Mark Bonner: 00:11

Okay. Welcome to First Draft Live. It's Friday, June 11. I'm your host, Mark Mark Bonner, business owner and chief, and I'm coming to you live from New York. We're thrilled to have so many of you tuning in from across The U.

Mark Bonner: 00:23

S. And abroad. And we're coming to you just days after President Trump signed a sweeping new housing and tax law bill, the biggest change in decades for real estate. It's nearly 900 pages of a tax and spending package with ripple effects set to hit everything from ground up development in the Sun Belt to to institutional capital stacks in New York, Chicago and Los Angeles. It's called the One Big Beautiful Bill, because of course it is.

Mark Bonner: 00:51

And it's already sending developers back to the spreadsheets. On today's episode: Is This the Future of American Housing? The bill makes Opportunity Zones permanent, slashes the bond financing threshold for affordable housing, and locks in a host of tax breaks aimed at supercharging development. But it also strips $1,000,000,000,000 from Medicaid, kills green retrofit incentives for landlords, and pulls the poll on energy credits that were helping to keep housing more affordable and sustainable. So is this a lifeline for developers, a new housing blueprint for America, or a high risk bet that could reshape supply and renter stability in ways we do not yet fully understand.

Mark Bonner: 01:35

Joining us today to unpack it all is Alex Jessett, President and CFO of Camden Property Trust. Alex has helped steer Camden through more than $25,000,000,000 in real estate transactions over the past two decades, overseeing everything from construction and capital markets to asset management, sustainability and risk. He is one of the most respected financial and operational minds in the multifamily REIT space. Alex, welcome to the show. I know you're calling in from Houston.

Alex Jessett: 02:03

Glad to be here, and happy Friday to everybody.

Mark Bonner: 02:08

Happy Friday indeed. So let's jump on in. This is the most sweeping commercial real estate tax bill in decades. From bonus depreciation in LITEC, OZ reform, REIT flexibility and more, Alex, what's the single biggest change in this bill from your perspective, both from a Camden perspective and also from the housing sector more broadly?

Alex Jessett: 02:31

So first of all, let me say that I'm encouraged by certain provisions of the One Big Beautiful Beautiful Bill, which really should help solve the significant nationwide housing shortage we have. The reality is that by and large new market rate starts are just uneconomical today with our current rental rates, high construction costs, and high interest rates. They just aren't generating a high enough yield to make it profitable for developers or for the equity providers. So, in order to solve the housing shortage problem, government at both the federal and the local levels need to be doing everything they can to encourage developers to develop. And the only way to effectively encourage developers to develop is to help make the development math work.

Alex Jessett: 03:21

I It really is economics 101 and unfortunately, the development math isn't working today and that's why I believe that many of the provisions of the one big beautiful bill really should help spur new development particularly at the low or affordable income levels. So the one that I look at is the expansion of LITECH and it really is a big deal. My sources are telling me that the LITECH expansion should add about 1,200,000 affordable units over the next ten years. Now think about it today, we have a shortage of about four to 5,000,000 units. So adding 1,200,000 alone from the LITEQ expansion is a big deal.

Alex Jessett: 04:08

Now, unfortunately, it's meaningful, but it doesn't solve the whole problem. What we really need to do is we need to get local government on board to help solve some of the regulatory pressures, which are also adding to development costs. You know, it's interesting, we believe that about 40% of the cost of building a new multifamily development is associated with regulatory compliance. And that's just too much. It's perpetuating the housing shortage that we have in this country, which as I told you is really detrimental.

Alex Jessett: 04:44

So I think LITEQ is a big deal, but I do also want to point out that the other provisions of the bill such as making permanent certain tax cuts is also really important because what I'll tell you is that real estate investors hate uncertainty. And if they don't know what the tax implications are going to be, that's going to lead them to not want to invest dollars. So putting a lot of those tax cuts and making them permanent is a big deal. And if we weren't going to do that, it would continue to exacerbate the development problem we have, which of course exacerbates the supply problem.

Mark Bonner: 05:21

Right. And look, there's a difference between solve and on the road to solving. I mean, a certain perspective, and the data does not lie, We needed this solution to the housing crisis years ago. And even with one big, beautiful bill talking about the units that you're that are going to come online in the next ten years, that's not enough. We that won't be enough to catch up.

Mark Bonner: 05:42

And then you mentioned local politics. This bill doesn't directly address that, Alex. However, this is a bipartisan issue. Neither both the Democrats and the Republicans will agree that the housing supply is one of the things that must be done in this country. But between political noise, insurance pricing, and construction volatilities, developers are still hesitant, even despite what has happened in the last seven days.

