Mark Bonner: 00:09

Okay. Welcome to First Draft Live. I'm Mark Bonner, business house editor in chief coming to you live from New York. It's Friday, November 14, coming to you just days after the federal government finally powered back on. And no, this is not a victory lap today.

Mark Bonner: 00:23

This is the hangover show. After forty three days of paralysis, the longest shutdown in US history, the lights are once again back on in Washington. But the economy isn't the one we switched off in early October. Up to $14,000,000,000 in output have been permanently erased. The country has sustained a major GDP hit, basically deleting a mid sized US city from the map.

Mark Bonner: 00:50

6,700,000 empty hotel room nights, 42,000,000 Americans still waiting on snap dollars at anchor half the country's most resilient retail, and 1,250,000 federal workers tightening belts heading into the holidays. So, yes, technically, the shutdown is over, but emotionally, politically, economically, well, the system designed to stabilize the country just reminded everyone how quickly it can destabilize it. And don't look now, but Sabres are already rattling about another shutdown in January. HUD's multifamily pipeline is jammed. GSA leasing is weeks from full speed.

Mark Bonner: 01:32

Federal contractors are triaging cash flow. And the statistical blackout has left underwriting and valuations drifting in what PAL calls fog. That's the real story. Not that Washington reopened, but that it reopened back into uncertainty. Something CRE has been battling all year.

Mark Bonner: 01:54

So how's survive to '25 going y'all? How about bliss in '26? Well, we're gonna see. And that's exactly why we asked today's guest to join us. Few people see the interplay between macro shock and real estate reality more clearly than Michael Episcope, co CEO of Origin Investments, a firm that's built an investment strategy around discipline, downside protection, and reading markets when they're at their murkiest.

Mark Bonner: 02:22

He's one of the sharpest voices I know on how capital behaves when this political system goes off the rails and where opportunity emerges when everyone else pulls back. Michael, welcome to First Draft Live.

Michael Episcope: 02:34

Thank you for having me Mark. And I was just thinking as you were talking, last time I was on here was, the big shutdown during COVID and here I am back in another shutdown about 40% of the country. So it's kind of poetic.

Mark Bonner: 02:48

It is poetic. And by the way, just for our listeners and our viewers who don't know, Michael is referring to the pandemic and Michael was our first guest ever on BizNows first webinar ever. Another moment where we found the economy in dire straits and yet here we are again. So Michael, let's get into it. What does a six week federal freeze reveal about the fragility of The US economy right now?

Mark Bonner: 03:11

And how are you navigating it from your perspective?

Michael Episcope: 03:14

Yeah, it's a great question. I mean, I think what it reveals more than anything is the dysfunctionality of our political environment and that is kind of the elephant in the room. I think what's happened over the last forty three days as you put it, it's the longest shutdown in history. It's somewhere between annoying and tragic. And if you look at the 800,000 federal workers that were furloughed, the food lines have never been more jammed food pantries.

Michael Episcope: 03:42

You have people who can't pay rent living paycheck to paycheck, having to pick up other work. That's tragic. That's absolutely tragic. And it's 100% in control of the politicians, This should have never happened. And then you have companies like ours.

Michael Episcope: 03:58

We were launching our interval fund and we were at the one inch line with the SEC and that's delayed. We don't know now that we're going to be opening back up whether we're going to start at the one inch line or be back at the 50 yard line, but we will be open. So that's more annoying. But it is impacting permanently what's going on in the economy And it's just wiping out growth that we just don't need to. And so like this political dysfunction is unsettling.

Michael Episcope: 04:27

I think the elephant in the room is really the government debt, the government dysfunctionality, the things that we're not addressing. This is like a sideshow to everything going on. And so like, there's a lot of ripple effect. I think you named a lot of them, but for us it's a speed bump. It's certainly not like it was in COVID, but there's a lot of ripple effects that are happening and it's it's kind of similar to COVID in the sense that you have a shutdown and you had you're going to have a permanent loss to the economy, but then some of that is going to show up in early twenty twenty six.

