The text below is a transcript of the audio from Episode 39 of Onward, "The rise of build-to-rent: A new era in real estate".
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Ben: Hello and welcome to Onward. Today I have the pleasure to talk with Josh Hartman. Josh is the CEO of NexMetro Communities, which has 55 projects and about 10,000 rental units nationwide. NexMetro is arguably the inventor and originator of the Build for Rent industry, which is one of the biggest trends in real today.
Before we get started, I want to remind you that this podcast is not investment advice, it is intended for informational and entertainment purposes only.
All right, Josh Hartman, welcome to Onward.
Josh: Oh, thanks, Ben. Great being here.
Ben: Okay. So you're one of the world experts in built to rent. So could you tell everybody what is it and why is it attractive?
Josh: That's a great question. It's kind of evolved. So built to rent, as it's defined today, is really what's considered traditional homes, townhomes, that are built specifically to rent. And so I'd say that's in three different categories. distinct categories. The first category is people who are building traditional single family homes that are then being rented to individuals.
But the key there is some of those are being built by homebuilders and then sold to these groups that are renting them to individuals. In that sense it can be a little bit of a misnomer because those homebuilders might have been building those homes for sale and now they're selling them to an institution and that institution is renting them.
Is that really built to rent? I don't know. We'll figure that over time. Now the second category is somewhat similar although I think more targeted towards renters is townhomes. So we're seeing a lot of townhomes being built with the intent to rent, even forward sales and things like that. So that's being treated more like a, what would be considered a traditional rental product where going in, everyone knows it's going to be for rent.
And then the third category is really our category, which is the cottage style multifamily, which our Villa Homes communities fit into. That was originally where people started talking about built to rent when we started building our communities here in Phoenix, Arizona, and then grew out across the U. S.
But then it became this broad category, which It's super interesting because if you think about built to rent, what is built to rent? Apartments are built to rent, we're built to rent, all these things are built to rent. What does it really mean? And if you look at, when we first started, I created a Google search for built to rent.
Not when we first started, but after it became popular. What you find out is in the UK, built to rent is everything. Everything, it's apartments, it's high rises, mid rises. In Australia, built to rent is everything that's built to rent. We're in this kind of interesting period where I think built to rent is still defining itself.
What is built to rent, and has it not fit into the right categories yet? And over time, we may get into this, but I think our particular product type, the Cottage Style Multifamily, the Avila Homes, is going to become part of Multifamily.
And it's just going to be like Garden Style, Wrap, Podium, blah blah blah, Cottage Style Multifamily.
And then I think the Town Homes and the Single Family Homes will be in a different category, that should be Single Family Rental. And you won't really talk about whether it was just built or whether it's been built ten years ago and bought by a large REIT. But those are really the three categories built to rent today is considered and I think it's still morphing.
It's really a nascent industry and there's still a lot of changes I think to come.
Ben: It's new. Most people haven't heard of it. I'm really excited about it. The way I think about it is that in real estate, there are ways of innovation. People don't think of real estate as an industry with innovation because it happens so slowly. In the 1970s, they invented malls. 80s were office parks. 2000s were data centers and tower reeds. 2010 was single family rental, invitation homes. So I think of build to rent as being the next major real estate wave of innovation. And also my experience is capturing those waves, being part of those waves, usually the best way to make money in real estate.
Josh: Yeah, getting in early and really dialing it in and understanding the product type. We've seen a lot of groups out there just trying to build
projects and they're like, there's so much capital out there chasing the BTR space and it was so undefined that people were just like, Oh, I've got a project. I'm building a town home community.
It's built to rent. But then our idea has always been, we're building a company and this happened to be our product. And I think it's starting to Settle out with the current market of more challenging capital to acquire. And so now you have to have people can really know how to operate, know how to build.
And it's a necessary changing in the market. But yeah, I think when you get in early, you're able to figure it out earlier. Right. And by the time other groups started doing built to rent, we had built 5, 000 units and we had our model down and we were in multiple markets. And so we were able to grow more quickly, scale more quickly.
We're probably the biggest in our particular niche. And then when the lumps come, we're able to ride through that because we've already got the scale and the relationships to ride through it. A lot of it's timing, though. We came out in 2010 and started doing this. Nobody was really doing it, so we've got a big jump on everyone else.
Ben: Yeah, I've got to come to your founding story, but I want to start kind of high levels. People appreciate what it is and why it's exciting. I'd also add that one of the reasons I think why these waves are such good investments is the beginning. You're obviously capturing new demand, which usually means there's premium or alpha there, but also institutions.
Yeah. aren't investing in it and there's no big money flowing into it. And so it's priced a lot better later at the end of the cycle. And there's this money, which would be pouring into it, hand over fist institutions. People don't really have a good sense of how they work, but they're programmatic. And so they'll get X percent of my portfolio needs to be in office.
X percent has to be in retail. And so once bill for rent gets this allocation, it gets another premium plus everything else, plus geographic growth. And so I think it has a lot of potential. I still think we're super early. I
Josh: Yeah, I agree. We are just starting to get contacted by institutions that are saying, Oh, we have an allocation for BTR, but we haven't bought anything yet. We've had an allocation for three years and we haven't bought anything. And the reason is there's just not a lot of opportunity. The market's actually pretty
small, even though people talk about Oh, there's such a tremendous growth in BTR.
It's actually relative to the overall market, pretty small still. So these institutions are all looking for the same thing, which drives up the values. I think we're even still today, probably for quite a few years, going to have a premium on cap rates because of the scarcity of the product. But as these institutions start to buy assets, everything reverts to the mean, right?
And so the returns will kind of go back to what everything else returns for over time. So I think if you get in early enough, you can really premiumize the returns for the product. I
Ben: think we're, not this decade, but I think next decade, maybe it reverts to the mean. I think we have a runway. Let's just put some numbers on this. I would say, I'm going to guess, and you tell me if I get this wrong, total bill for rent product, a couple hundred thousand units? Less?
Josh: think it's less than that. I think on the build to rent side, I want to say it's in the like tens of thousands, 20, 000, 30, 000. I think deliveries last year, I think it was like 14, 000 across the country and it's only been around for 10 years really. It's maybe 100, 000, but I bet you it's under that.
Ben: Yeah, just put that in perspective. Total number of multifamily units are like tens of millions of units.
Josh: Tens of millions of units. I want to say there's 500 million apartment units across the U. S. or something like that. That number's sticking out in my head. And then there's how many billions of houses.
Ben: There's a lot more apartment units than there are built for rent. And the single family homes, obviously there's 80 million single family homes. So this is like a totally new space. We invest with NexMetro. You guys are the best. We've also invested every single thing you said, every single format. We really thought it was B2R was going to be the next wave.
