Transcript
Dean Wehrli:
Welcome to the New Home Insights Podcast, that’s the John Burns’ Real Estate Consulting podcast, about the US housing market. I’m your host Dean Wehrli. I know we’ve done a lot about the rental world lately. We’ve done it. We had a whole series on the built for rent space, just in our previous iterations here.
Dean Wehrli:
Today, we’re going to further explore the rental world, go back to that old standby, the apartment market. And to help us do that, we’re going to talk to Jay Parsons, he’s the Vice President at RealPage. RealPage is more than just about apartments, though, they do software and management for the entire rental world, including the commercial a little bit. I’ll let Jay talk about that better than I can though, in just a second.
Dean Wehrli:
But our topics, we’re going to explore things like the demographics and fundamentals of the apartment market here. What shifts might be coming, what trends we’re seeing, lots of stuff. So, we’ll get into a lot of meat here just a second. First, let’s start with, good morning, Jay, how you doing?
Jay Parsons:
I’m doing well. Thanks for having me.
Dean Wehrli:
Thanks for being here. So, tell us a little bit about you, just your background and also about RealPage.
Jay Parsons:
Sure. So, I joined RealPage as a market research analyst back in 2009. So, right during the worst of the last housing bottom, I should say, of the last housing cycle. And now, having the opportunity to lead our economics industry principle team. So, RealPage is a global provider of software to real estate owners and managers. And a big part of our business is rental housing, apartments, and single-family rentals.
Jay Parsons:
And so, a lot of what I get to do is, get data out of our platform in the same way that ADP processes so many payrolls, a lot of great data on the economy through payroll information. We have the same thing through our software and rental housing.
Dean Wehrli:
I’m just impressed that you got a new job in 2009. That’s one of a few in the country at that point. So, that’s a good intro. So, let’s talk about that initially. So, let’s start with talking about big picture 30,000-foot, let’s talk about the apartment market, and maybe what’s hot, what’s not. First, though, let’s set up the basis here. Where do you derive the data from, that you’re going to talking about here?
Jay Parsons:
Yeah, so we get data from a few different sources, just real high levels, RealPage over the past number of years acquired a couple of big apartment data collectors that did traditional surveys. Some of your listeners may know the names of Axiometrics, and MPF Research. And those have been folded into the RealPage umbrella over the years. And then, but the better and deeper source of data comes from the software itself.
Jay Parsons:
So, RealPage offers property management and business intelligence and all the big revenue management tools are coming through RealPage. And so, we’re able to glean data from actual rent rolls, and that gives us a much better visibility into, not just a new lease asking around which, quite frankly, is probably the most overrated metric in rental housing.
Jay Parsons:
And certainly, the most misleading. But we get an insight into what are people actually paying to sign a lease, in retention rates, renewal rates, what’s the actual rent roll movement, revenue, all that type of stuff. So, it’s a real goldmine of insight into the apartment market.
Dean Wehrli:
In a sense that it’s just a massive sample of the whole national apartment market.
Jay Parsons:
Yes, yeah, RealPage services more than 10 million units across the country. And there’s a smaller subset of that, where we look at market rate stabilized apartments, where we can pull that daily information out of. And so, it’s a very big data set. It definitely makes my job a lot more fun.
Dean Wehrli:
We like to be flexible here at the podcast at New Home Insights. So, I’m going to ask you, first question it’s going to be different is, why do you find the asking rent to be such a misleading indicator?
Jay Parsons:
Oh, yeah, this is one of my pet peeve topics. Asking rents are a commodity these days. I mean, you look at just depending on what headline, on what source you pull up, you can get very different stories on what’s happening in the apartment market or rental housing, simply based on who provided it. There’s a number now of internet listing sites that have asking rents coming out of it. And they don’t always agree with each other.
Jay Parsons:
And the reason is that, there are different methodologies that cover different properties. But even more importantly, in a tight market like today, people forget that asking rents only cover the tiny sliver of units that are number one, available at a given time, and number two, that the property managers are choosing to advertise.
