State of the Multifamily Market: Rents, Supply, Markets & More feat. Jay Parsons

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. We've got a real treat for you today. This is one of my favorite episodes we've recorded in the recent past. This is with Jay Parsons. He's the chief economist at RealPage. RealPage is a data analytics firm focused on rental housing. So if you have ever invested in multifamily or single-family rentals or ever considered investing in those asset classes, you have to listen to this episode. He breaks down all the noise that's going on in the space. He talks about supply demand, some of the rent growth deceleration we're seeing right now. But what's really causing that? Talks about consumer demand and really the short-term kind of supply crunch we're having right now, but then really forecasts out over the next 2 to 3 years, where are we going as a market? You know, what is going to be the housing demand scenario like? He talks about capital markets. Talks about the impact of, of rent growth on CPI and actually makes a pretty bold prediction for CPI. You know, fast forward 6 months from now, talks about which markets are performing best, what types of asset classes or A, B, or C class apartments are performing best. He breaks it all down in this interview. It's a little bit longer than other episodes we do, but you definitely want to listen to the whole thing. It's power packed. So hope you enjoy. And again, if you are enjoying this podcast, We appreciate if you are sharing it with friends, helping us write reviews, helping get the word out to a broader audience so we can share this knowledge with more people. Thanks so much. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to another episode of the Invest Like a Billionaire podcast. I am your host, Ben Frazier. And very excited for our conversation with our guest, Jay Parsons. Jay, if you're not familiar with him, he is the chief economist at RealPage, and RealPage is an incredible resource for investors and owners of multifamily and rental housing. And he is— I've been following you for a while on LinkedIn, and he's putting out just amazing content, just explaining what's going on in real time in multifamily housing. And so Jay, just kind of set the stage here. What I really love to kind of gear the conversation towards is, you know, our investors are mostly passive investors. They've been investing in real estate for a while. And, you know, multifamily has been this big behemoth. It's, you know, one of the biggest real estate asset classes and was very popular over the past several years for investment. But there's a lot of things that are kind of creating headwinds, concerns. You know, people are getting capital calls, you know, maturing debt that's creating a lot of pressure. Potentially even seeing rent growth declines, all these different things that are happening. And, you know, we need you, the expert, to come and break it down for us. And so with that, give us a little bit of your background and, you know, give us more context for what RealPage does, who you serve, and then we'll kind of get right into it.

Sure. So I joined RealPage back in 2009, right in the middle of a crazy period, obviously, in the economy. And like a lot of people, I didn't grow up thinking, man, it'd be fun to work in rental housing. I stumbled into it and unexpectedly fell in love with it. And I love what I do. But RealPage is predominantly a software company to the rental housing and commercial real estate industry. So our clients are owners and operators and property managers of commercial real estate. Our largest client base is in apartments. And in my role, then that is heading up our economics and industry principles team. So I'm not a software guy, but I get all the data that flows through our systems You're kind of like ADP with payroll data, getting to see things kind of in more real time. And we're the same way. We're all, you know, through all these products that we offer, we're able to consume a lot of data on what's really happening in the sector. So it makes my job a lot of fun.

That's awesome. Yeah, that's great. I'm a little bit of a data geek too, so I've been going through all your posts recently and just I have a list here of about 50 questions, so I'm sure I'll get all to them, but very excited. So break down for us just at a high level you know, where are we at right now and how do we get here? And I'm really talking specifically mostly on multifamily would kind of be the main focus here. But, you know, set a little bit of the stage for us, kind of the supply demand. Yeah. All that.

Yeah. Well, I think it was— let's, you know, quickly go back a little ways. And you mentioned in the top that, you know, multifamily has become a popular investment category. And I'm sure you remember that really wasn't the case 15 years ago. And so it's really coming outta the great financial crisis. We've seen a real growth in the asset class of both multifamily and single-family rentals. Obviously they both existed previously, but you know, just to give you some numbers, you know, 15, 20 years ago apartment sales were half of what office sales would be in a given year. Today it's complete opposite. Apartment sales are 2x what office sales are. And so apartments are now really the— and SFR, but I mean, the rental housing overall is now probably kind of the primary asset class of commercial real estate. And so, and a lot of that had to do with just really favorable demand fundamentals. You know, we've been in an environment that, you know, homeownership rates actually going up since 2016. But there's also been a lot of just overall household formation that's been a good thing for single-family rentals and multifamily rentals. And by the way, I think a lot of people understand this is they can all do well at the same time and they usually do. They don't really compete with each other. They all are kind of dependent on the same underlying demand drivers. And so what we've seen more lately is there are some significant headwinds, as you mentioned, but these, these drivers are still in place. You know, the demographics are still seeing good job growth, we're seeing good wage growth. We're now seeing wage growth that's outpacing rents. And so, you know, longer term, there's those things are still in place and we're going to get more into the headwinds here. But that's what drew people to the sector. Those things are still in place, but there certainly are some shorter-term headwinds that are going to cause some real challenges for certain groups.

So real quick, before we get to that, break down a little bit more of the demand drivers, right? Because that, you know, it seems like, oh man, this has run out of steam. You know, it's—

it's—

You know, we've had a great run, but now, you know, we're seeing rent growth decline. So we're oversupplied and we have negative population growth and all the kind of easy headline narratives, right?