And so we've done. The detached single family, we've done the townhomes, we've done whole communities, done partial communities, we've done horizontal, and we've learned a lot. And one of the things that's happening is that all that learning means returns, the mistakes I'm watching everybody else make. They don't really exist in these mature spaces.
There's a formula, and today there's no formula for build to rent. I'm seeing things that, oh man, I wish I'd known this years ago when we started doing this. There's so many things that are different than what I thought.
Josh: People are still learning how to capitalize these things. You know this better than I do. They're capitalized different. If you're doing single family home, single home, single lot, it's capitalized completely different than what we do, which is more like multifamily. We tried to do a ABS structure, I think, three years ago, and we thought, oh, this is going to be great.
We're following the big innovation homes and those guys. And doing an ABS. And then we get through it and we're like, Oh, we can't do it because we don't have a single home on a single lot. And the way that structure doesn't work. So we had to like back up and do a SASB. We had to think about a different structure.
So we've been doing this the longest, right? So we're still making mistakes on how do we capitalize these things? Which markets work? There's just a ton of growth. And then who's the customer. So the customer is changing tremendously. As we've grown, we do surveys of our customers every single year. And when we first started, it was almost 50, 50, or maybe 60, 40, but 60 percent of our residents were millennials.
25 to 35 income levels were about 100, 000 a year and then household incomes and then nothing in the middle, very little 35 to 55. And then it was 55 plus, and that was the retirees that empty nesters that were ready to downsize. Fast forward to today, we just finished our most recent demographic study and it's way more broad.
So now we've got 20 percent of our residents are 25 to 35. Then we've got another, Say 20 percent plus or minus is in that 35 to 55 range. And then there's 20 percent in the active adult retiree sector. And then there's another percentage that's kind of just unknown. This interesting group in our market that we're still trying to understand, but effectively what it looks like is Gen Y, kind 35 year olds, whose parents are basically subsidizing their rent.
And there's 20 percent of our residents that are doing that.
Ben: That's a huge percentage of subsidies.
Josh: We thought there was a mistake. Almost 20 percent of our residents, and this is just our thesis, right, because We're like, okay, the report came back and it said it was like 18 high teams. I'm rounding a little bit, but 20 percent of our residents make less than 50, 000 a year.
We're like, okay, that means that someone is guaranteeing the rent. Cause we wouldn't rent to someone that's making under 50, 000 a year. It's that they can't afford the rent. And so our thesis is gotta be older people whose kids are subsidizing, but more likely. It's kids, I say kids, Millennials, 25 to 30, actually it's probably a different group now, but 25 to 35 year olds, whose parents are helping them pay rent.
And that's an interesting thing to think about, how do you target that group? Do you want to grow that group? Do you not want to grow that group, that demographic? But anyways, the broad point is, before I go off on that tangent, our base of customers is growing. And so that's going to affect the business.
And I think the more traditional single family, Know who their customer is. I don't think that's changing a lot. The innovations of those guys, it's couples with kits that don't want to or can't buy a home, and I don't think that's changing a lot. But ours is changing every year and evolving as people discover our product and we move into new markets.
So as we move into markets, we see different things. And to your point earlier as you look at our particular space, but I think is super interesting and a huge opportunity for us is. There really isn't a lot of our product across the country of the cottage style multifamily. And when you look at Phoenix, Phoenix, there's, I'm going to use John Burns's data because I know you follow John.
I referenced this, but if you go to his website, he's got his interactive map of built to rent. And if you click on just one Horizontal multifamily, which is how they categorize our product and some of the products in our category. In Phoenix, they have 75 communities. 50 of those communities are west of I 17, so the west side of Phoenix.
For those who aren't familiar with the west side of Phoenix, that's always been the lower cost, more affordable part of Phoenix. It's a great area, but it's just been the last to develop always. And then it's the first one to get hit. When things turn 25 of those communities on the North and South Southeast, not a lot, there's nothing in Scottsdale.
Interesting. The crazy growth in Phoenix. I always find it interesting when someone starts building a product, they're building our same product on our same market where we've got a huge market share, but okay. But then you move over to Dallas. And in Dallas, there's 22 communities. Huge metroplex, way bigger than Phoenix, 22 properties, and I think 12 of them are ours.
So not a lot of competition in that market in our space. Then you go to Central Florida, Orlando, Tampa, there's six. And we have, and we have a big pipeline coming in Tampa. Then you go to Atlanta, there's one. And it's like way to the northeast, Austin, there's like six. It's so nascent. We're still really figuring out who the customer is.
We're perfecting our business. We don't have a lot of competition, which is fantastic. It's a little bit of open field running, and we get a lot of advantage in those new markets. Because people don't understand how we can price the land. They're looking at us like a single family home. They're like, Oh, they're going to be able to pay a single family home pricing on the land.
But we're really evaluating more like multifamily. So we're able to actually buy the land at a lower cost per unit than a home builder. We can pay a little bit more, but it's less on our total underwriting proforma. And so we've got an advantage in an Atlanta or a Tampa or an Orlando where the land sellers haven't figured us out yet.
The brokers haven't figured us out yet. I don't want to give away secret sauce, but they haven't quite figured it out. So we get better pricing there.
Ben: One of the things I like to say to the Wall Street types in real estate is that they forget it's a consumer product. It's not just a financial product. It's a consumer product first. And the returns are derivative of people consuming it through rent. And so why your product and build to rent is so attractive is that you get a single family home, you get the light, you get the space, you get all the things you want from a single family home.
But you get a lot of the benefits of an apartment. So you have flexibility, it's cheaper. You're starting to see a lot more amenities. So you have the amenities you'd see in multifamily property. That's like gym and lawn care and all sorts of things that people, especially coming out of cities who are used to living in amenitized multifamily, they expect, and they don't get it in normal single family.
Housing. It's a great consumer product. We own about 5, 000 build to rent homes, not including NexMetro sort of investments, and they're different kinds of products, just different kinds of formats. And what we've seen is that most people have never heard of it. When we were in markets a couple years ago, we'd advertise on it, no one's ever heard of it, they didn't know it existed.
Even where you advertise for it, you can advertise for it on apartments. com, but it's not an apartment. This is big consumer awareness. Change where some markets now they've heard of it and we see the benefits of that in some markets. They still never heard of it. We did townhome and Charleston. We've really underperformed at first because the consumer it was so counterintuitive to them.
We wanted wasn't looking in that zip code. Because, they're used to looking for urban infill, and this is close to urban infill, but townhomes, so whole homes, and so there's this, not just the real estate industry and financial industry getting up to speed on this, but the consumer is early, early days.
Josh: And Phoenix is kind of ground zero, right? So the consumer in Phoenix really understands our product. And so we see lease ups much quicker in Phoenix. We're getting 20 leases a month. Right now we're probably getting 16, 17 on new lease ups. But in new markets, it's much slower. They don't know what it is.
