For the first panel session of day two. I'm very excited to be here with AvalonBay President and CEO, Ben Schall. We will start with a few opening remarks from Ben. I have tons of Q&A, but as always, I'd love to have the interaction from the field. So, feel free to jump in anytime. With that, I'll turn it over to Ben.
Yeah, thanks, Josh. Appreciate you hosting us and just conducting the conference. Always find it a great time to connect with investors and appreciate the group that's here with us today. Let me start off by recognizing this November will be Avalon's 30th anniversary as a public company. Round of applause, everybody. Thank you. Think back where we started, about a $500 million enterprise, and just focused on a couple of markets, and you fast forward to today, and we're the largest public multifamily company in the country. Real testament to our team, both past and present, real testament to our culture, and it also, you know, very much speaks to the power of our business model and our ability to drive both internal and external growth over time and throughout cycles.
Want to make sure we reflect back on that, and we're excited on where we're headed. I'll maybe kick off with some themes that are top of mind for me, and I'll put my investor hat on here and kind of emphasize if I'm in your seat, what I'm, what I'm focused on and why you need to own AvalonBay. First up on that list, our suburban coastal portfolio, particularly in an environment like today, where there's just a tremendous amount of supply that's coming online. And that, potentially combined with a softening economic environment, is going to create some dislocation in markets that have high levels of supply.
The reality is, our suburban coastal footprint and our suburban coastal portfolio just has significantly less new supply coming online this year, next year, and going into 2025, and we think that provides us with a level of stability, and you've also seen it in our operating results, over the last year and even more recently. Second item to emphasize is our development business. Obviously, you know, an area we are for sure known for, a real differentiator for us. Just to put it into context, we have roughly $2.5 billion of development underway today, and that is...
For us, it's actually a little bit of a muted number, but to put it in context relative to the peers, that $2.5 billion is more under development than any of our competitors combined. As you think about our development activity, and I'll talk more about this with Josh later on, one of the areas of particular emphasis right now is our underway development activity.
You just look at underway development, projects that were funded with yesterday's cost of capital, a lot of which the costs, the project costs, have already been locked in on, and in the near term, projects that we know we'll be delivering over the next couple of quarters. We are about to commence on a ramp of deliveries that, in turn, will then result in a ramp of earnings that will come from our development business. To a large degree, 2023, from a development NOI perspective, sort of a trough year for AvalonBay. So just based on our known activity, that will be one of our meaningful drivers of earnings growth going into 2024. And then the third area I want to emphasize is our operating model transformation. It's an area where we've been investing significant time and resources.
There's a lot that is underway to modernize our service offering to residents. What's exciting is it's actually, it is leading to real underlying earnings growth at this point. We put out a target of $50 million of NOI uplift to come from these activities. We achieved $11 million of that in 2022. We were anticipating an incremental $11 million this year, and we've actually been tracking above that number. So we're looking like we're going to come in closer to an incremental $15-$16 million of incremental NOI from those operating model activities this year, which will take us to $25-$26 million towards our $50 million goal, with the remaining $25 million to come online in 2024 and 2025.
So just look across sort of our portfolio positioning and then some unique drivers on development and operations, plus some other areas I get to before, and we have a unique proposition to generate outsized and superior cash flow growth over the coming years from our operating and our investing activities. That's my lead-in, and Josh, I'll turn it over to you to help facilitate the Q&A.
Yeah, no, appreciate all that, opening color. Maybe we can start with just the latest on the year-to-date performance. You did put out an update recently. Was there any surprises to the upside, downside? And then just how are you thinking about interquarter, just the interquarter update?
Yeah, definitely. We had, across the board, a pretty strong first half of 2023. We increased guidance twice, which is pretty unique in its own right already. We raised our Core FFO guidance up to 8%, which was up 250 basis points. Underneath that, we also increased our same-store NOI guidance by 175 basis points to 6%. So some strong momentum, and generally a first half of the year that exceeded our expectations. That momentum has continued in the third quarter. We put out an operating update a week ago. Same-store revenue in July and August was up 5.3%, and that is tracking 40 basis points above our expectation from just 30 days ago....
What's important about that 40 basis points of outperformance is two-thirds of it is from better than expected occupancy. So there's a healthy demand there, and I'll talk a little bit later about our revenue strategy, kind of the strategy we took in the first half of the year and our more recent strategy. But to be able to build our occupancy back up as quickly as we have, based on that underlying demand, sets up well for continued strength in the remainder of 2023, and sets up well as we start thinking about, 2024.