Mark Bonner: 06:09

Has the national Build More Housing drumbeat meaningfully shifted Camden's posture here? Are you ramping up, or is this just the beginning of more legislation that is going to be needed at any level to seriously address this crisis?

Alex Jessett: 06:23

So here's what I will tell you is developers, including Camden, will develop if it is profitable. And as I mentioned earlier, development is just not profitable today. Construction costs are too high. Interest rates are too high. If you think about rental rates, they're not high enough to make the math work.

Alex Jessett: 06:44

And so we have to have solutions that make deals more economical. The easiest thing that we could do, and to your point, is at the local level, is we can have local governments dial back on some of the regulatory pressure that they're putting in place. That is what's adding tremendously to the construction cost. 40% addition to construction cost is huge. If you got rid of all of that, I'm not saying you could, but if you got rid of all of that, I promise you that the supply spigot would open up and we would have far more supply in this country.

Alex Jessett: 07:22

But that has to happen from the local government level. Now, I do believe, and I've certainly heard rumblings, I'm sure you have as well, from the federal government that if the federal government is going to do all of these things to encourage new housing that they are going to try to encourage local municipalities to also do their part, whatever that means. And so I think you're going to start to see some additional pressure from the federal government. And I think where you're really going to see it, and you mentioned it really briefly, is on opportunity zones. If you think about opportunity zones, and we can talk about this later, but opportunity zones is a federal tax benefit.

Alex Jessett: 08:01

And if the federal government is going to give a federal tax benefit to something that is for the betterment of the local community, then it makes sense that there should be some encouragement from the federal government for the local government to do what they need to do to help really push forward what the ultimate goal is for opportunity zones.

Mark Bonner: 08:24

Well, you said it. I mean, I think the word of the year is uncertainty. We said it again and again and again, and I think we said it so much that we've forgotten what this means. But let me try. Tariffs, housing cuts, tax reform, interest rates, global politics, supply chain issues, the list goes on.

Mark Bonner: 08:46

Investors are dealing with whiplash. Commercial real estate is dealing with whiplash, uncertainty. The political environment itself may be a gating factor in capital deployment despite what happened with one big beautiful bill and however that is executed over the next few years. How much is policy unpredictability impacting Camden's strategic planning right now? Are investors asking more questions about this political risk, Alex?

Mark Bonner: 09:13

And how do you explain it?

Alex Jessett: 09:14

Yeah, so what I will tell you is right uncertainty is I think I saw that uncertainty was the most commonly used word on earnings calls in the first quarter. But let's put uncertainty aside for a second and let's talk about multifamily. Here's what we know in multifamily. We know that supply is dropping off the cliff. We know that absent any type of local or global recession demand for multi family housing remains really strong.

Alex Jessett: 09:47

So, with all of those things said, if it wasn't for the issue that construction costs are too high, interest rates are too high, and rental rates, although lots of folks would argue that they are too high, I'm going tell you they're really not for for the math that goes into making a development decision. Developers and everybody that funds developers will be putting lots of money in to new multifamily development. The problem is that we need one of those three or a combination of those three factors to adjust themselves. And so, if you think about it, most people who track the multifamily world closely recognize that 2026 and 2027 and 2028 are probably going be very strong years for the multi family business entirely because you have less supply, right? The problem is that we also need to see these construction costs come down.

Alex Jessett: 10:44

Now construction costs are going to start coming down and they're going to start coming down simply because subcontractors that are involved in the process will start to shrink their margins because they have less work. So that will happen. And then you need interest rates to come down and interest rates theoretically will come down over a period of time. But until those three factors play out, you're not going to see equity providers running to merchant builders and multi family developments and saying, here's money, let's go put it in and let's go start building some real estate. Now, my gut is is that that probably will start to happen in '26 when you start to see increases in revenue but something that happens or starts in '26 isn't delivered till 02/1930.

Mark Bonner: 11:31

So look, there's been a lot of doom and gloom headlines, right, the last few months on all of this, right? But it's all based in reality, it's the data. The data doesn't lie, right? But when the big beautiful bill came to pass, that was a gust of wind in a lot of people's sails, right? Straight after that happened, Alex, did you see more equity or lender interest on your end come, or is capital still cautious?

Mark Bonner: 11:56

Is there actually more enthusiasm backed up with action here? I guess is what I'm asking.

Alex Jessett: 12:00

Yeah, and so I'd break it into two components. First, let's talk about lenders. Lenders have a very robust appetite for multi family development and multi family acquisition. They absolutely do. The banks are trying to expand their positions.