Yeah. Yeah. My favorite one's the last thing you mentioned, the population growth. And, you know, the Twitter sphere loves this one where they'll point out, you know, the housing doomsday people will try to point out that, hey, because population's slowing or in some cases it could be declining in certain markets, you know, therefore we have oversupply of housing. And I always point out back to these people, it's like, okay, wait a minute, like, do you think your children are going to want to live in the same homes in the same cities that your grandparents and great-grandparents lived in? Absolutely not. And so where you tend to see the most investment in housing tends to be in growth markets. And I don't like to pick on certain spots, but you could just— everybody can imagine in their minds there's certain places you probably don't want to invest a lot into housing. There's other places you can safely bet are still going to be seeing population growth, household formation, in-migration, job growth and whatnot. And so I think it's just, you know, some common sense. Just be smart about where you're putting the money.

But I think it's a great point, right? Because if you're saying population growth as a nation, right, and we're actually probably leading the way globally from a population, you know, growth standpoint, even though it's not Amazing. But it's really local to the market, right? So population growth, not just on an average basis, but on what's that particular market doing. So we could theoretically have, you know, no population growth as a nation, but there could be parts of the country that have positive population growth. But it's a net-net, right? So there's— to your point, real estate is local. And understanding the local market is probably the biggest driver of understanding demand.

Absolutely. And that's the biggest factor to consider is there's, you know, there's markets that are still growing. And, you know, I'm sure we'll get more into this, but even the markets that are very high supplied right now, these are high demand markets as well. And so, you know, long term, that demand is going to be there. I don't think that all of a sudden, you know, you know, Austin, which is struggling right now, it's not like Austin is going to stop growing. It's still going to grow.

Right.

It's just going to have some growing pains along the way. Sure.

Okay. Well, let's get into some of the headwinds right now. So this is what all the headlines are saying, right? All the doomsdayers. And, you know, we do have some real headwinds. So, yeah, I'll make light of it. But, you know, break down what are some of these headwinds?

Yeah. Well, so there's, there's a couple of different things. The number one factor is supply. And, you know, supply is a tough issue because on the one side we need more housing. And I'm a big advocate for that. Anybody who follows my posts know that I'm a big fan of supply, supply, supply, build, build, build. And I think in the long term it's a win for everybody. It's, it's more investable dollars into the space. We're encouraging more supply, which is a good thing for affordability. In the long term, what you want is some balance here. And we've gone through a period where we were undersupplied, which led to crazy high unsustainable rent growth. And now that resulted in the highest supply volumes that we've seen in 50 years. And we're building more, more than a million apartments right now across the country. The most in 50 years. And so what's happening is that while we're still seeing good demand, rent growth is really pulling back. It's basically flat right now year over year, and it's already negative in a good part of the country. So that's a real significant headwind on the operational side, and we could get more into the ins and outs of that. But supply, I don't like the word oversupply because it implies something more structural and long-term, but there is very much a short-term supply-demand imbalance. Now with supply though, supply is the easiest thing to forecast. We know starts are going down because of the cost of financing and whatnot and the fact there's so much supply right now. There's less dollars going into that space. So by the time you get '25 and '26, there's a lot less supply. So we know that headwind is a short-term one. The probably even more significant headwind, we get into some other factors too, but is going to be the interest rate environment. You have a very— it's a small but very loud part of the market. That relied heavily on short-term floating rate debt with acquisitions in '21, early '22, 2- and 3-year terms. And those, those guys are in some trouble. I mean, looking at capital calls, potential disposition in some cases that are, you know, especially this is not— you see these headlines, but it's not necessarily the majority. But there are certain cases where you, the property's worth less than the debt. So that stuff's going to make a lot of noise. But it's not the bulk of the market. But for those who are in it, it's going to be painful.

Do you have a sense of how much of the market is made up by that? I know, you know, what you're referring to is mostly kind of these, these short-term bridge debt facilities that were very highly leveraged, sometimes 80 to 90% on acquisition. And you're buying, you know, as you're in the Sunbelt, you know, 3 and 4 cap deals, very aggressive growth plans. And, you know, we're not seeing the rent growth we saw the past couple of years. And with the interest rate increases almost double maybe what the acquisition, you know, a lot of squeezing on the margins.

Yeah. Yeah. It's, it's, you know, it is tough to know exactly how big that is. But I'll tell you, it's, you know, we know that the bulk of the market and I think, you know, for those who are, who are listening to this, you know, you may or may not know that, you know, half the debt market in multifamily is is agency debt, Fannie Mae, Freddie Mac, as well as some through, through, through HUD. And then the banks, they make a lot of news now. They don't really do these types of loans for the most part. They're more probably exposed to the construction loan side, but they— on their stabilized assets, they're generally longer-term. Life insurance companies, same thing. And that takes you to the smaller— there's $2 trillion multifamily debt in our country, and there's about 4% of it that's commercial mortgage-backed securities or debt funds, CDOs, things like that. That's where you see these more risky, high-leverage situations. And so you're really looking at— and even that, but it's obviously not all 4%. But, you know, even if you assumed all of that was at risk, it's still a pretty small share. Now, there's, there's risk elsewhere in the pie too, don't get me wrong. But the most elevated risk is a pretty narrow piece of the pie.

Right, right. What, what else? What other headwinds are we, are we facing here?