Any, I don't know if you've disclosed it yet, but since you've brought up 2024, any kind of, estimate of the earnings at this point in your loss to lease?
So, we're obviously still a couple months away from starting to give and provide more of the building blocks for 2024 to investors. We are providing, at this point, our loss to lease is about 3.5%, so a little bit elevated relative to a normal year. Couple other stats for you on the revenue side. So first half of the year, we had like term effective rent change of 4.5%. Our assumption for the second half of the year was that figure was gonna be roughly 3.5%, sort of tracking where we are today, so, you know, feeling relatively good about that. We included in our operating update that we've been sending out renewal notices for September and October in the 5.5% range.
We do, as usual, negotiate some off of that. You can kind of think about 150 basis points or a negotiation discount, but, you know, kind of achieving in that 4% type of range. So that's sort of the visibility on the revenue side. On the operating expense side, you know, we're just kicking off our budget process, but I'll give you kind of by some of the components, an early look and view on it. I think on the sort of places where we think the expenses will be constrained, effectively, the opportunity to maybe have continued lower expenses in 2024 relative to 2023. Payroll is on the top of that list, and that goes to my commentary before about the progress we're making on our operating model initiatives.
There's a revenue component of that, and there's also an efficiency component of that. We're excited that among our peer set, we're one of the few that's actually showing that efficiency go down to the bottom line on payroll. So that's a trend that we expect to continue going in next year. I'd say on the more relatively stable category in expenses, taxes, putting aside New York City PILOTs, you know, we expect to be relatively stable. To utilities, we expect to be relatively stable. The potential higher expenses for 2024, insurance, we're better positioned than most there, but expect some continued insurance pressure.
And then I'll talk more about bad debt, but the increased legal costs, we're benefiting a lot from improved bad debt right now, but there is the increased legal costs associated with it, so that could lead to some, higher, higher expense increases for 2024.
Maybe just quickly on the insurance, picking up on your comment that you're better positioned, just... Is that just-- what, what's driving that? Just like, where the renewals were last year or just how you-
Yeah, it's, you know, we've been a leader in this arena, given our size and scale, for a long time, so we've got definitely a preferred position in the marketplace. Our diversified portfolio helps in that. We do have a self-insurance program, which helps us mitigate our insurance costs. This year, just to give you a stat on it, you know, property insurance is obviously a large component of our insurance expense. We were able to lock in about a 12% increase. So relative to what you're seeing from some of our public peers and relative to the private sector, in a decent place.
But, just while I'm on it, because I did touch on bad debt, and as we think about drivers of earnings in the coming years, strange as it is, so the improvement of bad debt is on that list. Through the first half of the year, and even continuing into the third quarter, underlying bad debt has been better than we expected. We're in the kind of 2% range today. That 2% compares to a more traditional level, however, of 50-75 basis points. We have our landlord rights back now. We are going through the process. We are seeing some meaningful improvement there. We do expect underlying bad debt to get back to 50-75 basis points. It's hard to know exactly when, but over time.
But to put a number to it, that progress, or the transition from 2% underlying bad debt to 50-75 basis points, is to the tune of $40 million of NOI to come online. So it's hard to pinpoint exactly when it comes through the rest of this year into 2024, but in terms of a tailwind of the business, for sure that exists. And just while I'm on the topic, I've gone through sort of drivers of earning for, for us, development earnings, operating model transformation, bad debt. The fourth one is our structured investment business. So we've been building up a book of business to provide capital to third-party developers. This capital is on preferred equity or mezzanine on new construction loans.
And for sure, in this environment today, where capital is less abundant, our capital is more attractive to third-party developers, and we are seeing higher quality developers, higher quality of real estate, and the return profile is stronger. So we're now putting that capital to work in the 12%-13% range. Our target we put out is to build that book of business up to $400 million-$500 million. And it's, in terms of what's showing up on the income statement, it's still relatively early stages. We have $100 million, call it $100 million, $120 million committed today, but all that's not out and earning. So as you think about sort of step function, earnings potential, that's the fourth one that I would emphasize to the investor group.
Picking up on your comments about the operating model, can you talk about, like, the ultimate goal and where you're, where you are in terms of achieving that goal? And, like, is this gonna be more revenue-based, expense-based? Like, how are you thinking about that?