Mark Bonner: 05:00

I mean, it's not just a speed bump though, Michael. It's another speed bump. There have been a lot of speed bumps this year in The US economy for a whole variety of reasons. Is this just another moment that commercial real estate has to absorb? Is this par for the course at this point, this deep in the year now looking into 2026 or is this permanent structural dent in sentiment and pricing from your perspective?

Michael Episcope: 05:26

I think it's a little bit of both. I think for some you just have to roll with punches and do it. And you're right, there's lot of speed bumps, especially over the last few years. It feels like we've been operating on a street with nothing but speed bumps and we're waiting for kind of a clear road ahead of us so we can put the pedal to the metal. And we all are looking at 2026, some of the multifamily supply getting cleaned up growth coming back into the market and some normalcy.

Michael Episcope: 05:53

So I do think though structurally we're not in the DC or Metro or Northeast or, and we're not as impacted by a lot of these government shutdowns, but some of the delinquencies, I mean, you're talking about 10 to 15% delinquencies, vacancies rising. You sort of have to rethink your strategy if you're in those markets and you're building and you have a large presence there because this isn't going to stop. They're not taking care of the debt to GDP problem. Mean, this whole shutdown was about appropriations, but next year we're going to have to deal with this debt ceiling again. And when you look at that, if this becomes another stalemate, if the government shuts down, they're talking about this happening again in January.

Michael Episcope: 06:38

It's going to be very hard to be an owner of multifamily real estate in any of the Eastern Seaboard because it's so connected to what's happening with the government.

Mark Bonner: 06:48

And, yeah, we're seeing multifamily REIT suffering right now on that front. And so that that's a leading indicator of some pain that's either there right now or coming to a theater near you. Let's talk about capital markets for a second. Already wary. Now they're second guessing everything all over again.

Mark Bonner: 07:05

Transaction volume did pop in September, but confidence, not comps, I think is the real currency here. Liquidity typically lags a shock like this by one or two quarters. So now we're in the 2026. And this one wasn't just a shock. It was a statistical blackout.

Mark Bonner: 07:21

Right? The White House said yesterday that the jobs data from, I believe, October permanently gone. We'll never see it. Poof. Right?

Mark Bonner: 07:29

How do you deal with that blackout? I mean, can you rebuild it in the aggregate with with private private sources? Can you can you sustain a blackout like that, Michael? Like, what's your visibility into this? And how is this affecting your decision making?

Michael Episcope: 07:44

So we're not as impacted by the monthly release of government data because in real estate you're making three, five, ten year, twenty year bets on real estate. So you really have to look at the macro. That's why I was talking about. If you're in DC and you're in Maryland, you really you have to rethink your strategy because ultimately what matters in investing is that you're A, you're in a good asset class B, you're in a good market and C, you have a great micro location as well a good asset. And so like we think about it in terms of that.

Michael Episcope: 08:15

So missing one or two orders of BLS data doesn't make a difference to us. When we're looking at more of the global picture, if the government continues to operate at a dysfunctional level and we see unemployment start to rise and delinquencies and they start to leak into other cities wherein then we're going to have to start rethinking our sort of macro thesis here. With real estate, it's very different than if you're looking stocks, bonds, liquid assets, because you're making long term bets here. So again, it's more annoying not having the BLS data, but it's less impactful for groups like ours. We're just we're not looking at the month to month, we're looking out on the horizon.

Mark Bonner: 08:54

Right. But you know, you're making decisions now or next week or next month or in January, right? We just went through this speed bump, which we're gonna call the longest shutdown in American history. We've had the other speed bumps that we've talked about. Do you make and then you got this other thing happening here, which is another shutdown maybe in January.

Mark Bonner: 09:12

Right? And if you didn't believe that it couldn't happen, we're now forty three days into the longest one that we that has ever happened in this country. So it could happen again in January. Both Democrats and Republicans are unafraid to test each other on these fronts. So all of a sudden, 2026 is even murkier.