Well, those are the two primary ones. I think that, you know, I'll tell you on the, the, the bigger risk, of course, is what's happening with the economy. I mean, we continue to see, I think all of us kind of snickered at the soft landing idea a year ago, but you know, so far that's kind of playing out. And so we've seen a lot of economists that are revising their outlooks and pushing out recession forecasts and whatnot. But, you know, that's still a real fear. Like if, if we, if, if potentially the Fed overpushes too hard on rates or if, if, if jobs start to suddenly disappear, if wage growth disappears, you know, those are real potential headwinds. So they're not in place now. But I mean, if we do get into an environment where the economy is contracting, jobs are contracting at the same time, we're seeing record supply, you know, that's when the outlook is going to look a lot more challenging. So that's, that's a, You know, I'm more glass half full by nature, but I'm also, I'm also realistic enough to also recognize, hey, you know, there's still a possibility that could happen over these next 18 months as supply is peaking. So that's the other potential big headwind to really be mindful of.

Sure, sure. And, you know, we're, we obviously own a lot of assets and, you know, and we're seeing, you know, across the board expenses increasing. Right. So we had the past couple of years massive top line growth with especially in the Sunbelt markets, you're seeing double-digit year-over-year rent growth and expenses kind of lag, right? So we've had this great top-line growth, but all of a sudden, you know, the expenses are also, you know, increasing quite a bit. Insurance is probably the biggest one that people keep hearing about. And so you're having, you know, rent growth declines in the short term, you know, from the new competition of supply. You have increasing expenses. You know, and now you have higher interest rates potentially. So your margins are just getting really squeezed. But let's just go back to the supply here because I saw a chart you posted the other day which was just really insightful. And I think, again, this is where when you look at just averages across the board, the information can be misleading because it's so, you know, market-specific when you're talking about rent growth, rent growth decline and you know, it kind of is obvious, but, you know, we're seeing the most rent growth declines where there's been the most new supply. Right. So you had like this, this chart that shows all the new supply coming in relative to the markets and, you know, what's the rent growth doing. And so there actually are markets that are having very positive rent growth. Like we're in Kansas City and, you know, we're seeing actually pretty strong rent growth, you know, relative to maybe other Sunbelt markets. So break that down for us. Kind of give us the nuance there between, you know, it's not, not all bad from a, from a rent growth standpoint.

Yeah. And first of all, you made a good plug on the expense side. I can't believe I didn't mention that more for the economy stuff. That is a real concern. And turn costs, low premium— I'm sorry. Yeah, property insurance premiums, but also just the cost of turning over units. Labor materials have gotten more expensive, plus there's more turnover. Renters have more options. So that's a real headwind. Especially in the Class A space. So yeah, on your point about the rent, so we did some analysis that showed there is a remarkably tight correlation between rent growth and supply. And even I, I mean, I've always believed in the laws of supply and demand, but just to see it in a graph was remarkable. So basically what it showed is that in the submarkets that saw 10% or more expansion of their apartment supply, rents were already down, let's say 3% or something like that. And then in the areas where it was 5 or 10% supply expansion, rents were down a little bit less. In the areas where it was, you know, say 3 to 5% supply expansion, rents are basically flat. And then you get to the other side where there's no supply, we're still seeing, you know, 2.5, 3% rent growth, which is basically normal. And so it's more just the normalization story in those spots. And so yeah, you're right. And it really is, I think, an important time to remember that that, you know, you know, it's, it's real estate's always location, location, location. It's asset strategy and who's your demographic. And so there is a— I think over the next 18 months especially, there's going to be a wide variability in performance versus '21 and 2022 or first half 2022 when it was pretty much everything. You could have been— you could have had the worst asset and the worst operator and made the worst decision and still done pretty well. You know, that's not happening right now. It's changed, right? Yeah.

When I saw the chart, the inner data nerd in me saw that correlation and just rejoiced, right? When you see data as that tight, maybe it makes so much sense, but it's just to your point, when you see the data confirm the thesis, it makes sense. And so obviously we're seeing some rent growth decline in some of those markets. And the first question is, is this supply-related or demand-related? You've made a very good case for it being supply-related, obviously with that correlation. But talk about the demand side of this, right? From a consumer standpoint, what's going through the consumer's mind, right? The past couple of years, you know, we haven't seen great wage growth. You know, the more recent data has been positive. But, you know, meanwhile, we're having high inflation. Consumers are getting squeezed. They're seeing their rents the past couple of years have gone up, you know, in some markets 20%. Right. And so they're feeling the pain. But now all of a sudden, they have a lot more options. So, you know, talk about— I mean, from a demand standpoint, it seems like there's still a pretty good amount of demand, good strong health from a consumer standpoint, at least right now. But they just have more options. Is that kind of your analysis or what would you— what would you say to that?

Yeah, no, it's not. Yeah, absolutely. And so I think what's happened is, is, you know, we're— it's really an unprecedented event. We've not seen this in decades, which is you have rent deceleration that's quite significant, flattening. At the same time, you don't have demand destruction. And that if you think back to past periods of rent cuts, early 2000s, you know, we had a recession, job loss, negative demand. 2008, 2009, we all know how that went. Negative demand, rent cuts. 2020, demand goes negative for a few months, rents go down. And so we've not had a period like this. We're still good. We've seen good demand in 2023. There's still great job growth. There's still wage— wages are— I think it was more of a 5% still on wage growth.