You have people coming in and saying, can I buy one? It's like, no, you can't. These are for rent. You sure I can't buy one? This is perfect for me, but I'm not really a renter. And so our leasing agents, of course, have to turn them into leases. But you're right, it's, they don't really understand it. And in some regards, I would say the industry is a little confused, right?
Because everyone's calling themselves built to rent because that's what capital is after. But you dig into it and you're like, I'm not really sure that's built to rent. I've even seen some traditional gardens called built to rent, which is a little bit, I think, like stealing. Okay, Capital wants to be in this.
This is going to be my marketing on it. That's why our brand is so important. That's why we have all of our communities called Avilla. Because then as we get into a market and we have, in Phoenix for example, we've got over 2, 000 homes in Phoenix, all in Avilla communities. People figure it out, right? And they find an Avilla that they're like, oh, that's kind of interesting.
And then they type into Google, Avila, and they see that there's 15 projects across Phoenix. Oh, I'll even like that one better. That one's closer to my work or closer to whatever. We spent a lot of time on branding and making sure the consumer understands our brand and knows what we are. And the other piece is understanding your consumer.
So I think we do more consumer research than anyone in our category. And to me, the product needs to be driven by the consumer. So consumer driven product is going to enhance your returns. It's not what our investor wants. It's not what you guys want as our lending partner. It's what the consumer wants.
So we are constantly asking them, Okay, what do you like about the product? What don't you like about the product? And there's always an interesting story that I like to tell about being consumer centric. The big thing that we continually were told early on, there's a couple of things. One was, you need a clubhouse.
Why don't you have a clubhouse, right? People are going to want a clubhouse, they're going to want to work out, et cetera, et cetera. The other one was, you need to put dual sinks in the master, in the bathroom. And so we're like, okay.
So, the way we usually deal with those kind of suggestions from our partners is, we don't want to say, no, you're wrong.
We just say, okay, we'll put it in our survey. So we put it in our survey, and we asked, Would you like to see a clubhouse? And what value would you put on that as a renter? And would you like to have two, uh, Double sinks in the master and our three, two and three bedroom homes. And on both the consumer said, absolutely not.
I don't want a clubhouse. I don't want to pay for it. I'm not going to use it. It's going to be a small room with a Peloton and a treadmill and a couple of free weights that I'll never use. What we focus on as being in areas where. There's an Orange Theory, and there's a fitness club, you name your fitness club, of that area, and there's a CrossFit gym and that kind of thing, and they're going to go to whatever gym they want.
So we don't waste money on something that our customers don't want and don't need. Then the other interesting part was on the syncs. And I should have just asked my wife, I probably would have saved myself some time, but I just said, the response we got from our consumers, no, I don't want dual syncs because I'm a single woman, which is our highest demographic, and I want room to put my stuff.
I want to be able to put my makeup and my care products on the sink. I don't want another sink that's just going to sit there and never get used. And my wife said the same thing. She's like, yeah, you need counter space. So we try and really focus on what our consumers need. And then we're very disciplined.
And we use that in multiple ways. We use that to talk to our partners, our lenders and our investors and say, this is what our customers really want. We also use it to keep our team disciplined because. In real estate, one of the big challenges is everybody loves real estate and everybody wants to be on HGTV, everybody wants to pimp out their home or whatever, and development people are no different.
We have to really manage that by saying, this is what our consumer wants, here's the interior packages, pick one, there's four packages. You don't get to go out and pick your own finishes and cabinets and things like that. So it helps us really maintain our discipline by saying, that's great, but our customer wants this.
And so let somebody else do this creative thing. We're going to stay disciplined to our product. And I think that a lot of groups are figuring that out, right? The single family rental groups. They understand what their consumer wants and they're targeting those kind of homes, that kind of product. And also I think it's going to have an effect, you mentioned earlier, how people are moving out from more urban areas to suburban areas, they're getting into the built to rent, they're renting these homes.
They want new, they want new, they don't want to live in a home that's got Old cabinetry and isn't updated to the current interior expectations. And that's where I think BTR is going to continue to outpace just buying resale homes and then flipping them into rentals because the consumer really wants that new feel.
And if that's how you can steal them in our BTR, and I think in general, we can steal that consumer who's going out to buy a house cause they're like, yeah, I can buy a house, but I can buy a house that was built in the 1960s and it doesn't have the current fissionism, et cetera. In the area that I want to be in, or I can rent this place.
That is all the new stuff. Plus it has some entities, a pool, et cetera. It's got communities. So we've got to keep ourself differentiated in that sense. And I think that's going to be attractive to both the consumer and also to investors because there's a lot less, obviously CapEx and new product.
Ben: I want to get to your founding story, but quick comment, because I think it's been important for our customer, and I think has become important recently for the real estate industry, which is the difference between build to rent and SFR, single family rental. So let me just clarify that. Maybe you have comments, but so most people.
At first we're confused because since 2010, real estate institutions started buying single family homes. They buy them actually either out of foreclosure or then later off of MLS. So people who were going to buy a home were competing with big institutions to buy those homes. And they bought up a lot of homes in markets and that created, I think, a huge political backlash.
And I knew our customer does not want us competing with them. They don't want some big institution competing. Like our customer thinks of that as not attractive for their dollars to be ultimately competing with sort of individuals. So build to rent is like a different formula because you're creating new homes is expanding the pie and the industry institutional money has started to pour into it because these big institutions, big pension funds, they just can't get on the wrong side of politics.
And so there's another reason why Build A Rent, I think, has such tailwinds is that it has a lot of benefits, even advantages over SFR, but without the negatives.
Josh: I agree with you, but I do think that there's so especially with our product, because we're building typically on multifamily land. Or commercial land that we're converting into our product and our homes could not be sold individually. It's a single plat. It's a single site plan. And so it's really different.
I still think that there's risk. For example, if you're doing a deal with a home builder, you're an SFR group and you're buying an entire subdivision or you're buying a bunch of Individual homes that the builder's saying, well, this home and this home and this home in the neighborhood. I still think there's a risk.
That home could have been bought by an individual. That townhome could have been bought by an individual because it's set up to be able to be financed by an individual. And so I think there's still some risk there. Although I agree with you, at least there's being product added instead of just buying homes that are existing.
Then you're definitely taking away an opportunity from someone else. I continue to think there's some risk both to the home builder. I think there's a huge risk to the home builder because Especially if you're building in your own subdivision and you're selling to four rent groups, your customer's not going to be happy, right?
Because we all know people don't want to live next to renters. For some reason, people don't like that kind of nimbyism. But also, there's continued risk for the big SFR groups that buy those homes because you're still buying homes. There's a political threat there.
Ben: think it was federally they talked about trying to ban corporate landlords.
Josh: You can own like more than 50 homes, and if you did, you had to sell them.
Ben: Kimber, who was proposing it, might have been Elizabeth Warren.
