideas and more things to do, and real estate is a massive asset class. I'm excited that we were able to bring it into The Motley Fool a few years ago and I hope it really continues to grow.

Moser: Well, it sounds like it's been a very positive response thus far and I certainly understand it. If you've owned real estate, if you own a home, you see the doors that that opens up for you, and there has just been so much wealth created in the real estate market here over the past several years. It's something we definitely need to get out there on our investors radars more and more and you guys are doing a wonderful job at that there. Thank you for doing that and thank you for taking the time this week to join us and give us the low down here on real estate because this is an opportunity that we don't get to talk a whole heck of a lot about, but we do like covering it on the show and really to dig in with you. Today was a lot of fun, so thanks.

Argersinger: Thanks, Jason. It is a great pleasure and I am always happy to be on.

Moser: Well, you can always learn more about what we're doing here in regard to real estate by just going to a millionacres.com that can just launch you to all of those different services Matty was talking about there following Matty on Twitter @margersinger. He's always got great real estate tweets going on out there. You'll learn a lot from him, and remember, you can always reach out to us on Twitter @MFindustryfocus, or you can drop us an email at [email protected]. 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. Thanks as always to Tim Sparks for putting the show together for us, from Matthew Argersinger, I'm Jason Moser. Thanks for listening, and we'll see you next week.