Mark Bonner: 09:30

What's the real timeline here before deal flow normalizes in your mind, Michael? And when do you make the decision? Do you are you now making decision today between now and the end of the year? Or are you going to wait for January and see what happens on Capitol Hill?

Michael Episcope: 09:45

We'll continue to make decisions. We're not going put any big bets on right now because you're right. I mean, likelihood is that there is another government stalemate that there's a shutdown at some point. I mean, I don't know why we would think otherwise. And I think the real issue here can be just a loss of confidence in The US economy.

Michael Episcope: 10:07

We're starting to see that show up in interest rates. Again, it comes back to debt dysfunctionality and we've seen a lot of selling of US Treasuries. The new normal seems to be 4.1, 4.2. We briefly 104%. We were cheering for about a week and then all of a sudden we creep back up.

Michael Episcope: 10:26

And some of this, who knows if this is accurate is attributable to this government shutdown that we saw kind of 15 basis point spike in the interest rates. So I think we have to be wary about the things that really impact multifamily real estate and the variables there, which is the growth of rent vacancy, the job market, interest rates, to that extent, we will get through this like we have everything else, but it is impacting. I mean, developers have to carry properties for another month, two months, three months, four months, you're talking about another five, six, seven percent in carry costs. And some people are better equipped, better balance sheets, not using a lot of leverage to withstand some of these issues. Then other people have business plans that are more price perfection and they're going be on the edge.

Michael Episcope: 11:19

And so like we always look at kind of the dystopian view when things are happening here. This could lead to other opportunities, certainly buying opportunities next year for the market and people would just like abandoned projects don't want to get in, can't continue to float their projects in the wake of a government shutdown or just say uncle I'm not going to deal with this kind of unknown in my life.

Mark Bonner: 11:42

How important is this next Fed meeting to you in your world?

Michael Episcope: 11:47

Not as important as you think because there's two things. The Fed only has control over the short end of the curve and we've seen a long end is going do what it wants. And the long end is really, priced based on supply and demand of our treasuries, our risk as the U. S. Government are and there's not much they can do.

Michael Episcope: 12:09

So they can lower rates even 2% and the long end could go to 5% or 6%. You didn't really see a huge impact on the long end when the Fed lowered rates. I think if anything it does from an investor perspective, if they're no longer earning an interest rate, because there's so much money caught up right now in money market accounts. And as long as investors are getting 4%, 4.5% on a pre tax basis in those accounts, they're pretty happy. If they start earning one or two, they're going to start looking at risk assets more and more.

Michael Episcope: 12:42

So the biggest thing we saw, especially in COVID when rates went to zero is money flooded in, right? And it also helped that the government wrote $7,000,000,000,000 worth of checks. But that flow has really ceased in multifamily real estate and across real estate because the cost of capital is just so much higher that if you can't deliver returns in kind of the high teens, you're not going to be able to attract capital to your deals.

Mark Bonner: 13:09

Why does the industry obsess over interest rates? I mean, is this media hype? No. Where this has gotten Not

Michael Episcope: 13:17

at all. I mean, real estate is a leverage game and everybody uses real estate and leverage is a good thing, right? Used in moderation. And so like it impacts your your cost of debt. It impacts your ultimate cash flow, right?

Michael Episcope: 13:30

And deals and then it impacts your valuation methodology because there is a correlation between your interest rates and cap rates. You know, at times they become disassociated with one another, but it's one of the leading indicators. When you look at cap rates to Treasuries, that's a great forward looking indicator to the investment performance of real estate going forward. So when that spread widens, meaning your cap rates are much, much higher than your interest rates, that's actually a good sign. So you see that during distressed times where cap rates might be six-seven percent, but your borrowing costs are four percent.

Michael Episcope: 14:07

That is a phenomenal time Today, you've got 100, maybe 120 basis point spread between cap rates and treasuries. I would say it's good. It's not like you're not running away from it and you're not running to it right now. It's probably going to achieve historical decent averages going forward. I think '26 is going to be a good vintage.