Yeah.

And so wages are now growing faster than rents and most other costs, which is, I think, a really good sign. Consumer confidence is rebounding. Last 2 months, the University of Michigan Consumer Sentiment Index shows some of the best year-over-year improvements on record. Now, it's still low overall, but it's improving. And I think it's because incomes are now starting to outpace costs, at least for now. Now, again, as we said earlier, still some risks there, but I think all of that being said, that's creating more, that's allowing for more demand to hit. And at the same time, people aren't really— it's not like you're seeing a lot of people leaving to buy homes right now. You know, high interest, high mortgage rates, high home prices, that doesn't create more renters, but it does kind of limit the backdoor exits to homeownership. And so that's even if you have— and so that's, that's, that's protecting some of the kind of the overall occupancy as well. So, you know, occupancy—

explain that a little bit more because that, that's not as intuitive as some might think. So Because my first thought would be, hey, well, we have very prohibitive entry points into homeownership right now because we haven't seen a big drop-off in values, at least in most markets. And meanwhile, with interest rates doubling over the past couple of years, it's, you know, the cost is nearly doubled for a monthly basis. So it, it's, it makes renting more appealing. But you're saying that that's actually not the case. So break that down a little bit because that's interesting.

Yeah, well, I think this is a really, this is one of my favorite topics and because I think it's kind of a misunderstood issue. So first and foremost, it's important to understand that the rising tide boosts all ships effect. So historically, I think people have this mindset that if people are buying homes, that rental demand must be weak. That's rarely really the case. Usually it's, again, both are doing well or both are not doing well at the same time. It's both are dependent on household formation. The other thing, even by the way, peak home prices, like home buying in mid-2000s, you still had great apartment demand back then. So, and the same thing in 2021. So that's, that's part of it. Now, as it relates to the current market, what we're seeing is that, well, let's think about who's buying a house. Typically it's not somebody who comes out of college and is going to go buy a house. It's not somebody who's leaving mom and dad's house and going to buy a house. Typically your home buyer is already a renter. And so I always like, I see this even in news articles, it's like, well, you know, cause the housing market is just, people are choosing to rent instead. No, they're just renting long. They're already renters. They didn't, they didn't, they didn't just come out of nowhere and said, hey, which, which route do we go? Let's choose renting because it's cheaper. No, they just, they're just having to rent longer than they otherwise maybe wanted to or would have. So that's the real distinction. And so we do have net household formation. You know, that's the initial household formation, kids coming out of college, getting a job for the first time, moving out of mom and dad's place. They're typically going to be renting first no matter what home prices— well, almost no matter what home prices are doing. Right. And so again, it's really that backdoor effect that's more impacted.

And the backdoor being the people that if the costs were lower, the entry point was cheaper to buy homes, they would do it sooner. But they're basically being forced to stay in their current rental position because it's more prohibitive. Is that what you mean by the backdoor?

Yeah.

So basically it's creating pent-up demand for homeownership, you know, until costs kind of normalize. Is that what you're saying?

Yeah. But I also don't think it's— I said all the time, I think if you're an investor in rental housing, you should be rooting for a strong for-sale housing market. I think you want to see home prices be— or I should say mortgage rates be more accessible to homebuyers. And the reason is that there's well-documented research showing that when home sales are strong, there's more job growth and there's job growth associated with home sales. And so I don't— I don't look at them as like one or the other. I think that it's— that's— they typically are— you want both because if my view is that in periods you look historically in periods where home sales are strong, you're going to see even more rental demand as well because there's more household formation.

Right.

And so that's, that's kind of missing variable here. So we're still seeing good demand for apartments, but it's not like, like even like I see people like in the REIT earning calls, like they get asked this all the time and the numbers are like, you know, 9, 10, 11% of move-outs to home purchase and then it drops down 2 percentage points. Like it's like, guys, like this isn't that big of a deal. Like everyone focuses on the wrong thing. The bigger factor for apartments right now is not— and even previously in 2021 for that matter, it wasn't move-outs to purchase, it's move-outs to other apartments, especially with all this new construction going on. And that's, that's the factor. I think it's much more important for apartment investors to look at their own properties than these macro trends. People leaving to buy houses.

Got it. So, so it's a factor, but it's just de minimis relative to the other bigger factor, which is competition of other rental properties.

Yeah, no, it is a factor. But I'll give you one good example of this. It's like So like some of the Wall Street narratives historically has been that, you know, you want to avoid suburban areas because there's more risk of move-outs to purchase. Well, our data, we were able to track actual turnover. Turnover is much, much higher in downtowns across the country than it is in the suburbs. So if you get your head wrapped around these laws in Chester about move-outs to purchase, you're missing the broader point, which is you have less— who cares why they're leaving? They're leaving. And so that's irrelevant to you. So if your turnover is lower in the suburbs, then it doesn't matter if a higher share of the turnover you have is leaving to buy a house versus going to another apartment complex. It doesn't— they're still moving, but at a lesser rate than in a downtown area.