Jay Parsons:
And so, I mean vacancy right now is less than 3%. And so, why in the world are we gauging the health of the industry based on data covering 3% of the market, it doesn’t make any sense. Then beyond that, in the affordability narratives, these asking rent data is oftentimes extremely unhelpful, because the asking rent is exactly that. It’s not what people pay.
Jay Parsons:
And so, one of the reasons that rent income data on apartments is 100% wrong, almost 100% of time, unless it’s coming from a data source like ours, or an actual owner operator real estate is their matching, asking rents from a private data source. And then, which is generally covering market rate. And they’re matching that with census data on incomes for all renters, which is going to create a really skewed picture and showing rent income ratios much higher than they really are.
Jay Parsons:
And so, asking rent, it’s just that. I mean, asking rents don’t often get signed at those rates. It’s very seasonal in terms of leasing velocity. And so, I could go on and on and on. It’s extremely misleading. And it doesn’t actually tell you much other than marketing information.
Dean Wehrli:
So, in a sense then to play back on the whole sampling, we talked about how your data is based on a huge sample, asking rents data is often based on a skewed sample, isn’t it? Because again, it depends on what units that apartment complex is advertising.
Jay Parsons:
And I’ll give you one other thing, too, is nowadays, asking rents… There’s not really a number, meaning that your rent is going to vary many times based on especially for apartments, on your move in date, your move and move out date. And in certain floor plans that you pick. I mean, there’s different floor plan premiums. You have a unit by the dumpster, or by the pool, that’s going to be priced differently.
Jay Parsons:
And so, it’s a matrix of pricing options that a prospective renter oftentimes gets. And then, what these internet listing sites do is, they’re just picking a number without any visibility into what the renter is actually picking.
Dean Wehrli:
So, methodologically that means that should mean anyway, that the bigger sample is, the more of that noise is going to be solved. It’s going to be standardized. Is that fair to say? So, if you do get a big sample, you do lose some of those peculiarities of that data noise that is the smallest…
Jay Parsons:
Yeah, but I also think it’s just about better metrics. I mean, I’ll give you this as an example. It’s like for an owner operator of apartments, they’re never looking at asking rents as a KPI for their own portfolio. And so, I oftentimes tell some of my friends to look at that data points, say, “Hey, if you don’t look at that for yourself, then why are you looking at for your peers, the benchmark. It’s meaningless.”
Jay Parsons:
And so, better metrics are things like lease over lease rent growth, or trade out, or placement rents, or different terms for it, but it’s what people actually pay and sign, not what’s advertised on a website somewhere. So, regardless you got the most sample in the world. But if it just junk data, still not going to tell you much about what’s happening.
Dean Wehrli:
Okay, all right. Well, that was good. That was fun. So, now having said that, let’s talk about your sample and your data.
Jay Parsons:
I’m a data nerd.
Dean Wehrli:
You are. That’s good. We need data nerds. So, let’s talk about the general state of the market. I’m not going to constrain you to those traditional things like asking rents and occupancies, what’s your feel right now, the apartment market? How strong is the apartment market right now? What are the best metrics to measure that?
Jay Parsons:
Yeah, no, I think apartments are just like all types of housing right now. There is a severe shortage of housing of all types in an all-price point, and in all locations, and apartments are no exception. We have vacancy at the lowest levels on record. Net absorption last year was not only a record high, but it was something like 60% higher than any year in history.
Jay Parsons:
Rent growth is at the highest levels on record, as everybody at this point really knows. Retention rates, people are renewing their leases at the highest rates on record. And then, also importantly, renter incomes are shooting up significantly as well. We track incomes at the time of lease signing, and we’re seeing consistently double-digit growth over the last year among people signing these leases. And bear in mind, I mean, nearly half of units get turned on an annual basis.
Jay Parsons:
So, you’re dealing with a pretty significant data set there. So, overall, it’s a very strong market right now. The way I like to separate that though, is I think a lot of times you have to remember that apartments, it’s a very bifurcated market. The market rate sector which is on fire. There’s really no affordability challenges.
Jay Parsons:
But on the lower side of the market, we hear concerns about affordability. It’s really the lack of affordable housing. And I don’t want to get too much in the weeds on this, but there is a severe issue there. But it’s generally, among renters who weren’t living in market rate apartments even prior to the pandemic.
