PGIM's Marcus: Affordable Housing a Good Investment

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00:00I do want to start off first with the affordable housing issue that was raised last week, the

00:04potential restriction of institutional investors being able to invest specifically in the single

00:09family housing space. But there's just a broader question overall about demand for affordable

00:15housing, the supply or lack thereof, and as an investor, where you fit in in all of that.

00:21Sure. And I'm really glad that we're having this conversation more broadly. Just in the U.S.,

00:26there's a 4.7 million housing unit deficit. So until that's solved, affordability is just

00:33not going to be achievable. And this deficit is not just a U.S. problem. It's a problem

00:40elsewhere as well. And it's not just in affordable housing, capital A affordable housing. It's

00:46really across the spectrum, multifamily, seniors housing, student housing. And really, if you

00:52think about it, housing is such a basic need. And having that very basic need be in short supply

00:58is really problematic from a society perspective.

01:01I am curious, is affordable housing writ large a good investment these days?

01:06Affordable housing is a great investment. And there's all different kinds of affordable housing.

01:10And there's different affordable housing for different places on the demographic spectrum.

01:15There's, you know, age-restricted manufactured housing for people who are retired. There's

01:20affordable housing for families. There's even affordable units in urban apartments that are

01:26really more geared toward younger people. So affordability is an issue really all across

01:31the demographic spectrum.

01:32With regards to the senior citizen side of that equation, the aging population, if you will,

01:37there's been a lot of discussion as to whether we're going to see an uptick in real estate

01:40activity as some of those people age out, whether they either pass on or they move into nursing

01:45facilities or other types of care facilities. Are you anticipating that? Because it seems

01:49like a lot of people are also saying that some of these people are still stuck in their homes

01:52and don't want to actually leave.

01:54Well, I mean, so there's the, I don't want to leave my home. And there's the, I have to leave

01:57my home because it's not safe for me to be at home. And really, again, back to basic needs,

02:03needs-based real estate, needs-based demands. If you think about the baby boom generation,

02:08they're in prime seniors housing space now for the next couple of years. And while people are

02:15entering seniors housing at an older age than they used to, it used to be high 70s, now it's

02:20low to mid 80s, there's still a lot of people in that age group. And baby boomers don't really

02:26want to be in a very old-fashioned type seniors housing facility. The baby boomers led a very

02:33different lifestyle than the greatest generation. The baby boomers want a happy hour. They want to

02:38cool. They want a gym. They want to stay active. So a lot of the old stock just isn't fit for

02:43purpose anymore.

02:43These baby boomers are a very demanding bunch, aren't they?

02:46Exactly.

02:46In all seriousness, outside of just the living sector, there was a lot of talk last year about,

02:52obviously, the data center build-out and really just overall kind of industrial manufacturing,

02:56if you will, if I can just use a broader umbrella here. Do you see that trend going? And are you

03:00able to find, I guess, investments that are not overpriced, for lack of a better word?

03:06Sure. And if you think about, let's separate data centers from industrial, just to start

03:09with. Industrial and multifamily, actually, similar metric. The amount of new supply, meaning

03:17new construction, is off 60% from peak over the past five years. So there's just not enough

03:24supply for the demand. And now there are certainly some markets where there's plenty of supply,

03:28but writ large, there's not enough supply. Data centers is really the poster child for that.

03:34As we've all been talking, there's a lot of investment being made in AI, and there's a lot

03:39of talk about AI training. But the reality is that, in particular, in our data center investments,

03:44we're focused on cloud computing. We're focused on enterprise cloud. And those are things that are

03:50really even separate from the AI training. So there's so many needs. I mean, if you think about

03:56in your own personal life, I'm guessing that you're using ChatGPT or some other AI tool a lot more this

04:04year than you were last year. And so imagine what next year might bring or the year after. So at this

04:10point, we're nowhere near meeting the supply, the demand needs. What are some of the bigger risks that

04:15you're keeping an eye on for this year? Like everyone, the geopolitical risks are out there.

04:21In a way, I feel like that has become the norm in which we all operate in a sort of a volatile geopolitical

04:28environment, but it's still a very risky thing. You know, we're very much hoping that there is, you know,

04:34continued rate declines that will be very supportive of real estate. But overall, from a real estate

04:39perspective, one of the really good things about our sector is that beginning in mid 2022, we had a

04:45very, very significant repricing. And while that repricing bottomed out about 18 months ago, the

04:51recovery so far, it's been consistent, but it's been very, very flat. And so the risk for us of having,

04:58you know, value declines, that already happened. We're not sort of, you know, in a toppy pricing

05:03situation like other asset classes. So I do feel like there's less risk to the downside and actually

05:09more opportunity to the upside in real estate.

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