Mark Bonner: 14:31

If you're just joining us, this is First Draft Live. We're here with our origins Michael Episcope unpacking where the longest shutdown in US history leaves real estate investors and operators after six weeks in the dark. So for the past month, as we've talked about a bit, BLS hasn't published the data the entire market depends on. No CPI, no jobs reports. It's left it without a compass of sorts.

Mark Bonner: 14:54

Even the Fed is squinting. Investors had to navigate the most opaque macro environment years while all this political dysfunction that we're talking about is hung over every assumption. At Origin, how do you price risk when the government's data stream disappears? And Michael, I want to frame this as we have a lot of people that are watching this right now who are in the dark. Like, what do you do in these moments when you've got a little bit of lack of visibility into what's happening in The US economy?

Michael Episcope: 15:23

Yeah, it's not quite risk off for us. I would say we do have an advantage because we have our own data science team and a lot of the things you're talking about the CPI data, the BLS data, things like that. We're not pricing those exactly into our model. Certainly we're keeping an eye on the macro. A lot of times in real estate it comes down to the micro location to the deal, the deal economics.

Michael Episcope: 15:45

So we're tying something up today. We can sit on that deal for three, four, five, six months until that information comes up. I think the challenge is and we talked about this just a few minutes ago when you don't have this data when you start to get a kind of a loss in confidence in the market for what people don't know and understand they start filling in with their own ideas, right? And so you've seen an uptick in the treasuries and the treasuries are still functioning, they're still operating. And what I'm more concerned about is, is this a micro cosm of what we saw coming out of COVID where you've had 800,000 workers furloughed for forty three days.

Michael Episcope: 16:22

They haven't gotten paid. It's taken out. They're going to come back into the economy. They're going to get paid. Are we going to suddenly see this inflation spike and have this whole conversation about is it transitory again?

Michael Episcope: 16:34

And so like these are just this is volatility we don't need in the market. So we're not again completely risk off, but I would say that our parameters for doing deals, and this is really true over the last year, year and a half, two years is that our margins and our cost of capital has grown much, much higher. And something like this doesn't help even we're glad interest rates are coming down or have come down to where they were a year ago, but they're still not where we need them to be. And the government has to get their crap together so we can see some normalcy in the market.

Mark Bonner: 17:08

Yeah, I don't want be a Debbie Downer, but it seems unlikely, right? I mean, it seems like for at least the next few years, political dysfunction in some shape or form is going to continue. And so that in itself is predictable, right? And I wonder from your end of things, can political dysfunction itself become a quantifiable input in underwriting?

Michael Episcope: 17:30

It's a good question. Mark, the way I would answer that is it is an input in the sense that it's the status quo. And we could have a whole conversation about politics and you can give me riled up, but I mean, it's one of my sort of hot buttons and looking at the dysfunctionality of Congress right now in the Senate and what's going on. And these are just things that we shouldn't be dealing with, The government is supposed to be there to quote unquote, you know, help The US economy and that's just not happening. And I understand each side has their positions and is digging their heels in that they think they're right, But there's real people being impacted with these decisions.

Michael Episcope: 18:07

You can go back. We could have had this conversation five years ago, ten years ago, fifteen years ago. I think one thing we can count on is that there will be a dysfunctional government, right? I think the difference today is our debt to GDP is at 125%. We're looking at hitting the debt ceiling of $41,000,000,000,000 next year.

Michael Episcope: 18:25

There's going to be another conversation about that. We raised the debt ceiling a few years ago to $41,000,000,000,000 We just, you know, through the stroke of a pen by $5,000,000,000,000 So it does feel like there's a lot more political discourse that we have to deal with. But in terms of underwriting, that to me feels like a lot of noise because ultimately your real estate, especially in multifamily, it's going to be rely on jobs and population growth. And that's what we need to think about. And the government needs to be a supporter of those things, not a detractor of those things.