... Yeah, for sure. It's both, and I'll come back and talk about it, but let me start with the vision of what we're trying to achieve. From a customer perspective, what we're trying to achieve is we want to be able to meet the customer where and when the customer wants to be met. The reality in today's environment, customers are much more facile with having that experience be a mobile and digital-based experience. So it's forcing us, and forcing really the overall industry, to modernize our offering. That's the process that we've been going through. We've been digitizing huge amounts of what typically would have been done by person-to-person interactions. Components of that, one is there are significant investments in technology. This is an area where I feel like we are leading. Our scale definitely helps.
We're both developing our own technology and leveraging third-party tools. But that technology is allowing us to interact with the customers, and it's also providing tools for our associates to really get out of the business of the repeat, low value-add tasks, have that all be digitized, and have our associates focused on the higher value-add tasks. So you have the associate base, you got the technology component. The third part of the solution is the use of centralized services. And AvalonBay has been a longtime leader in the centralized service arena. We had one of the first centralized service centers of any of the multifamily REITs. We've continued to invest in it, and I really see it as an important sort of third leg of how we're going to provide services.
And it's also a place, and we can talk some more later, where the future of AI is going to also drastically change how call centers work and how service centers work. And the goal is you provide higher value proposition to the customer, right? They're getting the, the right response when they want it, more efficiently, and we're able to do it, and we're able to deliver it a more efficient side on the, on the cost side. So broadly, that's where we're speaking. The $50 million that I talked about before is our target over the next couple of years. It's not where we stop. So there's a lot that we're investing in, in the next... what we're referring to as the next horizon, that we continue to think we'll be able to deliver both on the revenue side and on the expense side.
So in April this year, you announced that the company entered into a third-party servicing agreement for AvalonBay's centralized service center to provide back-office support to Gables Residential. How is that business performing? And do you, do you hope to offer these types of service to others? Like, how big is that opportunity set?
Yeah, it's a, it's a good one to call out, Josh. It is different. We're the only ones that have taken that step, amongst our peers. And, we started with Gables, and for sure, there's a revenue opportunity associated with it. We've structured it profitably. We tested it before we launched more fully with them. And we do think there's an opportunity to add more clients like Gables over time, and have that be an incremental component of our earnings potential. But that earnings potential is not the reason that we entered into the agreement, and we've gone down this path in terms of a strategic choice. We've gone down this path on a strategic choice, going back to my comments around our view of the increased role and importance of centralized service centers.
For us to be able to have a centralized service center that's operating and executing as our own portfolio, but also an expanded number of units across the country, allows us to invest in that centralized service center at a whole another level. Think about people, technology, processes, right? The ecosystem becomes larger. We effectively can take that increased investment, utilize it on our wholly owned assets, and we think drive another level of operating performance for our portfolio.
I guess, maybe think about, like, the timing, like, how do you think about, like, rolling out the cadence to others? Like, if you're going down that route, is it more just an internal push, or like, you're letting people come to you?
Yeah, we definitely. After we announced Gables, we've gotten a couple of inbounds from some potential new clients, so it's a process we're going through. We haven't put a timetable yet on when or how large it can get to, but the starting point with Gables was not the ending point, right? We're going down this path more holistically, so we expect additional clients in the future and really get that flywheel that I was referring to earlier, going.
And then one of the other things you mentioned was just on the development side, it's big pipeline. Just kind of thinking about, like, going forward, yields, initial returns, like, what are you, what are you seeing as you underwrite new deals today, or they don't pencil? Just kind of curious, and how does that compare to what's in the pipeline today?
Yeah. Yeah, an important area for us. Let me break down our development platform into three categories, just to be clear with everyone. First category are the projects that are in lease-up. So these are projects that we've completed the development, we're in the process of leasing them up. Those projects have been meaningfully outperforming, this year. And the short version of it is yesterday's capital costs, yesterday's construction costs, we started them 2 years ago. They've benefited from rent growth. We don't mark our developments until we're in lease-up, and so we're having developments that are outperforming pro formas to the tune of $500 per month, right? So you've got outperformance by 15%-20%. So that's providing a nice boost of kind of unexpected, outsized earnings growth. So those are the products that are in lease-up.
We then have the projects that are underway today, and I referred to those earlier. So that's where you're going to see a ramp level of deliveries. And we have in our investor presentation, a schedule which shows the build of those deliveries back half of 2023 and into 2024, and that then will in turn convert over into increased earnings and value creation. And then the third category is the new development pipeline, right? So what's going to be the next set of projects? ... And there's really two components to that. One is, the beauty of the AvalonBay development business, and this has been a kind of core foundation for us for an extended period of time, is we're able to control high-quality land with very little investment. Short version is, we control these sites through land contracts.