That's such a great point. Yeah, that's, that's really interesting. Well, let's talk about— okay, we're kind of here right now. Where do we go from here? Right. We kind of got all these, these forces that are squeezing you know, the properties on an income level basis. Potentially we have some distressed properties coming to market, right, as a lot of the maturities of these bridge loans are starting to mature end of this year into next year. You know, maybe that, that creates some turmoil, right, where just some of these distressed property sales are hitting the market. But I just, we just actually had a podcast on this just, we released on a Wall Street Journal article talking about there's over $200 billion worth of funds being raised from these big private equity firms that are literally just sitting on the sidelines waiting to scoop up distressed real estate, commercial real estate. Yeah. And so, you know, while there may be some turbulence, some speed bumps, you know, our thought and thesis is that it's probably gonna be not that deep and not that dramatic because there's so much demand even still for these types of properties from an investment standpoint. You know, talk a little about the capital market side of this. Is that what you're seeing as well? What's kind of your forecast on, you know, Q4, Q1 as we kind of go forward?

Yeah, no, I generally agree with you. I think, you know, this is extremely unscientific, but gives you a pulse of a little bit of the market. So I put a post of the poll on LinkedIn, had 1,100 people, I think, respond. And I said, hey, for everything other than office, is there going to be more distress or more distressed or more buyers looking for distressed acquisitions? And 75% said that the buyers are going to outnumber actual distress. And right, you know, if that plays out, we don't actually know, but like everybody I talk to wants to be a buyer of potential distress. So I think you're right. Like there's a lot of money lining up for this, but it's also a market where, you know, number one, I think lenders are more are, and with some prodding from regulators, are more likely to work with borrower sponsors than they have in maybe in the Great Financial Crisis. But also the thing to think about, and so because I generally agree, I don't think we're going to see some, you know, all of a sudden cap rates 4 percentage point higher, some crazy number. If you're waiting around for that to happen, you're going to be holding, you know, your bank account's just going to hold that money in there for a long time. It's not going anywhere. But I will say though, I think there is some risk for certain segments of the market. I'll just say, speaking specifically to multifamily, there's a lot of the capital is lined up looking for Class A and B already value-added, I mean post-renovation or nicer product in good locations or looking for distressed lease-ups. And I imagine you look at some of the syndicator distress that's been in the news to where some of that exposure is, where there could be some real kind of hairier deals today in the market, even in the Sunbelt, a lot of that's kind of Class C and Class C locations. And there's just not going to, in my opinion at least, I don't think there's going to be as much capital that's going to be lining up for those deals. And there's going to have to be, I think, some cap rate expansion for those deals to be more attractive to investors. So you could see some nuance in the story there, but overall I agree with you.

Very interesting. Very interesting. I want to get into that here in a little bit. Let's shift to just kind of back on the supply demand standpoint. Right. You mentioned household formation, housing shortages. We have record supply hitting the market, but we also right now have, you know, new starts, new, new construction, you know, really falling off a cliff because of the prohibitive cost through you know, interest rates. And a lot of people don't think about this. It was kind of obvious that a lot of the housing in there and the properties that are hitting the market now were started, you know, 2 and 3 years ago.

Right.

And now they're just kind of hitting the market and they're kind of getting occupancy and leasing up. So to your point, you can kind of fast forward a little bit and, you know, where do you think we are 18 to 24 months from now from kind of a supply-demand standpoint, you know, regardless, you know, let's suspend the idea of a recession, you know, maybe we can layer that in, but, you know, live in a magical world here. No, but what do you, what do you kind of see forecasting just from a pure fundamental standpoint?

Yeah, so as, as, you know, I kind of joked there, but I mean, it's, it's very obviously no one really forecasts recessions. I mean, very accurately. So You take that part out of it, supply is the easiest thing to forecast because as you said, you're really looking at starts and you're looking them out, you know, 18, 24, 30 months. And so what's happening is we are seeing a rapid deceleration in starts this year. I think we'll end the year with starts about maybe 50% or more below where they were last year.

Wow.

That's just because of the, you know, the financing environment's much tougher. These deals aren't penciling, you're not going to get the rents you need to justify the deals. And so there's still some deals that are happening, but they're generally much more limited, obviously. And so that means by the time you get to '25, especially the second half of '25, you know, '26, there's going to be a lot less supply. So assuming the economy is still in good shape, there's very— yeah, it shouldn't be that complicated. I mean, you should be able to see occupancy rates rebound concessions are burning off, which means rebounding net effective rent growth. And so again, assuming the economy is in good shape, '25 and '26 should be pretty good years for investors.

And obviously it's harder to predict the demand side of this, but do you forecast, you know, when the rent growth kind of rebounds back to more normalized numbers, or does it, you know, or do we back— are we back in the same situation where we still have a pretty severe shortage given the lack of new starts happening this year, potentially into next year, and we're back into a higher rent growth environment? Is that just too hard to predict at this point?

No, I mean, I'm of the view, I think what, and you know, maybe if someone will show me this video in 3 years and show me I was wrong, but I'm of the view that what we just went through in '21 and early '22 was a once in a generation event that will never be repeated as long as any of us are still in these careers that we're in. Maybe we're retired by that time this happens again. But it was a perfect storm of factors that led to double-digit rent growth. I mean, that's not normal. And I don't see how you can reaccelerate back to that very easily, especially with the supplies coming in. And by the time you get '25 and '26, there's still supply. Like, it's not like it's just evaporating, but it's— and all this new stuff too is going to go through prolonged lease-ups. And so I don't think we're going to be in— it would take a lot of other factors beyond slowing supply for us to see rent growth anything like what we just went through.

