Real Estate as an Infrastructure | Durable Value Ep 86
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Ryan Swehla: Today, we'd like to talk about this concept of real estate as infrastructure. We hear a lot about, uh, this idea of infrastructure as an asset class and meaning electrical grid and solar power and, you know, irrigation and all these sort of infrastructure, roadways, bridges. But this is that idea that real estate, what we traditionally think of real estate, particularly multifamily and industrial, that it is infrastructure.
And so, I wanted to speak a little bit today about that.
Joe Muratore: Well, the, the two things we invest in, um, you know, workforce plus housing, um, in other words, not newer product, but sorta '80s, '90s, 2000s apartments, uh, and small bay, uh, multi-tenant industrial. The, the, the argument we're messing with here, toying with, is that these are a public good.
Almost like, you know, a community can't live without water and sewer and roads, uh, electricity. Like, try having a community without a apartment-- without housing and without, you know, small industrial spaces. These o- on, on the housing side, this is where people live in a community, and you don't have a community without people.
And on the i-industrial side, these are like the capillaries or the smallest part of the, the blood flow system. This is where the very last mile of commerce happens. This is where entrepreneurship happens. This is where, you know, small businesses live. This is where, uh, plumbers and distribution and specialty manufacturers live.
This is where jobs are. So there is a very strong argument to make that- That these are a, a quasi-utility of sorts, or at least they have significant, uh, utility, uh, characteristics. You know, I'll pitch it to you, but the last idea is the way we buy along the I-5, the I-15, and the I-25, you know, 30% of the US population lives on the, in the western US on those, more or less those highways- Mm-hmm
uh, totaling almost $2 trillion of real estate, and it is a grid. There is a network, a node, almost like the electrical grid for those two assets. They feed each other. They, they, uh, supply and demand riff off of those markets. Uh, populations move and stay based on how those things are, and it, it's an interesting spot we live, but the secondary and tertiary markets that we invest in are, uh, largely not institutionalized.
And there is a process going on of which I think we're in, in early stages and we are a leader in, where this utility is, uh, being utilitized.
Ryan Swehla: Being institutionalized, at least. Yeah. I mean, it, there is a fair analogy there because on two levels, uh, number one, you know, 10 years ago, 15 years ago, we never heard this term infrastructure because it was being done by utility companies or public agencies.
It was not a investable asset class. And today, through various structures, there are more and more ways to invest in those utilities, in those infrastructures. And in our markets, there's, there is a analogy there because, um, most of the real estate, um, in our markets has been privately held. Yeah. So it hasn't really been institutionalized, and so there is this kind of process of these markets becoming more institutional.
And the other e- analogy or, or, uh, parallel to infrastructure is the, the asset types we're talking about are kind of needs-based assets.
Joe Muratore: Yeah.
Ryan Swehla: Y- you know, when you, when you cross a bridge, you don't think usually, you know, what a nice bridge or what was the quality of that bridge or what was my experience with that bridge?
You just think, "I got across the water. I didn't... The, the bridge was there." And, um, well, our job is to create environments that, um, transform people's lives, so our job is to create an environment that is positive, that is memorable. We're dealing in an asset type that is much more like a bridge in the sense that it's there, it exists for a purpose, and it is n- a needs-based asset.
Now, uh, where we excel is through making sure that our needs-based asset is more desirable than, than another, but it f- these are fundamentally not, um, the asset types that, that are, uh, w- what would you call it? Discretionary.
Joe Muratore: I love that, what you're talking about with a bridge There's a thought in infrastructure or utility this, that, like, well, it's a monopoly.
There's only one irrigation district. There's only one electrical company. So that's totally different because, like, how would you build new canals? Or I mean, there's only so much for rail. That doesn't really apply to apartments or industrial. You know, they can build it anywhere. Well Here's, here's an, an interesting little spot- thing, which is that in most of the markets we work, let's take apartments, for example.
G- market rents of those apartments are $1,200 to $1,700 per month. Well, to build a new apartment costs about $300,000 these days. In some markets, three fifty. You know, in primary markets it could be five fifty or six fifty per unit. But the point is, uh, if, if you're gonna spend $300,000 per door to build apartments, you need to get about $2,300 in rent.
And in most of the communities we invest in, they're affordable. They're constrained. They don't justify new construction. Rents are fifteen fifty, sixteen fifty. They're not $2,300. And, you know, the people that are living there are not used to paying $2,300, and their wages aren't usually aligned with $2,300. So in a sense, it is like, you know, the power company in that they can't...