Alex Jessett: 12:16

It is good business on the lending side. So, let's talk about the equity side. The equity side is very bullish on acquisitions and so there's a lot of equity that's out there looking for acquisitions. Now, of course, acquisitions doesn't help solve the housing shortage which needs to help solve the housing shortage is new development. The challenge that we have today and I'm not going to go back through all the things we just talked about but you can buy almost across the country acquisitions at a discount to replacement cost.

Alex Jessett: 12:52

If you can buy an acquisition at a discount to replacement cost, then that inherently means there is no profit in a new development. If there is no profit in a new development, then an equity provider is far more likely to put their money into an acquisition than a new development. It really is that simple. If you think about the way the development business works particular in the multifamily, is almost everything that's built in this country is built by a merchant builder. That is somebody who develops to sell.

Alex Jessett: 13:24

They're effectively a manufacturer. And that manufacturer is hired by an equity provider to build a product and to then sell that product at a profit. If deals are trading at a discount to replacement cost, then inherently there is no profit. And if that's the case, then equity providers are not that encouraged that they want to go out and hire somebody to build a product that there may not be any profit. So, that is why, as I said earlier, we have to change a lot of the fundamentals and a lot of it is around the cost structure associated with development.

Alex Jessett: 13:59

If we can do that, then all of a sudden the cost is less, that will encourage more equity to come into the game, put equity into developments, that will help solve the four to 5,000,000 units that we have as a shortage across the country. That is what we need to see.

Mark Bonner: 14:19

Okay, if you're just tuning in, we're unpacking the biggest tax shift to hit U. S. Housing in a generation and what it means for multifamily development, affordability and investor strategy. We're here with Alex Jessett, President and CFO of Camden Property Trust. Alex, let's go to a question from the audience.

Mark Bonner: 14:35

Can you explain qualified production property deductions as you understand it? Wouldn't this be a solution to offset the cost of development?

Alex Jessett: 14:46

So I'm not going to get into the full details of the taxes, but here's what I will tell you. Tax cannot drive a development decision. Those of us who were around in the eighties saw what happened when taxes became the tail that wagged the dog and then all of a sudden, the tax bill changed and you ended up with all of this real estate that did not make economic sense absent the tax implications. And so that's why I say with all of the factors that we look at including opportunity zones, an opportunity zone in of itself is not the panacea. It is not the solution.

Alex Jessett: 15:35

It is part of a solution but the deal has to make sense on its own, right? When you take these additional tax advantages that come your way, they can bolster a transaction but it has to work on its own. So, no, I do not believe that in of itself it can make all these deals work.

Mark Bonner: 15:56

And we got one more from the audience. This is a good one. I can't wait to hear what you have to say here. What is Camden's treasury rate projection three years out?

Alex Jessett: 16:06

Whatever it is, is it's wrong. Here's what I'll tell you. I watch treasury rates very closely and every quarter I pull the estimates of all the bankers and what they believe the ten year is going to be going out one year, two years. And I compare it every single quarter. And I will tell you that every single quarter they change it and every single quarter they're clearly wrong.

Alex Jessett: 16:31

I do believe that interest rates will come down. Now, how low they will get? I don't know. What I do know and I feel very confident about is the days of free money, which is what we operated for when LIBOR was effectively nothing and you could borrow for a very small amount over nothing, that day of free money will never come back in my professional career. At that point in time, you were able to have this massive increase in supply, which is effectively what you actually needed.

Alex Jessett: 17:06

Had You this massive increase in supply because very very low interest rates solved lots of problems. We're not going to get there again. Now, does the ten year settle at three and a half at 3%? Perhaps But I will tell you if I knew that with any tremendous amount of certainty, would be on an island somewhere sipping a margarita.

Mark Bonner: 17:30

Yeah, Alex, I'm with you on this. I mean, if between now and the end of the year, even going to q one next year, even if we see a 100 or 150 basis point reduction, okay, it's still nowhere near where it was when it was near zero. Why do you think so many investors and so many capital markets players are so hesitant to address that reality? Like this is the new normal, right? We're not going back to the way it was pre pandemic.

Mark Bonner: 17:55

And it seems to me that it's been awfully slow for so many people to acknowledge that reality.

Alex Jessett: 18:04

You know, most folks I talk to do acknowledge that reality. Challenge that we have currently when it comes to interest rates is the volatility is far more than anybody wants to see, right? I always say that everybody in the real estate world can operate effectively as long as they know what the rules of the game are. And part of the rules of the game is what are interest rates, right? And when you look at interest rates that were you know barely over four not too long ago and today they're four four, right?