Dean Wehrli:
Okay, or earning incomes that are just can never play in the market rate field. At least, the newer or new-ish market rate apartment world.
Jay Parsons:
Yeah, the enormous depth of demand for these higher rent apartments from higher income households. In fact, Harvard’s Joint Center for Housing Studies, they put out their big rental housing report earlier this year. And one of the findings in their report showed that the fastest growing segment of renters of the last decade have been upper income renters making more than $75,000 a year.
Jay Parsons:
And so, it’s been relatively flat and other income groups. But we’re just seeing enormous household formation among renters in these upper income brackets. That’s what’s helping feed demand for these new lease ups at high price points.
Dean Wehrli:
Let’s come back to that in a second, Jay. We’ll come back to that in just a minute. But first, let’s finish up with the market, what’s hot, what’s not, are in this case. I guess, it’s relative, isn’t it? So, I was going to ask you, what are the hottest markets? They’re all hot markets? So, not what are the hot markets? What are maybe a couple of the hottest markets right now?
Jay Parsons:
Yeah, that’s a good way to put it. Because sometimes, I get on these panels at conferences, and they want to talk about what’s hot and what’s not. And then, I’m always like, there’s nothing to say about there’s no cool markets, there’s just some markets that are hotter than others. In terms of what’s the hottest, John and I have talked about this in the past is that, people oftentimes think of rentals and for sale homes as competitive. And we’re seeing different trends in different places, but they’re not. I mean, they really move in the same direction.
Jay Parsons:
So, the areas we see the hottest apart markets are generally the places we see the hottest for sale markets, that’s generally, the desert region, places like Phoenix. It’s Florida, all over the state Florida’s on fire. But then, generally speaking, a lot of the Sunbelt, Texas, the Carolinas, Nashville, parts of Southern California that are not Los Angeles, but outside of that area, some of the mountain regions, Salt Lake City and Denver.
Jay Parsons:
And so, those are the places that are benefiting from a lot of in migration right now. And as a result, the housing market both for sale and also the for rent apartments side is just on fire.
Dean Wehrli:
Yeah. Is there any kind of a denominator effect in that at all? That is to say, a lot of those Sunbelt markets are those markets that come from relatively lower rental rates? So, when we look at year over year or metrics that helps nudge them up in terms of percent growth, is that fair?
Jay Parsons:
Yeah, yeah, absolutely. I mean, certainly, these are less mature markets. And so, as a result, and part of the reason they’re growing is their lower cost of living, and that includes the cost of housing. And so, the lower denominator is a big piece of it. And then, and we did some research recently showing that we get a lot of questions like, “Hey, rents are going up by double digits in the Sunbelt. It’s not affordable anymore.” It’s like, affordability doesn’t change on a dime that fast, right? And so, the gap has narrowed a little bit. On average, a Sunbelt apartment is still about 45% cheaper than living in a coastal city.
Dean Wehrli:
Yeah, that’s a great point. It’s just the same in the for sale world, where yes, Boise or Salt Lake City for sale, housing prices have skyrocketed, but to that Californian it’s like, “Oh my God, let me buy three.” That’s…
Jay Parsons:
Yeah.
Dean Wehrli:
… what a deal.
Jay Parsons:
We hear that all the time. Yeah, that’s very funny. The other thing too, is now that rents are really growing in these coastal cities again, obviously, it took a hit in 2020, but start to come back second half of last year into this year, it’s eroding. So, it’s that shift of a shrinking premium is going away again. And so, we’re starting to see again, that’s a much better, much lower rates in the Sunbelt than the coastal cities.
Dean Wehrli:
Okay, so that’s the what, I guess in a sense. Let’s talk about the why, what are those most critical demand drivers that are fueling this very strong apartment market?
Jay Parsons:
Yeah, good question. I mean, I think it all starts with household formation. I’ve had this conversation with some of your colleagues. And I think Rick and John have had some really good data showing that household formations a lot faster than some of the government sources, the official sources that are really given credit for. In fact, I saw y’all put out it some datasets on electricity hookups, which is a really interesting way of looking at household formations.