They are options for future development, and today, we have roughly $250 million on the balance sheet for that land. That number, just to give it context, is lower than a number of our peers, who do significantly less development for us. So we control those sites. We are in the process, you know, some of those deals were cut, yesterday's sort of land economics, yesterday's, you know, rent figures, yesterday's cost figures. So we're going through and reworking those. And out of that, there'll be projects that meet our new return requirements, which are in the low to mid-sixes, and there'll be some projects that don't, but we don't have a lot of capital in, invested in those. Then and then you have the new opportunities, and we are starting to see some attractive and interesting opportunities there.
And this really gets into, you know, our view that over the next couple of years, a balance sheet of our size, our scale, our access to capital, our cost to capital, for the first time in a long time, pretty wide gap between that and where a private developer could borrow on a new construction deal. You know, our cost of capital has gone up from 2% to low 5s, right? But if you're a you know, if you're a merchant builder, and you're going to get a new construction loan, your senior mortgage is starting with an 8, right? And that's before you come and get preferred equity and mezz, you start thinking about the cost of equity capital. So that is starting to convert over into land opportunities.
We've seen a couple recently, one site in Boston, another site in Southeast Florida, that was under control by a merchant builder. They didn't get their economics together. They walked away, and we were able to get those sites under contract for 30%-40% lower than where they had priced a year ago. So that'll be an interesting opportunity and window for us, and maybe I'll kind of end this section with, like, we will be positioned to start a set of projects. They need to meet our raised return targets. But for those projects that do start, you fast-forward 2-3 years out, they're going to be opening into what I think will be a pretty attractive window of relatively new supply.
How do you balance that? Just thinking about, like, maybe where the market's going and maybe just, like, the volatility, because maybe people are, like, concerned if you start now, you're just adding to the supply picture.
Yeah. So, supply... It's good. Let me talk a little more about supply. One, everyone should be very clear that the heightened supply dynamics that particularly exist in the Sun Belt markets, this is not something that's going away in the near term. It's the reality of what's under construction today, delivering and going through lease up is taking us well through 2024 and into 2025. That's just the life cycle of multifamily development and construction. As it relates to our kind of next group of starts, we're most influenced by making sure we're making the right capital allocation choices. And so for us, we've raised our targets into this low to mid-six range, and that's up, you know, 100 basis points, over the last year or so.
You've all heard me talk about this, but one of our key focuses is making sure we maintain 100-150 basis points of spread between where our development yields are on new starts and underlying cap rates. Then we also look to where can we raise that incremental cost of capital, locking in that cost of capital, and making sure there's an accretive spread as well. The end result of that is there's an appealing and increasingly appealing opportunity set. At the same time, you've seen us be a little bit more constrained in terms of new starts because it is important that we react to what's happening in both the macro, sort of the more micro capital, micro financial system.
Any questions from the field?
Yeah. So the question was, how do we think about the opportunity set on our structured investment program relative to the opportunity set on development? There, we're utilizing a similar set of capabilities, right? We're tapping into our existing development, construction knowledge, operating teams. So we have terrific information, right, to be able to make both of those capital allocation choices. But they, to certain degree, are very different, right? On the development side. These are assets. We're writing the full capital check, and we're going to own these assets forever, in quotes, right? So these are long-term decisions to own these assets forever, and for both the upfront value creation and the ongoing earnings growth that comes from it. The structured investment business is a singular opportunity, point in time.
Each average checks in the range of $15 million-$20 million, and we've intentionally sized the structured investment business into this $400 million-$500 million range because we think it's an opportunity. But at the same time, like most of you as investors, there's a limit to how much of that type of earnings growth and kind of earnings generation you want. You want the bulk of your earnings generation to come from the assets that we all own collectively. So that's how we think about it. I wouldn't in today's environment, we're active in both. I wouldn't think about kind of the structured investment business tapping into the development business or related, but different capital allocation choices for us. Thanks for the question.
... Any signs of distress in the merchant builder development market that you might be able to capitalize on? Or is there still an expectation that there will be distress?
There's not a lot of distress in the system. On the opportunity side, so a couple different categories. One is land. I talked about that, a couple of minutes ago. So we are seeing opportunities there. I wouldn't call it distressed opportunities, but it's, we're able to get a higher quality of land repriced and control it under better terms. So I think it will lead and generate to some pretty meaningful dividends for us for a couple out of year - for a couple of years out, but they're not, they're not necessarily distressed. Where we've been looking, and you've, you've heard us and our peers talk about it, are, on the buying side, you know, are there going to be deals that are in lease up under their construction loans?