Josh: Throw on top of that, God forbid your money doesn't come from the United States, right? You're backed by sovereign wealth or something like that. It's an even worse political situation. Still challenging out there just because of the political environment, but I think that hopefully we can get to the point where we're delivering enough homes for everyone.
We need to get that supply up. I think more supply solves a lot. I mean, look at what's happening in multifamily right now. People have been saying, how do we get these rents to stop growing so fast? Guess what? We've got the biggest supply in history coming into these markets. And rents have been flat or even declining for the last 24 months.
So supply is the answer. It's not federal programs. It's not rent control. It's supply. And hopefully I think multifamily has gotten there. Single family is a little bit more, it's a smart strategy. It's trying to build the right amount to keep pricing up, but keep building their business and home builder.
I think the GFC made home builders a lot smarter. I used to be in home building, as you probably know, and I think that they've really changed their thought process on just bigger, let's have sustainable growth and make sure that we're keeping that pricing up.
Ben: Go back to your point about politics. It may not be apparent to people who aren't in the industry that politics is filtered into all sorts of decision making. As a real estate developer, you're dealing with it at the federal level, you're dealing with entitlements, you're dealing with communities. There's just a lot of politics in business and can make it difficult to know how to deploy and how to grow. The massive wave of multifamily came into the market. It's been fascinating because on one hand, yeah, it kept growing. Rents down or flat, but also we saw the most demand for multifamily in the last 12 months than anybody ever expected.
And I think that's because of the migration immigration wave added something like 7, 8, 9 million people to the country in a very short amount of time. And that has all sorts of consequences, but one of those is it drives demand for real estate.
Josh: I heard that even this morning, we had the largest amount of immigration in any single year of last year ever since like Ellis Island was built. I think demand's been very strong. I think it's going to continue to be strong because we have a shortage of housing and it's not going to be solved with one year of high multifamily.
All it's doing is it's causing lease ups to take longer because you have more opportunity. In the moment, but that's going to get absorbed, and then rents are going to start growing again, and there's continue to be a shorter supply of housing. That's just a long term tailwind in the housing market, and I think development companies have been ringing the bell for a long time saying, How do we get more supply?
And the big impediment is, a lot of times, I'll call it politics, but it's really local jurisdictions not wanting certain product. They're trying to over control the market. They're trying to say, we don't want that, or we want more commercial, I mean like the complaint we get all the time is, we don't want more rooftops, we want more commercial.
And we say, you know how commercial groups decide on where to put retail? They look at population. So the reason you don't have the retail you want is because you don't have enough population, what you need is more homes. There's a misunderstanding there with leaders in local jurisdictions. And then the neighbors don't want it.
They want to move into a neighborhood, they buy their house, and then you say, we're going to do this rental community in this area, and they say, no, no, we don't want renters. Renters are bad. They don't want, More traffic. Complaints we always get is more traffic, more crime, all these things. Yes, the roadways are designed for more traffic. The schools are designed for more people. So I think, I would say, when we first started, most of our projects, because they're, our product is unique, it doesn't fit in any zoning category. So we're almost always doing a zoning case. So you probably don't see this as much, but our average time in escrow on a project is like 18 months.
And that's all we get zoning. We have ones that are 12 months, and we have ones that are three years to get through a zoning case. And so we're spending all this money and all this time. That's all on us as a developer, right? That's our cost. We don't put that on our investors and on your investors. When we first started, we had about 85 percent success rate.
We'd put a property in escrow 85 percent of the time we'd get through zoning. That's now down closer to 60%, maybe a little bit below or below 60%.
Ben: You can't get it zoned for your product and you don't build it.
Josh: Yeah. And then we don't build it. Then we take a loss and we move on. And that community doesn't get more housing. And then they wait for the next person to come in. They shoot them in the head too. It's like such a ridiculous problem. That's another expense to housing because that money's got to come from somewhere.
Right. And we've got to make a profit. We're a for profit business and all that adds to the cost. It's really challenging.
Ben: Yeah, you've built all over the country. I've also built man all over the country and the zoning or regulatory challenges. It's so much more complicated. People realize we actually tried to do a project, not a horizontal multi, but we, there were 200 units. People were going to build multi. We went into the city.
So we want to build them as bill for rent. And they had no zoning designation for it. They didn't know what it was. I think we've even spent three years on it. And then the park service fought with the department of transportation over a bicycle path. through the property and they fought about it for like literally a year.
And we ended up basically, once we got it zoned for 200 houses, we're selling it to a big home builder. We're like, forget it. This is too hard.
Josh: I'm exhausted, I can't do this anymore. We just had one, I can tell you, I'm a civil engineer so I've been doing zoning cases my entire career, but we just had one where we got all the way through zoning, we're ready to start construction, we're getting ready to close, we're getting ready to call our investors capital, and the city goes, we screwed up, yeah we told you you didn't have to go through a full zoning case, it was administrative, and this is like 12 months into this escrow, yeah, you're going to have to go through a zoning case.
So we had to start from scratch, and now we're trying to, like, push it through the system. And then as soon as you go through a zoning case in a public hearing, everyone changes their opinions, or there's people that don't want it or whatever, and we have to spend all this money politicking with the mayor and council members to make sure that they understand the product.
And there's no consequences. We did everything you said you wanted us to do for a year. We're all singing kumbaya, and at the last minute you say, oh, you know what, we read our own code wrong. You actually need to go through a zoning case. You're just like, I can't even believe this is happening right now.
Ben: I actually had a question on that. Let me just make a clarifying remark for people. So you keep saying an escrow just so people understand what that means.
Josh: Here's our process. Our teams are always out. We always want to have a pipeline of new projects that we're working through zoning, etc. So we're out talking to landowners. It's much like when you buy a home, but you basically go out and make a bunch of offers. We probably put out 20 offers for everyone that gets accepted, maybe less than that.
Once they accept the offer, you do a contract and we put a deposit down on the land and say, okay, we have 12 or 24 months or whatever it is to get our zoning approved. That's opening escrow when we make our deposit and sign the contract.
Ben: How big a deposit are you talking
Josh: Typical deposit, a hundred grand is I would say average, sometimes higher.
Then sometimes there's structures where they say, okay, you get a, I don't know how much detail you want me to get into, but I could talk about this in minutia. But sometimes they're like, okay, we'll let you open with 50, 000. Then you have 90 days. To do your investigations, which is engineering, environmental studies, geotech, soils or studies, sit down with the city, et cetera.
And at the end of the 90 days, you got to put it down another 50, 000. And at the end of that, your money's hard. So now if you back out, you lose that money. And sometimes that's 200, 000, it's could be different amounts. And then sometimes there's deposits along the way, like. When you make your first submittal to the city, when you get your zoning approved, etc, etc.