Jay Parsons:
And so, that’s the number one driver. I mean, everyone’s always like, “Hey, where is this all coming from? The economy is bad, and all this yada, yada, yada. It’s like, it’s not as bad as we probably think. We’re seeing a lot of new household formation particularly, among young adults.
Jay Parsons:
And so, people moving on to mom and dad’s place, roommates that are decoupling. I mean, think back to 2020, we had a whole generation of college graduates who had nowhere to go. And so, they’re the heart of the lockdowns and the pandemic.
Jay Parsons:
And so, they just surfaced in 2021. And then, I also think we saw some fast-forwarded household formations for rentals in last year that people like moving out of New York or San Francisco, who are going to do that anyway. We’re not big believers in like, everybody left the city. I mean, we’re not death the city people at all. But there was a segment of the population who was going to leave anyway and move into the Sunbelt for that next phase of life, and maybe that was going to be in ’23, ’24. And they went ahead and made that decision a little bit earlier.
Jay Parsons:
And so, I think it’s come from a variety of sources. But again, I think generally, it seems to the fact the economy was doing much better than people thought, came back faster than expected. Wages have gone up significantly, and people had more buying power and wanted more space, and unemployment set, lowest levels in decades. So, all of this stuff is playing together just to go back to household formation and demographics.
Dean Wehrli:
How much do you look at demographics? Or how fine tune? I think, and depending on how you measure it, or how you define it, Gen Z is actually as big or bigger than the millennial cohort. So, and Gen Z is now coming into their rental years. I mean, does that indicate to you that the good times for apartments are going to just keep on rolling?
Jay Parsons:
Yeah, that’s a good question. I mean, another side of it, people make a big deal about the fact that the peak growth rates, people in their 20s starting to slow down a little bit. But the point I would make back is what you just noted, which is that there’s still this big wave of Gen Z’ers. And whether where you draw the line of millennials to Gen Z is somewhat arbitrary.
Jay Parsons:
But either way, the important thing to note here is that, that growth trend it moderates, but it doesn’t go away. And that’s important, because if you go back to what happened after the baby boomer generation, Gen X came to adulthood, and let’s say, late 80s the 1990s. And in that timeframe, we saw half the number of young adults, as we saw Gen X was half the size of the boomers.
Jay Parsons:
And so, that’s what created some challenges on the demand side. Now, going forward, that’s really not the case for the reasons I just mentioned. I mean, Gen Z is very sizeable. And so, that’s a good tailwind. At the same time, for a variety of reasons, people are choosing to stay put in apartments longer than in previous generations. And so, you have positive drivers on both sides here, the front end and the back end.
Dean Wehrli:
Yeah, the baby bust, in a sense was Generation X. And that’s just appear to be happening now, or it’s for sure not happening, we can see the numbers. How do you characterize renters? And let’s go back to what you said about income a minute ago. So, you’re seeing that you’ve seen in truth, renter rental household incomes actually pushing up, and they’re pretty affluent now, is that fair?
Jay Parsons:
Yeah, no, you we’re just looking at market rate apartment renters. And so, it’s definitely a segment of the market. But I think there’s a lot of conventional wisdoms that just aren’t true about renters. I mean, a lot of renters, it’s not just about, it’s cheaper to rent or buy, or can’t afford a down payment, or to buy a home, especially in the apartment market, these are people who are in an apartment phase of life. They’re more likely single. They’re less likely to have kids. They don’t really know where they want to settle down, yet. They need that flexibility or want that flexibility.
Jay Parsons:
And what we’re noticing is that, in this demographic, again, on the market rate side, they’re seeing significant wage growth. You think about who’s doing well in this economy, we saw early retirements among older adults and through the pandemic. And then, we’ve seen this hiring challenge. And so, where it’s really great opportunities is what I would call your senior contributor in the lower level manager level, where you need people who just do stuff.
Jay Parsons:
And oftentimes, those are people who are in their mid-to-late 20s, into their 30s. These are people who are not your most senior, but they’ve got some experience. And a lot of them are living in apartments. And so, they’re moving around, they’re bringing in bigger incomes. And that’s really, driving up the whole market.