Michael Episcope: 18:58

And certainly what they've done in this last kind of two months has not helped that, but it's not spread equally because it's certainly going to be felt more on the Eastern Coast, the Maryland's, the DCs, places like that than it is when you're talking about Sunbelt markets, but there's so much of the economy that's tied to the government that nobody's immune right now.

Mark Bonner: 19:18

Yeah, and look, on the consumer level, Americans have been on a roller coaster ride. You know? This forty three day shutdown, you know, it exposed some new challenges on that front. Snap payments, that have been delayed, straining grocery and discount chains, a lot of other retail, unpaid federal workers, and it cuts discretionary spending. Tourism has weakened.

Mark Bonner: 19:40

Maybe it balances back. Maybe it won't. You know, in CRE, the demand side, you know, wobbles show up fast in collections, occupancy, and tenant health. Right? So how do you think investors should be viewing consumer risk in this political landscape going into early next year?

Michael Episcope: 20:01

One thing I was reading recently is you have to assume that there's going be lower demand as a result of this government shutdown. You had mentioned SNAP program, yes, and the HUD shutting down. I mean, that also impacted 50,000 families, Section eight vouchers, things like that. It also pushed out 2,000 multifamily starts a lot. It's going to impact your rent growth.

Michael Episcope: 20:22

I read that it went from 3.5 to now 2%. That's going to impact underwriting and it's just going to kill a lot of deals when you look at that because one of the most important variables when you're underwriting these investments is rent growth. When you go from 3.5, which is sort of a little bit above your normal average down to 2% and look, not every city is created equally. Some are going to grow at zero and some are going to grow at five still, But that will come into the calculus and decide which deals get done and which deals that don't. And if you're on the margin, you're going to have to scrap your deal or find some cost cutting savings, things like that.

Michael Episcope: 21:00

But there's trickle effects to this. So that's kind of how we think about it. I mean, it's again, these things, this too shall pass. I don't think we said that. I don't know when we were talking about COVID way back when it didn't feel like it was going to pass in the moment.

Michael Episcope: 21:14

This too shall pass and we're going to have to deal with it again. But I think we're pretty insulated because of our diversification, Southeast, Central and Southwest. So that's what we do feel good about. And multifamily is an asset class that is essential. People need shelter.

Michael Episcope: 21:32

They need a place to live. However, as we've seen, you can always overbuild. We'll be out of this in a few years. And I go back and I reminisce about 'eight when we were completely overbuilt on the for sale side And then five or six years later, all of sudden the headlines were we have a housing shortage. This is cyclical.

Michael Episcope: 21:48

We'll get through it. We'll get to the other side. And we'll be talking about this in two years. Hey, look at all this rent growth. We're on the other side.

Michael Episcope: 21:56

Look at where multifamily starts are, demand is outpaced. And so like, you can have me back on when those are the headlines.

Mark Bonner: 22:02

I can't wait. I can't wait. And just going back to the pandemic, like I'm really glad you brought this up because I think there are some corollaries here. But on the other hand, I could say we're not past the pandemic yet. We're still dealing with the after effects of the pandemic.

Mark Bonner: 22:16

I don't the pandemic was way more profound than a forty three day shutdown. Right? I mean, so it's an unfair comparison. But, you know, the pandemic permanently altered all sorts of things in society and commerce, and we're still dealing with that shift. And a lot of those things that we took for granted pre 2020 are never gonna ever be the same again.

Mark Bonner: 22:34

Right? But to come back down to this moment for a second, like, what do you think are some underappreciated after effects of the longest shutdown in history from a commercial real estate perspective, at least over the next couple of months?

Michael Episcope: 22:50

The after effects, what always happens anytime something gets shut down as you create pent up demand in the future. So a lot of these things are going to show up in 2026 and we're going to see certainly lower GDP this year as a result of it. That's going to probably knock 50 to 100 basis points off of our GDP growth. And next year, some of that will actually show up and you'll see hopefully a lot of starts coming in Q1. But I think when I look at some of the key features, actually I have this list, it was interesting, like what are the most impactful things.