On our average, I would, this is just me estimating, but I would say from the time we open escrow to the time that we get zoning approval, if we get zoning approval, it's more than 500, 000 and it's less than a million, call it 750, 000 on average, what we've sunk cost. Deposits, all that kind of stuff. Our projects are small. We're doing 200 units, just an average for us and 20 acres. Imagine folks doing these much larger, those deposits gets pretty substantial and your costs on costs get even bigger.
Ben: Just to summarize that, so you're talking about taking, on average, 18 months You only have a 60 percent hit rate, spending 750, 000 each time. You have your team that you're managing across all these projects to build 200 units. And you're talking about wanting to build millions of units more than we normally do.
The practical challenges, they're not surmountable unless you nationalized zoning or something. I think it's going to be, which I don't think makes sense. So
Josh: in 2006 and seven and eight, it got really hard to get zoning approvals. Every jurisdiction was fighting you tooth and nail and then the GFC came and then in 2010, you could walk in and just like approved.
Ben: yeah,
Josh: build in our community, right? You could see some of that.
But what would be super helpful, I think, would be, and I don't know how you would do this, but to require cities somehow to make a decision early as to whether they're going to support a product. Because some cities, you have to go all the way through engineering to get a zoning approval. And you're like, listen, just tell me Here's a site plan, a picture in elevations, and here's how it fits in the zoning. And just tell me if it's a yes or no, and then that's binding. Then I could spend a hundred grand testing and testing until somebody's like, Oh yeah, we like this product. Okay, great. Now I'm willing to spend a million dollars to go get it approved. But I haven't spent a million dollars and done all this engineering, like literally completely engineered the entire property.
That's what costs all the money. And then you say, you don't like it. Tell me you don't like it early. Tell me and I'll go away. I don't really want to spend a million dollars for you to say no.
Ben: Okay. So let me roll back the tape here to the founding story and the origin. I think it's great if you give context because most, probably most of our listeners were not in a professional career in 2008. So like when we talk about 2008 financial crisis, like you and I are like, get cold shivers
Josh: And they're like, what was that?
Ben: and they're like, Oh yeah, I feel like organization.
They're like, yeah, I was in eighth grade.
Josh: I've had people on my team, I'm talking about GFC. They're like, you realize I wasn't even in college during the GFC. I was like, Oh my God, I'm so old.
Ben: So long time ago now. Yeah.
Josh: So speaking of GFC, so our origin story is, it's a classic startup company story. There was a guy named Roger Carver, he was in Tucson, Arizona. This is 2009, everybody's losing their home.
And there's a group in Tucson that had built essentially what is the Avila product. So single story, detached, with a backyard, smaller cottage homes, average of 1, 000 square feet. And they had built them. It was two guys that went to the University of Arizona together, and they built a couple homes on a couple acres, and then he grew it up, and at the end, in like the late 90s and early 2000s, they were building 120 homes, effectively, the Avila Mall.
Roger knew about that. He knew that people were losing their homes. He said, this was a cool product in this point in time, because the folks that are losing their home aren't going to want to move into an apartment, they're going to want to move into a home. So he went around in Tucson and was talking to different equity groups, or basically high net worth family offices, trying to raise capital.
And the one that took them up on it was GS Joggy. Joggy is one of my partners and they started building the first project in Tucson. I think Joggy actually financed the whole thing himself. And Roger was a project manager and there was a guy named Gary Braff, who was the contractor in their partnership.
They started building the first one. They bought a second property. They bought a third property all in Tucson. And by the time they had bought the third property, they started syndicating. And Tucson's a small place, so syndicating is probably, sounds a little bit more broad than it was. But that's where all my other partners came on board.
Mark Sandroff, Ken Abrahams, they gradually all came to Joggy's company as an investor. But then in 2012, they opened their first project, and they said, Man, we're onto something. This isn't the same customer we thought we were going to get. These aren't people who have bad credit and are moving out of their homes that they just lost.
These are people with great credit, high incomes. They just don't want to buy a home, and they also don't want to rent a traditional apartment. We worked with and said, could we build a business around this? Could we go and take this national? Of course the answer was yes. And it was like, this is a differentiated product, it doesn't really fit any categories, there's no one really doing it, there's a lot of moat around it because of the zoning issues.
So they decided to form NexMetro. NexMetro was formed in 2012. That's when they found me. My background is really corporate, national home builder, understanding scale. I built master plan communities. That's where I cut my teeth. I built my first community in Phoenix was called Vistancia, which is in northwest Phoenix.
7, 000 acre master plan, but I'd always been entrepreneurial and someone came to me and said, Hey, this group out of Tucson's. Starting this company. I think you should talk to him. And I met with Mark and I met with Ken and met with Joggy. We hit it off and they're like, okay, young dude, go out there and make it happen.
Right. Here's some money. Go do this. And so we started out in Phoenix. That's where I was based. And so that made sense, but we wanted to get into new markets. We knew that we wanted to be geographically diverse, but we started our first project in Tucson, in Phoenix, and then we quickly were in Dallas. But we continue to be syndicators.
So we basically would do an individual project fundraise with our friends and family network, really. And all high net worth individuals and family offices. And that's how we've capitalized every project we've ever done still to date, except for one change last year, we changed to a fund structure, but we moved from Phoenix into Dallas, uh, Dallas was a real challenge, really difficult market to figure out.
I had never worked outside of Phoenix. I got to trial by fire in Dallas, learning how to develop there. Then we went into Denver. Denver was much easier in terms of the community. The real estate community there is much friendlier. I felt like I met everyone a lot faster. Then we moved into. Tampa, Florida.
And then after that, Austin, San Antonio, and then Atlanta. So that's all of our markets today, but it's still the same product. And this is what's unique about us. And by the way, when we start, I missed this part. When I said a classic startup, I mean, we started the company with 800, 000 loan from the founding partners.
That was it. I subleased a back office from a private equity group here in Phoenix. It was just me for two years. 18 months before I finally hired a accountant, like an internal accountant. I was my first employee, then I hired a assistant, then I hired another accountant, then I hired a development person.
And so we started out with just me, and now we have, I think, 74 team members across eight markets, delivering about 2, 000 homes a year. Still all friends and family, high net worth individuals and family offices funding our development side. And, uh, A big change that we had in 2019 was we were going to be a merchant build company.
We're like, we're going to build these things. We're going to sell them, build them, sell and build themselves. And in 2019, one of our advisors came to us and said, Hey, you should think about doing a portfolio or recap into a portfolio with these assets and generating long term capital. And I had listened to guys, I had met Steve Ross and a few other guys had said.
Hey, the way to really make wealth in real estate is holding the assets and building a portfolio, not staying on the hamster wheel of building them and selling them. And you've got a great product. Why would you sell it? Just manage it longterm. So we did a recap with our own existing investors. We didn't go out and find new capital.