Maybe they get to the under the end of the construction loan before they're quite ready to put on a permanent loan. So there's sort of a good real estate, but a capital structure issue, and we just haven't seen it yet. Anecdotally, what we've been seeing is, in those types of situations, two things: One, some places, the equity capital is stepping up and putting a little bit more equity capital in for those third-party developers. And then we've also actually seen some situations where lenders, construction lenders, are just agreeing to extend out loans for another 12-18 months. So that's limiting distress opportunities from surfacing. And then the third opportunity set is, so you have land and sort of the buying side, and then the third is our providing of capital to third-party developers.
I talked about the Structured Investment Program. We also have what we call our Developer Funding Program, and that is more similar to our own development, but we're funding a third-party developer, particularly in our expansion markets. There, we provide the full capital stack. We own it at the end of the day. And that's another place where, for sure, we are seeing in terms of the quality of the real estate, quality of sponsor that's coming to us, is a, is a much greater opportunity. And so that's a, that's a third area where we've, we've been leaning in.
So a couple of years ago, you started entering new markets like Southeast Florida, Denver. You've added Raleigh, Durham, Charlotte, Dallas, Austin to the mix. Could you just kind of go over how you're thinking about, like, your expansion into those markets? You mentioned, obviously, the supply risk isn't going away. Like, just kind of how are you still thinking about it, and maybe just like how fast you think it can expand, just given maybe some of the pressures going on there?
Sure. I'll hit on a couple of areas of that. First is our growth in the expansion markets started about 5 or 6 years ago, when we announced our entry into Southeast Florida and Denver. There's been a little bit of commentary, you didn't ask me your question, which I appreciate, but I get, which is like, is this sort of like you started this during COVID, which is not the case. This was a movement we started 5 or 6 years ago to grow in these markets. What we've done more recently is put a specific target about the percentage of our portfolio that we'd like to have in those markets. And so we put out a target of having 25% of our portfolio in our expansion markets at this point by 2028 or so.
So kind of call it another 5 years from now. The other part that we've added is we've added incremental expansion markets. So over the last 18 months, we added Austin, Dallas, and North Carolina to the marketplace. Now, the underlying rationale for why, I can go in more detail with it. The primary one is we recognize that our core customer, our knowledge-based worker, is in a more dispersed set of markets than they were 10 or 15 years ago. And so there's an opportunity for us to take what we do well across operations, development, our strategic capabilities, and bring it to incremental markets to create value for shareholders. And so that's the process that we've been underway with.
In the near term, it's interesting, you have the supply dynamics in the Sun Belt, which are leading to some dislocation there from an operating perspective. For us, we're conscious of it, but this is a long-term sort of path and long-term investment for us. So in the near term, I actually think there's an opportunity maybe to acquire or get land sites in these Sun Belt markets at more attractive pricing than we could have a year ago.
Then, you've been at AvalonBay for three years now, roughly. I guess, anything surprise you to the upside, downside, you know, internally or externally?
Yeah, it's a great one. It's an awesome platform. Amazing group of people, really care about AvalonBay and its success. The thing where I could probably answer the question, Josh, is I think there's a ton of core foundational elements of who we are that we can and we continue to leverage. So just think about everything from our people, our culture, our balance sheet, our development capabilities, our operating excellence, our strategic capabilities. So we continue to leverage those, while we also recognize there are places where we need to evolve the business. And, you know, my reference to our portfolio allocation and our approaches there are an example of some of that evolution. And then there's some places where we recognize where transformation is needed.
And the operating model is a good example of a place where we think customers have a different expectation, and it's a real opportunity set for us, and we needed to rethink and reimagine and make investments in our operating platform, our technology, and our centralized service center to transform that relationship. So that's sort of the vision that we have going forward. And, I, you know, we continue to show our leadership across a number of areas, and I'm excited for this year, next year, and the years ahead. Any questions from the field? Yeah, thanks. So the, the question was, what was the driver of the better-than-expected occupancy in July and August? An area, yeah, an area I want to spend some time on, so thanks for asking about it.
It really gets into what our operating and revenue approach has been this year. In the first half of the year, we pretty consciously made a choice that we wanted to push rate, and that was different than some of our peers. And we did that, and we pushed rate in anticipation of two potential things. One, the anticipation in the second half that there'd be a little bit of an economic slowdown, you know, job slowdown. Also, the second one was also in anticipation that we knew as we got our landlord rights back in some of these markets, there'd be some increased turnover as we got out non-paying residents and put those units into paying residents. So we kind of anticipated both of those.