Michael Episcope: 23:27

And some of these things, like The US debt ceiling, what's going to happen next year. I think that's the next thing that we have to look towards. That was raised by $5,000,000,000,000 in July 2025. And you think about the magnitude of that, that's the size of Japan's GDP. It's actually more than that, right?

Michael Episcope: 23:46

800,000 federal workers, that's more people than live in San Francisco. The 43, the longest shutdown ever. Before that was twenty two days. So there's a lot of, I think after effects that are going to happen and people are going to really have to rethink their investment strategy and how these government shutdowns, how the debt, how the government, because there is a possibility and I wouldn't say it's a possibility. It's a when, not an if.

Michael Episcope: 24:14

When does the government really have to get the debt under control? We don't know when that's going to happen. We're growing the debt at 6% per year GDP. We know that sustainable is 3%, but if you cut 3% off of that number and you get to that 3%, that is going to have a ripple effect. And where is that going to impact the most?

Michael Episcope: 24:33

I think as our debt grows, we have to be cognizant that there will be a reckoning. I don't know if it's austerity, if there's like a healthy reset or if we're just going to absolutely run off the tracks. But when people ask me, what do I worry about the most? Yes, it is government dysfunction, but it's it's the government debt just running running a ride. It doesn't seem like anybody in Congress, anybody you know who's in DC right now wants to really do anything about it.

Michael Episcope: 25:00

And you hear these senators, these congressmen who raised red flags, and they're just met with deaf ears. You're like, actually like what he's saying. Why does nobody else see this? And I know many people and I'm sure the people listening today agree with me. We see the problem, we see the situation, it's a simple solution.

Michael Episcope: 25:19

And yet there are so many kind of hands in the cookie jar and so many conflicts here that are just not letting us address the problem. And it might have to be, just go off the tracks and then address it. And hopefully Ray Dalio is not right in his predictions.

Mark Bonner: 25:37

If you had to call it right now, what does 2026 look like for the real estate investor who keeps their head while everyone else panics?

Michael Episcope: 25:47

I think 2026 is going to be better than 2025. The fundamentals are setting up. I think this is regardless of what happens to the government. There's always an X factor, but a shutdown isn't going to be because and it's going to be better than 2024 and it's certainly going to be better than 2023. So the market is starting to show signs of recovery.

Michael Episcope: 26:12

Have the supply starting to dwindle. You still have one of the biggest challenges in the economy, which is owning is incredibly expensive. Renting is way, way cheaper. That rent to own gap is fueling demand for rent, for rentals. I mean, you go to Nashville right now, Tom and you're renting down there, you're going get three months of free rent, walk into any multifamily property down there that will slowly disappear.

Michael Episcope: 26:37

And I think that when you look at the demand side, when you look at the supply side, things will start to clear up. Market and the economy has a self regulating mechanism and it's the profit incentive. So people have not put a shovel in the ground in two years. They see this probably two and a half, maybe even three years now. And all that supply cliff is going to happen.

Michael Episcope: 26:59

It's going to take a while to clean up the existing supply, get that rented, get rid of this free rent, get back to some normalcy. But I'm optimistic. I don't think this is going be a V shaped recovery, but I think you're going to see us, like we've been skipping on the bottom and I think we're going to start to leave the bottom here. And I think the first place and for anybody watching, just start to watch the public REITs. And I think you're going to see them start to go up over the next year.

Mark Bonner: 27:27

Okay, Michael, I'm getting the hook from my producers here. That's our show for today. Thank you so much for taking the time.

Michael Episcope: 27:33

Thank you for having me, Mark. It's been a pleasure.

Mark Bonner: 27:36

If you missed any part of this conversation or wanna catch earlier episodes, you'll find every show on biznow.com or in your favorite podcast feed. Just search First Draft Live. We'll be back next week. Until then, this is First Draft Live. Have a great weekend, y'all.