We just went to our investors. We had a pref equity slug over Fannie. Our Fannie rate was like 3%, something like that, 30 year. And then we put a prep piece over it and we went to our investors and said, Hey, your development investment's over. We can pay you out based on the appraisals we just received.
We've got two appraisals and a BOV. They're all basically within a range, or you can roll your investment, your profits, because they'd already gotten all their capital back and some profits, roll your profits into this. Portfolio and 98 percent of our investors rolled and it was like light bulb on different business.
Now we're not just merchant bill. We're not just on the hamster wheel. We're going to build this portfolio and that's where we've been going from there. So now we have 12 projects in our portfolio right now. I'm going to continue to grow that. We still sell assets from time to time for various reasons.
And we had to sell them early on because we had to prove out. But our product, we get the same cap rates as class A garden because people didn't believe it when you're underwriting, whether it was the banks or whatever. So we did sell some, we still sell some for different reasons. It's strategically, but now we're moving more towards building this large portfolio.
And our goal long term is right now, our aspiration is we want to start 5,000 homes in a single year by 2030. I think we're going to be able to do that. It's really just a question of capital, I think, from an infrastructure basis and a development perspective. Decide we can do it and grow a portfolio.
Maybe we'll have 20,000 units in our portfolio by 2030. And now we've got more revenue coming in from our asset management, but our ownership of that portfolio, we take a huge ownership stake in our portfolios and in our development side. And it's a different business. Okay. This is ongoing. And then when the development does this, which it inevitably does, there's just so much volatility in development.
It smooths out the business. And I've learned, these are all things I learned from talking to people way smarter than me, Steve and Greg from Fairfield and things like that. I just, you listen. To the guys who've been around a long time, you start to pick up themes.
Ben: Yeah, there's so many follow up questions I have, but I want to point out how unusual it is that what you're doing, because very few real estate companies that have a programmatic brand, whether it's malls or multifamily or office, they're all different cities. The fact that you have a very similar or the same product across many markets with the same brand, there's very few like a Mills Corporation.
Mills was a branded retail concept, but there's very few. I think it's so smart that then you, of course, you want to keep owning them. You don't want to sell off your brand and your product type. And I think it has really hidden power. Development is the hardest kind of real estate by far. I guess a hundred times harder than.
Owning real estate? Way harder. And the fact that you've done a scale across nine cities is extraordinary. Really unusual. Just a few follow up questions on that point. How the heck did you do that?
Josh: So I'm the kind of guy that can eat the same thing every single day, so I'm comfortable with that. I also like, but I think that kind of speaks to the nature of NexMetro. It's, we're super disciplined. I mean, we had a great product and everyone was saying like, Oh, you should do this and you should do that.
And why don't you get into a different niche and blah, blah, blah. And we're like, no, we build one, two and three bedroom homes. That's what we built. Brian Rosenbaum, who's my chief development officer. I've known him for
probably at this point, 30 years. He was with Lenar when I was with Pulte and we both say, it's like, Hey, It's not sexy, but it makes a lot of money.
Our stuff is just banging out. It's great housing. People love our product. We're not going to win any architectural awards, but if you're building the same one, two and three bedroom home, same floor plan all across the U S and just putting different wrappers around it, there's a ton of things that does for you.
And we're evolving the product, but when we evolve it, we roll it out across the entire country. I don't have to worry about whether I. I'm going to like the product that my team is building. I don't have to review plans. I don't have to have a team that reviews plans. I don't have to have them. There's all this infrastructure I don't have to have because you're building the same product over and over again.
Right? So it starts there. It's just simple. It's like manufacturing. So I know the product, what it's going to be like. Our customer knows what it's going to be like. So that's great for our brand. We said, we're going to have this brand develop. People said, you're idiots. It's never going to work. And the number of times I've been told that in the history of NexMetro is.
Yeah, there's many things that we've done that people are said, I don't overwork and then it works, but we just think it creates that consistency. And I just, I don't think other groups have had that consistency where you can actually have a brand, right? If it's not the same product, how do you have a brand?
We have people that will transfer from Phoenix to Tampa and they'll say, Hey, I'm moving to Tampa. I see you having a villa there. Can we translate? Yeah. We waive the transfer fees. They know exactly what they're getting. They can furnish it in the same place. They pack up and it's easy. So that was the first thing.
Brian is super disciplined. He's a second generation home builder. So he understands the value of production building and then it flows through the whole thing. Right? So our investors know exactly what they're investing in. They don't have to spend a bunch of time. They look at an offering memo. They're like, okay, another villa.
What are the numbers look like? I know what I'm getting. They've been successful. Then you go to the lenders and lending partners and they're like, Oh, you're building the same product. Down the street. So your costs are dialed in. You're not going to miss on your costs. The only thing you can really miss on is your land development.
That's where the biggest risk is in our business. Because if somebody messes something up on, Hey, they don't have a sewer connection, right? Or they miss something on the grading and things like that, but the houses, we know what they cost. And that's the biggest part of it. That's 80 percent of the cost of the business.
So our lenders love it, right? Cause. It's so consistent. And that's the same thing with the Fannie Freddie. We can underwrite really quickly because I understand what it is, the permanent financing. So it just makes everything so much easier.
So you're able to streamline. If you think about it, we use third party, general contractors. We use third party property management. We're delivering 2000 homes a year. We manage 5, 000 homes a year and we have 72 people. We're super lean, but you're able to be lean when you're building the same product over and over again. And the other thing we're doing is we're getting rebates and we're able to rebuy materials.
In bulk, because the product's all the same. At a high level, it's just as an organization, we're very dedicated to the discipline of our product. And when someone starts trying to go off on a tangent, collectively we pull them back in. Every year we do a strategic planning with my leadership team, and every year someone says, Should we do a different product?
Should we try and do a townhome? Should we try and do this? And we talk about it for about 10 minutes, and then we decide we're not doing that. Because there's just so much opportunity in our space.
Ben: That discipline is unusual. In any industry as it across tech and real estate and finance, and you just don't see the financial sector, not famous for discipline,
Josh: Yeah, you got to find the right partners, right? Even on the financial side, there's people who get it and they're like, Oh, this is great. It's super easy to underwrite and I can really understand. And there's not a lot of risk there because of how the product builds. But then there's other ones that are like, this is boring or I don't like the product.
It's not cool enough. Go build something cool and lose money. That's fine. We're here about. Building a great product, delivering a fantastic customer experience and hitting our returns.
Ben: considering that you are across the country, building homes, you have fairly complex supply chain and labor across the country. How have you seen supply chains change? Was it difficult during the pandemic? Has it gotten better? What's happening with labor. We saw a lot of problems with keeping the laborers on the job is really challenging at different points.
So what was it like then? And what is it like now?
Josh: Worst point, I would probably say it was in 2022. Costs were going through the roof. That was really when the supply chain started becoming a problem during COVID, but it really hit us at that point where it was just like, okay, can we sustain these costs? Even with incredible rent increases, is this going to go upside down?