We said, "Listen, let's push rate through the first half of the year, through prime leasing season, get the rent roll in a terrific shape, sets up well for revenue growth in the back half of this year and going into 2024." At the end of kind of in June, end of June, and then going into July and August, we did make a shift in terms of our approach, and the shift was in response to the turnover that I referenced. And so you saw our occupancy dip down to the 95.2% range. We expected that, and we made a strategic shift. Let's lighten up on rate a little bit. Let's build occupancy back up. We're getting at the tail end of the prime leasing season.
We want to be at a strong occupancy arena going into the softer season at the end of the year, which then turns into kind of how you start off 2024. So we lightened up a little bit on, on rate. Now, what happened was we were able to build that occupancy back up quicker than we expected. And it so that goes to my comments at the beginning about there was a healthy level of underlying demand there. So that cycle is a terrific one for us, right? We can get out non-paying residents, be able to get them into paying residents, get a mark to market on the new rents, and do it in a relatively efficient time period. That's a good result. So that's what led to the outperformance through the first part of Q3.
Any other questions from the field?
I guess maybe just exploring that. It... like, the fact that you pushed rate earlier in the year versus, like, pushing occupancy, I think that's a different strategy than maybe some peers I've heard. Just, what kind of led you to that decision to push rate versus, like, maybe push occupancy? Just-
Yeah, it-
about that.
It was sort of a strategic choice on how you want to manage the year. At the core of it, and I think we all are, so this is not specific to AvalonBay, but it's an emphasis area. I mean, we are very attuned to micro changes in what we see in supply and demand, you know, weekly, daily basis, driving to optimize as much as we can, that balance between occupancy and rate. And we started off the year on a fairly strong foot, and we were able to continue to build from there. But you can't get set in that one approach, right? You need to be looking out, right, a couple of months in terms of what's coming down the road, and so that's why we made the strategic shift.
One last question from me. Just where are you spending most of your time today, and, like, how did that compare to 6, 12 months ago?
The strategic focus areas for us remain the same, and you've heard me hit on them. And I'll describe them as one is optimizing the portfolio as we grow. So that gets into sort of expansion market growth, selling out of slower growth assets, reallocating that capital into our expansion regions and higher growth assets as a part of it. Second one is how do we leverage our development DNA further? And so that's taking us into programs like the structured investments business, the developer funding business, and then the operating model transformation is for sure a big investment and focus area for us. So those primary areas are remain sort of true and set. I...
The capital environment is one in which, you know, it's definitely kept us. I describe it as sort of equal footing between front foot and back foot, right? There is heightened uncertainty. We want to make sure in an environment of heightened uncertainty, we're driving as much cash flow as we can from the portfolio. But on a capital side, we want to continue to reinforce your strengths, right? So continue to have the strongest balance sheet of any of our peers, make sure we remain match funded. At the same time, sort of being on the lookout for opportunity, even if now is not necessarily the right time to step in in a big way, but I kind of be out on the lookout, but I do expect that over the next 6-12 months, there'll be more sizable opportunities for us to take advantage of.
Awesome. And then, I just, we're basically out of time, but I have three rapid-fire questions-
Sure.
that I'm asking everyone. The first, which is a two-parter, is: Do you believe the Fed is done hiking, yes or no? And do you expect the Fed to cut rates in 2024, yes or no?
My, my answer to that is not a rapid response question. My, my answer to that is, on the macro side, I don't know. None of us really know. What I can tell you is we continue to be prepared for a wider set of potential economic outcomes than kind of in normal times, and I want to assure investors that we will continue to adjust our approach based on changes in the macro and the micro environment.
I'll put that down as a question mark. Do you believe real estate transactions will meaningfully pick up by, A, the fourth quarter of 2023, B, the first half of 2024, or C, the second half of 2024?
I like that. More multiple choice. I like that. I'll go with the first half of 2024.
Are you using AI today to help you run your business, yes or no? And do you plan to ramp up spending on AI initiatives over the next year, yes or no?
Yes on both. We've been early in utilizing AI on our operating model execution. So give you one example, and I'll be brief here: Today, about 95% of our interactions with prospects is done through AI and AI-facilitated chat box. There's a lot of investment that we're making there in terms of how we interact with customers and a lot of incremental investment. When I talk about our Horizon Two opportunities of operating model transformation, a lot of it will be oriented towards there.
Awesome. Thank you, Ben.