Jay Parsons:
And so, we’re seeing a lot of rent growth, but the income is keeping pace with it. And we oftentimes, have to remind people is, “Hey, you can’t push rents, if people won’t pay those numbers.” And rents are getting collected. I mean, the rent collections are near normal levels. They can see is that, near record low or is at record lows, I should say demand is through the roof. None of this happens if we were hitting an affordability ceiling.
Dean Wehrli:
Do you think there’s any element of some households being pushed “into the rental world” because of very high for sale housing prices? And also very, very low for sale supply?
Jay Parsons:
Yeah, no, I mean, I’m not ignorant to that, of course. But I think it’s a lot of times not being pushed into rentals too much as they’re staying in place longer. So, when you look at net new demand, it’s really not so much impacted by that. That may be impacting the retention side more. But I think more than likely what’s going to happen is that, people struggle to find a home to buy and let’s say, remember the key thing, key drivers to buy a house oftentimes, marriage and kids.
Jay Parsons:
And so, in those cases, it’s really about being in a single-family home. So, we’ve not talked about this. But I mean, like the single-family rental market is also on fire right now. And I think a lot of the demographic tailwinds in favor of that, too. And so, I think a bigger impact is on the single-family rental market, people who can’t buy right now, they’re probably still going to leave an apartment if they can, and go get a single family home just to rent in. So, it’s a rising tide boosting all ships right now.
Dean Wehrli:
How about mortgage rates? That’s another very, very hot topic right now. We’re recording this, by the way, in later mid-April, just FYI, for the listeners, and mortgage rates are much higher than they were a couple of months ago. Do you see that? I mean, I think the conventional wisdom is that, that’s pushed some folks or kept some folks in rental. Do you see the mortgage rate impact in that way.
Jay Parsons:
Yeah, I mean, I obviously I believe in price elasticity, and laws of supply and demand. So, certainly, as things get more expensive, it does narrow the pool a little bit. But it’s not narrowing the pool enough to actually, so far meaningfully impact the for sale housing market. There’s just so much pent up demand right now and not enough supply.
Jay Parsons:
I think the other thing too, as well, it’s definitely, I mean, people take a very… I think you’d appreciate this. I mean, I think broader like the media narrative takes a very short-term view of interest rates and mortgage rates. And obviously, if you go back to, even the biggest home selling period of our lifetimes, but really up to the great financial crisis in the mid-2000s.
Jay Parsons:
Mortgage rates are more expensive then than they are now. And it certainly, wasn’t a blocker to deal buying houses. And so, at some point, we’re obviously going to get there, it’s going to be a driver, but I don’t think we’re really there yet at any kind of meaningful scale.
Dean Wehrli:
Yeah, I honestly, I agree. I think the market rates is certainly has an immediate impact. But the housing markets tend to acclimate to the new mortgage rate reality, and use different tools or use different mortgage instruments or what have you, or just acclimate to the fact that they can’t afford the same price house that they could a couple of months ago.
Jay Parsons:
Yeah, one of the things I would point out, too, is, at some point, it becomes kind of a boy who cries wolf argument, because we’ve been hearing for years and years and years and years now, I mean, going back really to the earliest part of the recovery, that the home prices were getting on unaffordable, the recovery was happening too fast on the home price appreciation in certain markets and everywhere.
Jay Parsons:
And certainly, in the last few years, we’ve been hearing about affordability a long time, it’s going to slow, it’s going to slow. And it hasn’t really slowed down, I mean. Inventory levels as you know, are ridiculously low levels. And so, we’re always going to hear that kind of noise in the background. But again, and it’s going to, obviously, I don’t want to be ignorant to the fact that at some point, it’s a factor. But again, we’re just not there yet.
Dean Wehrli:
I agree. I think I am in the camp, that it has to have an impact here eventually. Honestly, I think it’s already lasted longer than anyone thought it would, and fairly so. But it has to have an impact eventually here. We’ll see when that happens, though.