The challenge, there's a lot of challenges around it, but when that happens, people start talking about, oh, should we be forward purchasing lumber, hedging lumber, right? By the time you realize that, it's too late. You gotta be doing it when it's cheap, not when it's expensive and thinking, how are you gonna hedge it right?
But the challenge is, as soon as you think you've got that locked down, then something else changes, right? So it was, first we couldn't get lumber, then copper was challenging. Then it was, you couldn't get appliances at some point. We've got a national contract with GE. And at some point we just said, listen, as long as it's stainless steel and has an ice maker, we don't care what model it is.
And so we were getting higher end refrigerators and microwaves and things in our homes, because they're like, we can give you this. We have it. We're like, okay, we'll take it. And our customer doesn't care, right? As long as it's stainless steel and it's quality that they're not picking out their appliances.
So that gave us a somewhat of an advantage, but then it was, you couldn't get. Transformers. The boxes you need for people who aren't in development, that's the green or tan boxes you see in your community that basically brings power into it, right? They're being allocated. Our construction time increased by over 50%.
So every project was behind schedule. And every project was over budget because you couldn't get materials and you're willing to pay. And then, the worst part, the real reason it was behind is because I always remember this story. I forgot the guy's name, but anyways, we had a project that was under construction at that time.
And we got all the way to where we were. We're doing a roofing and then the schedule just kept on getting delayed. I'm like, what is going on with the schedule? We can't get roofers. I'm like, what do you mean you can't get roofers? We work with the biggest roofer in Arizona. Yeah. We just can't get labor. I said, how many people are out there?
And he goes, one guy, his name's like Kevin, the roofer. We're doing 200 homes and we got one guy. And I literally, I was like, do I need to show up on the weekend with my hammer and help this dude out? What is going on? That was the worst. Budget's increasing. Labor was challenging. I think the supply chain was really the more challenging part.
Labor tends to solve itself because you just start paying them more. Fast forward to today. Total reversal. Costs haven't come down substantially, but our project duration, has come down about, I'd say, 15 percent. So we've taken about 45 to 60 days off of our construction cycle from start of construction through first home delivery.
Ben: Which is normally what 18 months.
Josh: That's more like 12 months, 12 to 14 months.
Ben: Ooh, that's fast.
Josh: Yeah, so we've taken some time off of that schedule. 18 to 24 is usually our total project completion time frame. And then labor, we haven't had major schedule delays due to labor anymore. At least I'm not hearing about it. My team struggles with it, but it hasn't gotten to my desk.
And so that means that it's working out. So we're able to find a lot of that's the immigration that you referred to earlier. Some of that immigration is that's coming in that the record immigration is coming from folks moving in from China and Russia and Ukraine, trying to get out of that and have a lot of cash.
Quite frankly, but the others are obviously just people who want to come into us and be laborers and chase the American dream. And so that always helps with labor. That's why anyone in the real estate business secretly is like, when there's a lot of immigration, like great, it's going to lower our costs and also creates more customers for us.
So there's a benefit there. I mentioned costs are not coming down. I'd say we're starting to see general contractors and their subs squeeze. So we just had a project, I think we pulled, I think it was like three million out of costs with just going back to the subs and the general and saying, Hey, and one of the things we did is we said, if we give you two projects, how does that drive down a cost?
And so they've shaved off, I think that would have been probably 5 percent of the total project costs just by going back and Asking people to be a little sharper with their pencils. And so, we're starting to see a little bit decrease, but it's not going to be monumentous. We saw 20 percent cost increases in one year.
We're not going to see 20 percent cost declines in one year. We'll probably see a decline now, and then it'll probably start accruing back up.
Ben: And the bottom line is that I'm seeing the same thing, more or less inflation's gone from the market. And I was also seeing it on the team. You know, we'd hire software engineers and chasing salaries and sorry, bonuses.
Josh: From a business standpoint, I'm seeing really great candidates. In the last two years, I feel like we've made some really outstanding hires, just people are more available and there's just not as much, I don't want to say there's not as much opportunity out there, but I just think people are kind of like, Hey, it's not quite as crazy as it was a few years ago in terms of everyone's getting offers all the time.
Ben: There's all this stuff in Wall Street and the news today about how interest rates are going to re accelerate, inflation will re accelerate, and I'm like, nothing in our world is re accelerating. It's normalizing, some of the stuff is normalizing
slower, but it's all going back to normal. I'm not that worried about, I mean, I guess the government could do something crazy, but it does feel like the environment's getting a lot better.
Josh: Oh yeah. We're seeing cap rates come down. We're seeing lending spreads shrink a little bit. And of course the Fed coming down 50 basis points helped us a lot, helped our lending partners as well. We see rents are starting to come back. It's October and we had 200 basis point increase in our stabilized portfolio occupancy last month.
That's counter seasonal. Fingers crossed. We continue to see improvement in the business. I mean, our thesis right now is listen, if you're investing in a Villa Homes community today and in one of our funds, that community is going to deliver in 2026. Then we're going to lease it up in 2026 and 2027. And then we're going to sell it or recap it in 2028.
What do we think is going to happen between now and then? I don't know when, I don't know how quickly they're going to come down. I don't know. where they're going to bottom out. I don't know how much interest rates are going to come down. I don't know when they're going to bottom out, but it seems like in the next five years seems like a pretty reasonable guess at some point.
And so I think an investment today may be the best investment you've made in a long time because cap rates are definitely going to come down. Interest rates are going to come down. Costs are leveled out. So to your point, it's like it's normalizing. Everything's elevated right now and it's normalizing.
And maybe we even get a little bit of compression as we bounce from the recovery. Barring any unforeseen thing. I think the tariffs, a lot of people are talking about that. I think that's a bigger risk to our business just because it drives up costs. Politics aside, tariffs drive up cost for us. How real is that when it has to get through Congress?
Hopefully that isn't the thing that derails us a little bit, but I think if it starts to derail us, there'll be a correction. Whoever's in charge is going to see that and be like, okay, let's back off of that. I don't want to create an inflationary situation again.
Ben: Just to add one more positive, which is that what's happened with high interest rates is that it's really difficult to start new construction, the cost of construction, the cost of interest rate is so high, the lenders have pulled back a decent amount. So new starts for multifamily or for your kind of product has fallen, I don't know, 80 percent or something really significant.
Josh: Yeah, 75, 80 percent. There's no perfect number, but yeah, you think about that. We have a housing shortage and starts just dropped 80 percent, which means deliveries are going to drop 80 percent in 24 months.
Ben: Yeah, so like in 2026, looking at shortage 2027, so you're delivering back into a really good market. And so real estate got hurt last year, and now I think it's going to get helped, but clearly not going to be a straight line.