Talk a little bit about rent growth as it relates to CPI, right? So Consumer Price Index, this is a big measure of inflation.

Yeah.

And you know, the Fed uses different measures, but obviously the higher interest rates are intended to stymie inflation. And you've made a point in some of your recent posts that these kind of rent decelerations we're seeing are lagging in the data, right? And so we, what are you kind of seeing from a CPI standpoint? Does this start to, you know, continue to go down? Because obviously housing is a big part of the calculation, right? So break down what's happening in CPI a little bit.

Yeah. So yeah, this is a great topic. It's one that I think no one really paid attention to for the last couple of decades because frankly CPI was so steady and predictable. And I didn't really even look at it. I mean, I, you know, people in the industry always kind of looked at the CPI version of rent and shelter. It's kind of just kind of snickered at like, yeah, this is— it's just an overly smooth metric. You look over history from like basically like the late '80s and through until the inflationary run-up, you know, it was basically, I think, in the 2 to 4% range all the time except for one brief period. It got to about zero in the Great Financial Crisis. And so, is we always kind of snickered at this kind of overly smoothed out metric. And, and obviously what happens is that it didn't really run up initially when rents were jumping in 2021. We didn't see until 2022. And so what we as we kind of dove into kind of understand, okay, what's happening here? Well, there's some interesting history. The last big inflationary period in the late '70s or mid to late '70s, early '80s, back then home prices were part of CPI, Consumer Price Index. And so the back then, then the economists and policymakers from the Bureau of Labor Statistics and the Fed and whoever else is involved said, hey, home prices are too volatile, we got to pull this out. And so we're going to replace it with rent. And this concept of owner's equivalent rent, which may have heard of OER, it's kind of a controversial metric, but it's still its primary variable is still just a survey of renters asking what rent they pay. So it's the same variable as what's of what we're surveying the rent. It's the same rent survey basically. And so everybody kind of thinks of that as something like measuring home prices, but it really doesn't. And so all that to say, like shelter is the biggest category of CPI and rent is the most important variable in the biggest category of CPI. And so as a result of all that, there's rents have outsized importance. And so there's about a 12-month lag effect for some technical reasons between asking rents you typically see in headlines versus what the CPI tries to measure, which they call the contract rent, or the industry calls the embedded rents or in-place rents. And so, uh, so because of that, there's always going to be a little bit of lag effect. And so as you look at that play out, it didn't really peak until last year, and now it's going to take another year for that to really show the slowdown. So it's not going to be early— until early 2024, maybe late winter, early spring, before we really start to see more normal CPI shelter numbers as a result of that. So I could talk about that for days. I hope I didn't nerd out too much there, but it's a really interesting topic.

No, I think it's a very important topic because it's, it's something that is, you know, inflation is this big sticking point, but we are seeing a deceleration. And so when that starts to show up, you know, that really impacts Fed policy. So do you see— I mean, obviously it's— no one can predict what's in the mind of Jerome Powell. Jerome Powell at all, but you know, what's kind of your thought of does this start to relieve some pressure from, you know, just inflation that we're seeing and potentially make a good case for, you know, actually dropping rates?

Well, yeah, I mean, my expertise is very much on the rent side, not overall fiscal policy. So I certainly don't fancy myself as being as smart as Jay Powell there. But, you know, I will tell you that You know, I think a lot of people, they see the headline inflation numbers and then, you know, obviously a lot of the economists know this and some of the nerds really dive into the CPI. But in this last month, 90% of CPI inflation was driven by shelter. So you take out shelter and year-over-year inflation's been basically flat these last 2 months, which really tells you that, you know, the things that you could really impact more readily, those things have already been impacted. Now, who knows what happens going forward, but right now they've been impacted. Rents, again, shelter, you can't impact it right away in real time. It's a 12-month lag, but the leading data, the asking rents, the leading indicators show us that's being impacted as well. And I will tell you, it's like, you know, well, certainly I can't speak to what the Federal Reserve Board is looking at. I can tell you that the staff economists are very aware of these trends. They see our data, they see other providers of data, they know what's happening. And I'm sure as they fed up the ladder, But I'm sure that Mr. Powell has a lot of pressure to be overly abundantly cautious in how he interprets it. But it's a near certainty that shelter is on a rapidly downward slope over the next year.

Wow. Very interesting. Very interesting. Let's shift a little bit here. You've kind of alluded to some of this, but you know, what markets are performing best right now and where do you kind of see, you know, fast forward the next couple of years, are the same markets that were the darlings of the past few years continue to be that or, you know, where do you kind of see opportunity from an investment standpoint, you know, given some of the data you're seeing?

Sure. Well, I'll tell you, just long term, I'm a big fan of of following the people, but you want to follow the demand. And the demand is still going to the Sunbelt and to the mountain regions. But we're over the next 18 months, there's going to be a short-term supply-demand imbalance. So for long-term investors, if you see deals that make sense and you have a longer-term hold period, you could get, you know, you're not worried about exposure for, you know, higher rates or whatnot, or able to buy at a good price and kind of wait out until refinance till rates are cheaper. Those deals I think still make a lot of sense. There's investor demand for those. Those are now the most— the large Sunbelt markets are the most liquid in the country, and the demand's still coming. Like, those demand drivers are not going away in most of these key Sunbelt markets. Now, short term, what we're seeing is these lower supply markets are in much better shape. It's— that's primarily the Midwest, the Northeast. You know, the only market in the Sunbelt, in the South region of the country that's really seeing much strength right now is Virginia Beach, where there's really no supply, but also has not been as much job growth in the last few years. But, and those are good markets, I think, for especially long-term holders. There's less— those markets a little bit less liquid historically, but I think they're going to be of more appeal just because they're a little more slow and steady. There's some, you know, kind of if you're in favor of the tortoise over the hare kind of philosophy, like those are markets where you could get a little more value. But they're also just not going to be the high-growth markets of the future either.