Alex Jessett: 18:38

You look at that and you may say, oh okay, that's 35, 40 basis point increase. That's a 10% increase in interest rates. And it's a 10% increase in interest rates that happen very quickly. And if you look at the volatility of the 10, in my professional career, thirty years of doing this, I've never seen this level of volatility. That's what's got to really stop.

Alex Jessett: 19:00

And I think as soon as we all say, we get to a point and whatever that is, right? If it is four four or if it's three five, whatever that is, once we know that we're going to operate within this band, I think you're going to see a lot more people start to put capital to work. We just have to get rid of this volatility.

Mark Bonner: 19:20

Okay, let's get back to big beautiful bill. So LITEC gets a big moment. The bill expands LITEC dramatically, lowers the bond test from 50% to 25%, makes it permanent, and aims to unlock 1,200,000 units, which you mentioned earlier. Even if Camden doesn't use LITEC directly, Alex, how do you see this impacting housing supply and the competitive landscape you operate in? What's the reality here?

Alex Jessett: 19:46

Yeah, mean, so the reality once again is LITECH is going to have a big impact, 1,200,000. So let's say that that solves 20% of the problem. The rest of the problem can be solved with market rate housing. Market rate housing, think about Class A traditional type real estate. The reason why that can solve much of the problem, there's lots of studies out there that show that whenever a Class A asset is developed and put into the system, it actually creates affordable housing because of the trickle down effect.

Alex Jessett: 20:23

Basically, what was an A becomes a B, what was a B becomes a C, what was a C becomes affordable. So, that's how this works. And so, what we need to see, as I said, is more things that can also encourage market rate housing. And the easiest solution of that to me that can happen today is it can is the local municipalities really start to encourage multi family housing. The interesting thing is is that you will always hear local municipalities say, we want more housing because they recognize they need more housing, but then you have to fight the nimbyism, the not in my backyard mentality or the idea of, I don't want to tell my constituents that I am incentivizing somebody who is perceived to be a wealthy developer.

Alex Jessett: 21:17

The problem with that is, is that developers do want to build. It just has to make financial sense. And today, deals don't make financial sense.

Mark Bonner: 21:27

Yeah, and to your point, I'll give you a stat here, NMHC says 60% of developers are delaying projects due to construction, but it's also insurance, and it's demand uncertainty. Yet, it seems like Camden is still breaking ground. I mean, what type of deals are making the most sense to you at this moment?

Alex Jessett: 21:46

So, will tell you, actually don't have that much demand uncertainty. I feel very, very confident that in particular the Sunbelt markets where we are today, is where the demand will be. You can look at migratory patterns in The United States over a thirty, forty year timeframe, and you will see it as a direct funnel out of the Northeast, the Pacific Northwest, and the Rust Belt down to the Sunbelt markets. And it's really easy to understand why. It's affordable and jobs are plentiful.

Alex Jessett: 22:18

And that is what people are looking for. So I feel very good about the demand side of the equation. Quite frankly, I feel pretty good about the supply side of the equation in terms of competitive advantage because there's not enough supply, right? Obviously for the good of the nation, we need more supply, but for competitive advantage, we know that supply is falling off the edge. That's what makes me feel pretty good about doing some of our developments today.

Alex Jessett: 22:45

Insurance is such a hot topic. Here's what I'm going tell you about insurance. I've been in charge of insurance for two decades. I have seen the cyclical nature of insurance replay itself over and over and over again. Everybody has to remember that insurance is a global market.

Alex Jessett: 23:05

What happens when you see a tsunami, when you see a wildfire, when you see a war, recognize that the insurance providers that are covering those losses all over the world are the same insurance providers that are providing insurance for multifamily. And so, whenever they start to have significant losses, which is what they had about four or five years ago, they have to increase their premiums in order to not only be profitable in the current year, but to build back their reserves. And that's exactly what happened in 2022. And I will tell you that Camden's insurance in 2022 was up 40%. Huge number, right?

Alex Jessett: 23:48

But in 2023, it was up 20%. Okay, so it's getting better. Well, here's what I will tell you is that every insurance provider that I talked to at the end of twenty twenty two looked at their 2022 financials and said, we're making a ton of money. Their loss ratios were nowhere near the premiums they were taking in. And so they said, we want more of this book of business.

Alex Jessett: 24:15

How do we get more this book of business? Well, the reality is, is that insurance by and large is a commodity. The way you get more of that business is you lower premiums. So, our insurance last year was down 17%. I just renewed our insurance for this year, May.