Dean Wehrli:
Let’s talk about supply now. So, that is kind of one of those fundamental factors is that, there is such low supply, a structurally low supply. What are MF, multifamily, residential actual permits right now? Is that just scuttling along at 700,000 or so annually? Or what do you see activity going? Or how’s it? Would you characterize it’s been lately?
Jay Parsons:
Yeah, there’s a lot of new apartments being built. And the one thing that’s different between apartments and single-family is that, even prior to the pandemic, we had 30-year highs in construction. On single family side, obviously, we were nowhere near the highs, we saw in the mid-2000s. And so, apartment construction, we’ve seen a lot of interest in this among investors and developers, really through this entire cycle.
Jay Parsons:
The last 12 years now, there’s been a lot of elevated construction, and really, that’s just tied to the demographic factors, which was talked about earlier with millennials, now Gen Z. And so, I think what the pandemic has done, certainly, accelerated interest in them is vacancy rates have gone down. And we’ve disproven this supply as the boogeyman story over the last few years. I think it’s going to be a more comfort level in building apartments.
Jay Parsons:
But the other part of it too, quite frankly, is investors are trying to place capital into the sector, and it’s very competitive to buy a stabilized apartment right now. And a lot of times, they’re finding better yields on a new development. So, given low vacancy and rent growth, they’re willing to take on the development risk associated with funding new development.
Jay Parsons:
And so, and of course, even taking a level beyond that investors who were previously focused on office and retail are trying to reallocate into apartments and build for rent. And so, all of that is, you have the pure supply demand fundamentals of all the things we just talked about, plus this investor appetite for apartments and build to rents. And so, that’s created this perfect storm for even more apartment construction than we had last year. So, we’re building more than 700,000 units across the country, which is the highest level in 40 years.
Dean Wehrli:
Do you see any chance at all, any whisper for possibility that there’ll be adequate or even God forbid, oversupply in the multifamily world in the near term?
Jay Parsons:
Yeah, I mean, oversupply and apartments, I mean, these are the same types of voices of those who worry about affordability of for sale homes every year. And so, they’ll all be right, eventually. But so far, they’ve been wrong. On oversupply, it’s like, there’s been plenty of estimates showing that on a macro basis, we’re under supplied by millions and people can disagree about the number.
Jay Parsons:
The real question, though, is about the allocation of what’s unsupplied and tend to be there’s oversupply. Meaning, most of today’s construction is at a higher price point, Class A plus properties, high income renters. And we don’t really have a great handle on the depth of demand at that price point. We’ve not run into a ceiling yet, obviously. But there’s a little bit of risk there.
Jay Parsons:
And then, but the other thing I would say, on the flip side is, if you compare to 40 years ago, were also much more diversified in locations of construction. We have a lot of the construction today is going in places that we’re seeing very little construction four years ago, and just our undersupplied markets, and that’s a lot of the Sunbelt, for instance.
Jay Parsons:
And so, that’s where the demand is going. So, people are going. And so, the oversupply the way I like to see it, and I think history tells us this lesson pretty clearly is that, oversupply is usually a short-term phenomenon associated with demand going away. And so, people, if you look back at 2009, for instance, you can say, “Okay, we were over supplied.”
Jay Parsons:
If you were a developer who had to exit in 2009, then yeah, you could say we were over supplied, you paid the price for that. But if you had some flexibility, and you were a longer-term holder, you had a prolonged lease up period. But you ended up just fine. The demand returned really, really fast. And so, at some point, demand goes away. I’m not smart to exactly the month, and the day that happens. It’ll happen eventually, vacancy will go up, lease ups longer to lease up. But such starts will then slow down, and then vacancy will go back down, and then it will be undersupplied again. And so, all these things are cyclical.
Dean Wehrli:
Yeah, it’s like the city of San Francisco, right? When COVID hit suddenly, they were massively oversupplied because they had several apartment buildings in going up, and under cranes. But at that time, they were trying to satisfy seemingly insatiable level of demand. And it made a lot of sense.
Jay Parsons:
Yeah, no, it’s true. I mean, it’s cyclical. And San Francisco and New York City, I mean, those are two places that I saw a lot more volatility than the rest of the country. But yeah, you’re right.