Josh: And that's what I love about real estate though, right? What I love about real estate as an investment is it's a long term investment. I've always been, I buy stocks, I don't sell them. I've always been dollar cost averaging, right? Even from my first IRA when I was 18 years old. I love the long game in real estate.
If you look at over the longterm, it goes up. So as long as you don't get over leveraged and you don't make mistakes. And I tell people what you want to do when you're investing in real estate is invest in the sponsor. Don't get hung up in all of the minutia. There's so much financial engineering that goes into. Proformas and things like that. Who's your sponsor? What's their track record? Have they performed in the past? Are their customers happy? That's who you want to invest in not focus on what's my waterfall look like and do I have the best waterfall in the industry? It's okay. You invest in a great waterfall with a crappy sponsor.
You're gonna lose your money I think there was a stat from Peter Lineman. I'm probably gonna screw it up But he said they did a research on commercial real estate investment over the last 45 years and they said They would basically do an investment every single year. Okay. So if you invested in 2007, 2008, 2009, 2010, like every single year, if you held that asset in any given year for three years, even if it was 2008 to 2011, you made money 96 percent of the time, maybe it's 93, it's in the nineties.
And if you extend that to five year period. You made money 98 percent of the time because real estate eventually recovers and goes back up. And that's what I just love about it. It's like, you got to be patient. You can't look at a company on an annual basis. You certainly can't look at it on a quarterly basis in real estate, look at your investment because it's just, that's not the timeframe of real estate.
Real estate's a long game, which is why I sometimes think. People have asked me, would you ever IPO NexMetro? I'm like, no, because I can't predict the quarterly earnings. It's very volatile, but I do know over time it does this. I just think it's a fantastic. And people know that from when you buy a house, people say, do you really think that renting is better than owning a home?
That's the question I get because are you really against home ownership, Josh? You're a rental company. I'm like, absolutely not. If you're going to own a home. For more than three years, or if you're going to be in a place for more than three years and you can afford to buy a home, you should buy a home because you're going to build equity in that.
But if you're not sure if you're going to be there for three years, and I would even say probably five years is better, you shouldn't buy a home because you could get caught in the cycle and now you got to move or whatever. I went through a ten years from 2005 to 2015. I bought my house in late 2005, my last house.
I had to hold it for ten years to get out of it and not have to take a loss.
Ben: That's because you're old now. You've seen a down cycle.
Josh: I've seen the down cycle, right?
Ben: It's been 16 years and most people don't know what you're
Josh: 16 years of straight growth. That should tell you something right there, actually.
Ben: Let me ask you one more sort of long term question because you're in Phoenix, and I'm interested in this. People outside Phoenix wonder about the rising temperatures. There's some long stretch over 115 degrees or something.
Josh: 60 days over 115 degrees or something crazy. We broke a record this year.
Ben: Yes, you have rising temperatures, you have water scarcity, at least it seems to me, from the outside. So how do you think about the long term environmental complexity of Phoenix?
Josh: I think you could throw a bunch of places in that, right? You could talk about Central Florida, obviously.
Ben: Las Vegas.
Josh: Speaking specifically to Phoenix, first of all, I'll start out with the water part of it. Arizona has the best water policy in the country, because you had to. Starting in the 50s and into the 60s, we have a program in Arizona where As a developer, you have to prove out a hundred year supply of water for your development.
Now, the confusion happens and water policy is really complex, so it's hard to do a sound bite in a news article and have it make sense, but there's parts of Phoenix that don't have water and they should not be building them. West side, west of the white tanks, challenged with water. We've known that for 20 years, no surprises.
But if you're building in a city, the city, like Phoenix, Goodyear, Scottsdale, whatever, Chandler, pick your city. They're what's called a designated water provider. They have to prove up 100 years of water supply for their city. And then they can give a developer, by paying your water permit fees, where I'm allocating, to you this much water so you have 100 years supply through the city.
The city continues updating their models. Where you get in trouble is when you're building in areas that are not designated. Then sometimes you have to go buy water. You can buy water from farmers. If you buy a piece of property that was irrigated, you usually have a water right. Point being, without getting too much into the weeds is, I don't really worry about water supply in Phoenix.
I think it's an overstated concern. I think Colorado has more issues with water supply than Phoenix does. By the way, we pay, well I'm just gonna round numbers, but we're probably paying 2, 500 a home in Phoenix to secure our water supply through this city. In Denver, that number is 45, 000. Let that sink in.
So you're paying 45, 000 in Denver just to secure water to build a house. That's not sustainable. I'm not worried about that. I do worry about the temperature, I just think You adjust to it, but you think at some point it's going to be unsustainable. But when is that point? And as a business, I guess we would just probably over time, basically what's going to happen is people are gonna stop moving to Phoenix and you'll be able to see that start happening.
The demographic shift will happen and people won't be moving here and you'll say, okay, Phoenix is no longer a place to invest and then we need to move away from it, but I don't think there's anything we can do about it as a developer per se, other than obviously trying to, we build the energy star, we try and be energy efficient, et cetera.
Try and be water efficient, you get better air quality. I've been in Phoenix for 26 years now. I moved from Wisconsin when I got out of college and it just seems like it gets hotter and people keep moving here. But it's interesting when you think about people used to move to Phoenix because you could buy a home for 250, 000.
Four bedroom, three bath home with a big yard. That's not the case anymore. That house costs you 600, 000 now. The weather's nice. Not as nice as California, arguably better than Texas, I would say, but depends if you like heat or cold. We went through an initiative where we talked about how do we think about climate change for our business?
And it's just such a long term problem. It's hard to think about how do you make business adjustments for that? And I was talking to our insurance broker and I said, how the big boys think about this, right? How do they consider climate change? And he said, well, I can't tell you how many big climate studies we've done for people, for developers.
And we say, Hey, you shouldn't develop here and here because over time, Next 50 years, you're going to have climate change issues, rising water levels, temperature, blah, blah, blah, blah. And he said, and then we give them that report and they're like, wow, this is really interesting. And then a property comes available in one of those locations and it's a such a good deal.
They're like, we've got to buy it.
Ben: That's the discipline we're talking about.
Josh: Oh man, it's such a good deal. And we'll sell it in five years. So who cares? It's hard as a business to like really think about climate change in your business strategy.
Ben: This has been awesome, Josh.
Josh: Yeah, Ben, it's been great. Yeah. We could probably talk for another hour. So I appreciate
Ben: had all these questions I didn't get to ask you, so, maybe next time.
Josh: Sounds good. I appreciate it.
Ben: Alright, onward.
You have been listening to Onward, the Fundrise podcast, featuring Josh Hartman the CEO of NexMetro Communities.
My name is Ben Miller, CEO of Fundrise. We invite you again to please send your comments and questions to onward@fundrise.com.
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For more information on Fundrise sponsored investment products, including relevant legal disclaimers, check out our show notes.
Thanks so much for joining me.