Alex Jessett: 24:33

I renewed it down again. So, yes, there's a lot of noise around insurance costs going up. I'll tell you they're actually in the process now of coming back down. Now, do have to remember though that the way Camden insures ourselves is that we have a blanket policy covering 60,000 units across the country. That is very different than what a private person who has to go out and put an individual policy in Florida, what they may see.

Alex Jessett: 25:04

And I will tell you that if you're a private person trying to put an individual policy on a multi family development in Florida, you may see your insurance as high as your taxes. For us, that's not what we're seeing. Insurance is about 7% of our total expenses. Taxes are 36% of our total expenses. So we're not seeing a ratio anywhere near that.

Alex Jessett: 25:27

That is a competitive advantage for somebody like Camden because of the way we insure and because we can spread the risk.

Mark Bonner: 25:34

Certainly, it's true that the nature of insurance is cyclical, but I think something that's not cyclical and is defining the moment of the last half decade, especially for a variety of factors, natural disasters, etcetera. Carriers are walking away from entire metros. What do you do about that?

Alex Jessett: 25:55

Well, if you look at the carriers that walking away from the entire metros, what I will tell you is, and I did a heat map, if you look to see where are people moving and where are the greater losses, they're almost 100% correlated. So the reality is that people are moving and want to live in the locations that actually do have significant losses. Now, so the question that you may ask yourself is if you are a homeowner and you can no longer get insurance and that's really where you are seeing the issues where insurance providers are saying I'm walking away is on the is for the homeowners. Does that perhaps give further advantage to a multi family provider? Perhaps.

Alex Jessett: 26:45

But what it also does, and this is back to the original point that we're talking about, is that may add in additional demand for multi family further exacerbating the supply problem. And this all circles back around to we have to solve the supply problem that we have in this country. And in order for that to happen, we've got to get and that's what we come back to one big beautiful bill. We have to have the federal government support, which is what it looks like we have today. And then we need to get the local government support, which is what we have in certain municipalities.

Alex Jessett: 27:19

We need to see it across the country.

Mark Bonner: 27:21

Got it. Alex, we're running a little short on time, but I do want to get to Opportunity Zones before we go. OZs are now permanent. Tighter eligibility rules and new reporting mandates, but the major benefits don't activate until 2027. Now we're in the quote unquote dead zone.

Mark Bonner: 27:37

Do you expect Camden to touch the OZ program, or is the delayed timeline a barrier for you?

Alex Jessett: 27:44

So opportunity zones are primarily a tax issue, correct? And because Camden is structured as a REIT, we don't actually get that significant of a benefit from an opportunity zone. So let's sort of put us aside. I do believe that long term capital will go into opportunity zones. Yes, there is a period between '26 and '27.

Alex Jessett: 28:10

Listen, we'll get past that. Deals take a while to underwrite regardless. So I think if somebody's looking at a deal today, it wouldn't start until twenty eight, twenty nine, thirty. So I don't think it's going to have that much of an impact, but I think opportunity zones are a big deal. I think it is a very creative way to encourage development in underrepresented communities.

Alex Jessett: 28:33

This is what we need to be doing as a society. So, I'm really a huge fan of it and I'm a big fan of the fact that we're making this permanent. I think this could really help the areas where we need to see help, where the affordability problem is most acute.

Mark Bonner: 28:50

Okay, and we're going to end here. What's your advice to institutional capital entering the multi space, multi family space right now? Buy, build, wait?

Alex Jessett: 29:00

My advice for institutional capital is that you should invest in multi family REITs that are focused in the Sunbelt and particularly those that are in the Sunbelt that start with a C for Camden. That's my advice.

Mark Bonner: 29:16

Okay, one fun thing really quickly. Alex, I know you're a huge Texas Longhorns fan, seasons coming up in the next couple of months. Predictions for the year, is Arch Manning gonna be a Heisman candidate or are you guys gonna go win the title?

Alex Jessett: 29:27

I think Arch is a Heisman candidate. I think we shall see. We had to get past Ohio State and Georgia. Those are two very, very strong teams. Hopefully we can do it and I'm looking forward to seeing what Arch can do.

Mark Bonner: 29:42

Okay, that's all the time we have today. Alex, thank you so much for being here. We'll be back with another episode of First Draft Live next week, so don't miss out. You can sign up now on our event page. You can also find today's episode and all of our past conversations on your favorite podcast app, and also at bizmail.com.

Mark Bonner: 30:01

This is First Draft Live. Have a great weekend, everyone.