DoubleLine's Ken Shinoda on what's next for real estate

Yahoo Finance's Julia LaRoche sat down with DoubleLine's Ken Shinoda at the company's investor days to discuss real estate.

Video transcript

ADAM SHAPIRO: Julia La Roche is live at DoubleLine headquarters today. This is exclusive. And Julia, take it away.

JULIA LA ROCHE: Well, thank you so much, Adam. That's right. We're here for DoubleLine's Investor Days. And I'm joined by Ken Shinoda. He is portfolio manager for non-agency RMBS. And, you know, we've been talking a lot about inflation today, but we also need to talk about the housing market, which has just been red hot lately. So does inflation pose a risk there? And what do you think could kind of bring some of these prices back down to Earth?

KEN SHINODA: Sure. We talked about it maybe a year ago, with the big driver of housing being low inventory and increased demand. And the inventory just keeps going lower. So that's why you're seeing prices go higher. But in order to buy homes, people need to borrow. And the mortgage rates are driven by interest rates. So I think the threat to the housing market at least slowing the pace of home price appreciation is really going to be driven by will inflation continue to cause a rise in long-term interest rates. And where does that take mortgage rates ultimately?

Now that being said, I think that rates can be higher. And I think home prices can go flat. Maybe they go down slightly. But I don't see some type of crash being caused by a rise in interest rate. I think it'll just slow down the crazy pace of price appreciation that we're seeing.

JULIA LA ROCHE: Well, you know, one of the other trends we did discuss about a year ago was kind of this flight from the cities to the suburbs. Where does that trend stand? And what is the data showing you now?

KEN SHINODA: Sure, if you look at the data, you do see that, if you look at kind of urban versus less dense urban versus suburban, that the suburban and less dense urban are definitely going up in price at a faster pace, so probably going up in price about 10% to 11%. The urban is still going up in price. It's just not going up in price as much. But I think the tide has turned.

We talked about the people fleeing the cities. Will they ever go back? There were some alarmist articles written about the end of New York. My view is that people are social beings. Eventually they're going to get tired of working from home. They're going to want to go back into the city centers. We're here today at DoubleLine offices. Everyone's kind of got a smile on their face and happy to see their colleagues.

And I think you're starting to see that demand to go back to the cities come in. I think rents in some of these cities like New York and LA and San Francisco that may have dropped, they're bottoming. They're starting to go back up. So I think the worst is in for the big metros. And I think there's going to be some increased demand for those regions on a go forward basis.

JULIA LA ROCHE: So the worst is behind us for the big metros, but it does bring up the topic of commercial real estate. We are in an office building here. What does the commercial real estate look like to you as we emerge from the pandemic?

KEN SHINODA: I think a lot of companies are thinking about how they're going to utilize commercial real estate. How many floors of office do you need? We have four floors here. Do we need four floors? Are we going to have some portion of our workforce working from home? A lot of the big banks are talking about this, too. Maybe we don't need everyone in midtown Manhattan. Maybe we can have regional offices in the suburbs.

So I think there's going to be a change in the demand for commercial real estate. The desire to be at the top of the US Bank building behind us, I think there's limited demand for that. What you are seeing high demand for in LA, at least, is people wanting to be in their own building. So self-standing building, it's all my company in that building.

And so I think there's these changing appetites for different types of commercial real estate. So it's hard to say all commercial real estate is bad. But I think that big office towers like the one we're in, I think they're going to struggle a little bit in the near term until people get more comfortable with going back into more densely populated spaces.

JULIA LA ROCHE: Yeah, it's interesting when you bring up that people are going to want their own spaces. Let's talk about, now that we're on the topic of business, the resumption of business travel and kind of the divergence we've seen there between leisure travel. And what's your outlook in that space?

KEN SHINODA: If you look at the hotel space, which was one of the hardest hit parts of the market, what's coming back is the appetite for vacations. Again, this cooped up at home, haven't gone anywhere, I want to go somewhere. So we see that occupancy rates for leisure-based hotels are definitely on the rise. The data is actually pretty strong. It's up about, like, 65% of before the pandemic. Now granted, we just had spring break. So take that with a grain of salt. There's a spring break effect.

But what you're not seeing in the pickup in demand is, you know, the Sheraton in Midtown or the Westin that I'm looking at across the street, the [INAUDIBLE], iconic LA hotel here. The business travel is not coming back. I think it will come back. I think it's going to come back. Different parts of that will come back. I think there's appetite for, you know, I'm going to buy a piece of real estate. I need to go visit that piece of real estate. I'm going to buy a company. I need to go visit the management. But you're my client. I want to come see you. Do you want to come-- do you want me to come see you? I'm not so sure. So I think you'll slowly see some parts of business travel come back. But it's going to take a little bit of time.

JULIA LA ROCHE: And just kind of, if we could circle back when we were talking about the cities and some of the themes that we've seen-- is it the end of New York-- even here, we're sitting here in California, and some of the exodus there-- I live in Miami now so we're seeing a lot more people move there-- how are you kind of looking across the US as to different cities and maybe where you might want to invest in?

KEN SHINODA: Even before the pandemic, you were seeing a demographic shift going from larger urban metros to kind of what we call kind of growing cities. These are smaller cities in the US. A lot of them are university towns that have an employment base of younger students coming out. A lot of them actually have lower taxes, too. So I can move from New York. I can move from San Fran. I can move to a city that's got cheaper real estate. My family can afford it. There's jobs. It's growing. The taxes are lower-- many positive things.

If you look at the change in prices of real estate, if you look at the change in prices of rent for a multifamily, it's those cities that are growing the fastest, right? And I think that what the pandemic did, it just kind of-- it was-- we call it the great acceleratant. It accelerated a lot of themes that were already happening in the market, just like moving to online sales.

So I think those metros, those low tax states, they're going to continue to benefit from people moving there. In fact, California, this was the first year, I think, we had net population migration going away. People have been leaving for years. But this was the first time that it was a net loss of population here in California.

JULIA LA ROCHE: Yeah, a net loss in population. So one final question-- from an investor's perspective, how might you want to express some of these themes that we've discussed?

KEN SHINODA: Sure, I mean, I'm bullish on residential real estate, so you can kind of play that in the equity markets in a couple of ways. Probably the easiest way to beat would be to look at some of these single family rental rates that are out there. I'm not saying the valuations are cheap, but it's a way to get income.

Also, some of the commercial rates are a way that you could play a recovery in retail recovery and hospitality. A lot of that may be already priced in. But, you know, here, we're seeing some weakness in equities. So maybe it could be an interesting time to take a look at those opportunities and add it.

JULIA LA ROCHE: Well, Ken Shinoda, portfolio manager of non-agency RMBS at DoubleLine Capital, thank you so much for your time. And for our viewers, be sure to stay with us tomorrow. We are going to have an exclusive sit-down with DoubleLine Capital's founder and CEO, Jeffrey Gundlach, at 4:15 PM East--