Right. So same question relative to, you know, class of property. So A, B, and C, you kind of alluded to this earlier, but you know what, what we kind of saw over the past couple years on like the Class C properties is the cap rate compression, you know, relative to other classes seem to be the most aggressive. And maybe that's partly due to some of the, you know, quote unquote syndicator bubble that, that kind of happened, right? But do you, do you kind of see normalization of cap rates, you know, to the long-term means of these different classes? Do you see one class outperforming more than others? I mean, another layer of this is, you know, if there is a recession, a lot of people say, hey, Class B is a good place to be because the Class A renters, you know, downgrade to more Class B properties. You know, break that out a little bit just from kind of class of property.

Yeah, so you're right. I think one phenomenon we saw these last couple of years is that cap rate compression was so strong across the asset classes that we saw quite a bit of Class B and C investors trading out into newer assets and just seeing greater value in that from, you know, just like an OpEx standpoint, seeing better NOI opportunity, knowing that you have a newer asset, not having to worry about the maintenance costs quite as much of it and generating a higher rent. You know, I think, I think you're right. I think there's probably my guess. And again, the crystal ball is fuzzy these days, but my guess is we'll see a little more normalization in the variability between asset classes, particularly because I mentioned I think a lot of the, a lot of the messier stuff in the market right now in terms of distress, I personally, I think it's going to be Class C. So I think you're going to see some class rate cap rate expansion in that segment. The other thing to consider is Class C Well, we're currently— it's been doing well relative to A, because there's less supply pressures. The other thing is that it's most vulnerable to affordability challenges. And right now that's not so much a concern because wages have been strong, job growth is good in working-class job segments. But historically, when you do hit a recession, that's where you're most likely to see household consolidation, more likely to see delinquencies. And so it's— there's a little more risk there. Class A, of course, you're more exposed to supply. And so we're big fans of the, you know, one of my pet peeves, I hate when I see like broker packets like Class B/C. And so we have— there's no such thing as B/C. B and C are not the same thing. They're different markets. And B is a real sweet spot where you don't have the same affordability concerns, but you still have a pretty good rent gap between B versus the lease-ups especially. And you're not really building Class Bs by any— but, you know, you can't build that stuff at those price points unless you get some tax credits to do so. So Long term, I'm a big fan of kind of the B to A- category.

Got it. What about new development right now? So one of the things, you know, we're looking at a lot of development projects and, you know, they are a lot more difficult to pencil. You've got to build in a little more margin for a potential slower lease-up. But, you know, if your delivery is going to be 2 years from now and a lot of this short-term supply has been absorbed potentially, you know, does that mark a good kind of recipe for development? What's kind of your thought on development projects right now?

Yeah, well, I'll tell you, I think pretty much every developer in the country right now is trying to raise capital off of this thesis that there's going to be less supply in '25 and '26. So now's the time to, to go. And but not everyone's successful at that strategy. And, and it's, it's only certain groups that are going to be able to make this work, which is why supply will indeed still be limited. In '25 and '26. But the thesis is very sound. I think especially if you're able to target, you know, locations where, you know, A, you have a good cost basis, or two, you're not, you're not directly competing with a lot of properties that are flooded with supply in this cycle and maybe still having prolonged lease-ups in that period of time. So I think for the right assets and the right strategies, that, that can really pay off nicely in the next couple of years if you can, if you can actually get it, get a deal done.

One other kind of piece of this. So obviously a big driver to your point is the rising tide lifts all boats from a demand standpoint. And one of the biggest drivers of housing demand is household formation. You know, we've seen that kind of been happening later on. What are you kind of seeing as far as kind of going forward? You know, even you posted something on Gen Z the other day, just how as a percent of their income, they're paying more for housing than any other generation. And there's some other nuanced factors there. But how does kind of lifestyle, you know, culture of different generations impact some of this future of demand? If you kind of zoom out even beyond just the, you know, 2 to 3 year period, but kind of 5+ years as kind of different generations are moving into housing.