You can't build more '90s apartments. '90s apartments are, they're bigger, they have balconies. They don't build them that way anymore, and they can't afford to build them that way any- anymore. And unless they can get those high rents, they can't build more apartments. So it's this, uh, it's this stalemate. But in that way, the markets we serve are robust and durable, and, uh, there's not going to be much new supply to meet, you know, the steadily growing, that three percent or so a year demand.
I think, I think a important idea here, and what we're getting to in talking about this as infrastructure, is that real estate is a durable good. More durable- Mm-hmm ... than people think. W- what's interesting is that millennials are hitting peak spending. Gen Z is just coming online. Uh, in the Western US, over the next seven years, there's, uh, projected to be demand for two million more h- housing units.
I mean, there's millions of unbuilt units. This also comes at the same time as secondary and tertiary markets are arguably becoming the new primary markets. Instead of people living in major metros with gridlock and high prices and, you know, in the post-COVID era, there's more work from home, there's self-driving cars.
The people listening to this podcast right now are communicating with us in a way, you know, that they're still interacting with us from their cars probably, and they're about to get on a Zoom meeting and have a meeting with someone who's not even in their city. So, like, a- at the same time as, as new money millennials and Gen Z's are coming fully online, uh, you know, drivers for secondary and tertiary mar- tertiary markets are coming online, and yet new supply isn't being built.
This is forming up a more durable thesis for these secondary and tertiary markets, and the idea that housing and industrial last, these, these are buildings. Yeah. They last decades. They don't la... These, this isn't a momentary thing.
Ryan Swehla: Yeah, and, and in many senses, these markets are, uh, invisible because, uh, you know, people don't recognize that, you know, Grand Junction has existed for, you know, 200 years, and- It's a beautiful place
or 150 years. And, uh, the- these markets have r- not only reasons to exist, but they've been growing year over year, and there's a whole ecosystem there that's existing that is kind of off the radar of, uh, the typical institutional investor.
Joe Muratore: Maybe close with talking about how we own the grid.
Ryan Swehla: Yeah, I think that, that fundamentally goes back to our thesis of, uh, really building along the I-5, the I-15, and the I-25 as really the main nodes in the Western US, where all of that commerce is.
And fundamentally, we believe that utility or, uh, real estate is like a utility, and this is a, these are markets that are not broadly institutionalized. These are markets that are underappreciated, and yet there is a grid-like, infrastructure-like necessity for the, these markets to exist and for the real estate there to exist.
Joe Muratore: It's a lens. If you choose to see it as, like, just owning an apartment complex somewhere, great. If you choose to see it through the lens of the network, how all the nodes in the network reinforce themselves, for us, with each new building we buy, with each new market we're in, these are beacons of information.
These are pieces of conviction on the ground. Uh, it's both. On the one hand, it strengthens our original data. This is, like, live data. This isn't just from some service. Like, this is our own authentic data, which is conviction. On the other hand, with each deal we do, we get more deals offered. So we're, we're, our alpha is really 15%.
We have our own live data, which builds conviction, and then our own, you know, authentic off-market deal set, you know. And, and what we do is we marry up where we see conviction forming with, uh, additional deals, and i- in that, we create alpha.
Ryan Swehla: Yeah.
n this episode of Durable Value, we explore the concept of real estate—especially multifamily and industrial properties—as essential infrastructure. We discuss how these asset types function as a public good, their role in the economic grid, and why secondary and tertiary markets are becoming increasingly important. Tune in for insights on market dynamics, institutionalization, and the future of real estate investment.
Timestamps:
00:00 – Introduction
00:51 – Real estate as a public good: Housing and industrial as community essentials
01:15 – The “capillaries” of commerce: Small businesses and last-mile industry
01:36 – Real estate as a quasi-utility; the Western US grid analogy
02:30 – Institutionalization of secondary and tertiary markets
02:57 – Infrastructure as an investible asset class
03:22 – Needs-based assets: Comparing real estate to bridges and utilities
04:08 – Asset desirability vs. discretionary assets
04:31 – Monopoly vs. competition: Utilities and real estate supply
04:55 – The economics of new construction vs. existing apartments
06:34 – Demographic shifts: Millennials, Gen Z, and housing demand
07:21 – Post-COVID trends: Remote work and changing lifestyles
08:23 – Owning the grid: The I-5, I-15, and I-25 corridors
09:02 – The network lens: How properties reinforce each other
09:21 – Data-driven conviction and deal flow
09:42 – Building alpha through authentic data and off-market deals