Yeah. So a couple of thoughts there. I think number one is that the good— everyone's, I think, pretty much well aware at this point that, you know, we've had declining birth rates, the population growth is slowing. Growing. But you know, for the apartment demographic, your key is kind of that, you know, 20s to 30s category. Your median renter is 31.5 years old in an apartment. And so, and so that group, while it's not going to be the same boom that we saw with the millennials, you also don't have the same drop-off effect that we saw in the '90s with Gen Xers coming of age where all of a sudden there was net contraction in the young adult category. It's going to be more, you know, steady growth, you know, modest growth or even some flatness in that demographic. Over these next, you know, 10 to 20 years. And so that's a good thing. Now, what it means is we can't build a million units every year, but it suggests that there's still, I think, an overall good demographic story for the apartment demographic. And the other thing to watch for with Gen Z is that, you know, we recently commissioned a study by a third-party research group, the Center for Generational Kinetics, I believe, Jason Dorsey's group, and they specialize in trying to study differences in generations. And one of the things we found is that Gen Z, at least for now, and to be honest, even as a rental housing, I'm a little bit suspicious of the long-term view of this actually sticks long-term, I should say. But Gen Z's, like, people are, Gen Z, the generation Gen Z is most, I should say, least confident about homeownership. They actually, a slight majority of them actually in the survey saw renting as a better financial choice than homeownership. And they've probably seen and grown up with the volatility in the home price market over these last few years and seen that. Now as they get older and kind of reach age of getting married, having kids, maybe that view changes. But I do think we're going to kind of extend this trend of this kind of prolonged stage of renting where it's not just so much about cost, whichever gets the focus on, a lot of it's about lifestyle. It's about flexibility. It's about, you know, not being tied down. And this generation, even more than millennials, really values flexibility. And so, you know, with renting and typically 1-year leases, you're able to maintain more of that flexibility. So I do think that's going to remain a generational tailwind.

Got it. Okay. Kind of last question, and I hate to open up this whole can at the very end of the interview here, but I know you're passionate about, you know, affordable housing and just trying to help move policy forward on this. But, you know, how do we solve affordable housing? Right. This is an issue that just continues to be at the fore, and especially in certain markets. And there's a lot of misconceptions about, you know, what, what needs to happen for that to really, really be solved. What are some of your thoughts and And if you had a magic wand and could, you know, write the policy, what would, what would you do?

Well, thank you for that question. Yeah, it's a, it's an important one. And one thing that I've, you know, kind of become educated on over these last few years, starting to realize that, you know, even if, even if you're an investor watching this and you have no interest in investing in affordable housing directly, you should, you still have a vested interest as any housing investor should have in affordable housing success in our country. And the reason is very simple. Number one, It's the right thing to do. People need housing. But number two is in a, if you have enough affordable housing, it takes pressure off of the market rate segment of the market. And by that, what I mean is a lot of the challenges today on affordability really stem from a misunderstanding about who lives in market rate apartments. Anytime I see these, I see these stories that rent income ratios are 40, 50%, and it's not true. But what's happening is people are taking government data and incomes and say, hey, the population income is income. The population's only this in this market, rents are that, therefore they can't afford rents. Well, that's not who's living in these apartments. It's people who have middle and upper incomes, those live in market-rate apartments. But that narrative, in fact, I mean, what it really is not just a narrative, it's a shortage of affordable housing. It's not that people are living in units they can't afford, it's that people can't find suitable housing. That problem is leading to, I think, some, you know, wrongheaded policy approach. I'll give you one great example really quickly here. There was a city in New Jersey, I can't remember which one it was, I don't want to misquote it here. But they recently, they have rent control and they just expanded their rent control program to now include new construction. It was previously set to exclude new construction because the view has been that, hey, if you have rent control, you're going to restrict future supply. People aren't going to build with rent control. And that's true, right? We see that there's less supply in rent-controlled markets. So this town and city in New Jersey says that, hey, we're now going to include rent control for new construction. Because rents have gotten too high and we need to make them more affordable. Well, what they need to think about is that to build new construction, you're not catering to the middle and lower income renter anyway. And so even if they move in and have rent control, you're not— you're benefiting upper income renters all of a sudden. And so a lot of these benefits are being directed to the wrong place. And so really, I think what we really need to focus on as a country is figure out, okay, how do we expand programs that have been very successful, like the Low Income Housing Tax Credit program, which which creates tax subsidies that incentivizes rent-restricted, essentially rent-controlled housing, but with a carrot and a stick approach, not just a stick approach. And that's been phenomenally successful, but it's just, it's just too limited. And we were— these programs have been, have, you know, unfortunately been underfunded by both parties for decades. And now we're seeing the consequences of that. So I go on and on and on with this kind of stuff. But, you know, we need more housing. And the only way to build low-income housing is with subsidies, given the cost of land and labor materials. A lot of people don't realize this. One last point here is that the cost to build affordable housing isn't that much cheaper than building luxury housing. Like, the building, building out your granite and wood floors, like, those are rounding errors in the cost of construction for a 300-unit property. The cost is the land and labor and materials. Like, no one's discounting the land, labor, materials just because you're building affordable housing. And so the only way to do this is with subsidy programs like LIHTC I mentioned earlier.

Yeah.

Wow.

Thank you. Thank you so much for talking on that. And This has been very, very insightful and I want to be respectful of your time and definitely would love to have you back on in the future.

Thank you.

As some of these things play out. So what's the best way for folks to kind of learn more about RealPage? Obviously, I think LinkedIn you're pretty active on, other platforms you're active on, but what are ways for people to kind of get into the ecosystem of RealPage?

Yeah, so primarily RealPage serves owners and operators, as I mentioned earlier, a lot of software that does various things. We also have research that comes from our data, so you could find that at realpage.com/analytics. We post a lot of articles and blogs and data. As you mentioned, I post actively on LinkedIn. You search my name there and on, and on Twitter as well. So we hopefully are not too hard to find.

Yeah, we'll put some of these links in the show notes. So thanks so much, Jay. This has been really, really helpful and fun. Thanks so much.

Well, thanks for having me. I appreciate it. Enjoy the discussion.