Dean Wehrli:
You mentioned a minute ago about how you’re talking about Class A and how much incomes have gone up, it seems like virtually all of this new apartment building that’s not subsidized in some way by the government and is literally, below market rate is pitched at the highest level. The highest rental levels within that market, is that an issue? Is anyone out there satisfying that, I don’t know B plus kind of space where it’s not the highest rents, but you have new product for folks that a little bit lesser level of affluence?
Jay Parsons:
Yeah, I know it’s tough. A lot of the reasons that, I mean, land costs are going up, your cost of labor, construction materials, appliances. I mean, all of these costs are driving up the cost of rent. And so, it creates a real challenge because quite frankly, from an investment standpoint, the Class B story is even better than Class A in the sense that like you’re truly are under supplied. It’s very difficult to add supply.
Jay Parsons:
And in fact, you oftentimes lose class B supply as value added investors upgrade these properties into a class A. And so, at the same time, this is the deepest demand pool is the class B renter. And so, from an investment standpoint, it makes a ton of sense. So, we are seeing a handful of investors trying to build into this space.
Jay Parsons:
Crow is one. They’ve started one where they’re as part of kind of an ESG initiative with some institutional investors on the social impact side. They’re trying to build for middle income renters, and they’ve got a fascinating model for how to do that. And I think, everybody in housing should be cheering on the success of that. I hope it is successful, and there’s a model for others because we certainly, need this to work.
Jay Parsons:
But so far, it’s not something we see a lot of for those reasons. It’s just a very challenging. I mean, it’s just being in rising costs. You have to pass those costs on somewhere to get things done. And that means a higher rent. So, it’s a tough nut to crack. But certainly, hopeful that we see some success here.
Dean Wehrli:
Yeah, I just made a note to myself to get those guys on the show. That’s interesting. It sounds like a fascinating topic. Let’s talk about the work schedule. We touched on a little bit earlier with hybrid schedules, and folks returning to the office, at least to some level here very soon or already. Do you see this having a locational impact that’s a differential kind of impact? The classic or the obvious idea is the city’s gain, the suburbs, maybe lose, do you see that playing out?
Jay Parsons:
Yeah, no, I think that the city and suburban thing has been, I think one of the most fascinating things to watch through the COVID period. I mean, I think as everybody knows this point, I mean, COVID really impacted the downtown areas the most. I mean, obviously, COVID lock downs, it wasn’t just the office factor. It was like, all of a sudden, I can’t go out to the bar into the restaurant. I can’t do all the city stuff I’m used to doing.
Jay Parsons:
And so, that had a real impact on the rental market there. And so, when we saw this, first of all, I mean, the suburbs were strong prior to COVID. I mean, we did a lot of research. In fact, the reason I’ve got plugged in with John Burns years ago, I gave a presentation NMHC I don’t know, probably six, seven years ago, on the strength of the suburbs, and how it was an undervalued investment play.
Jay Parsons:
And so, we had been bullish on that for a while, but we ended up happening is that, a lot of these naysayers like, “Hey, the suburbs are going to go back down as the cities and repopulate. And that never happened. We ended up seeing over the last nine months, that demand has returned to the cities. And what’s really cool is that, it was not tied.
Jay Parsons:
And this is part that really surprised me the most, it wasn’t tied to the return-to-work aspect, it was actually tied to the return to city life. So, many cases, go going back to the cities, working from home, at least, maybe not five days a week, maybe the work from home five days, and you missed three days a week. But the reason they’re back in the city is, they want that city lifestyle, and they can have it again, because the cities have reopened.
Jay Parsons:
But then, the greatest part about this is that the return of the cities has not come at the expense of the suburbs, or the beach towns or anything else. I mean, we’ve seen demand explode. And I think part of that is that, when you think about demand for a downtown apartment in a major city, there is an inbound train of highly paid young professionals, recent college grads. Every single year, they’re moving into these big cities. They want to be there, young singles higher .
Jay Parsons:
When COVID hit, that train stop coming, right? People couldn’t. And so, now that train is going up, again, with new household formation pouring into those markets. But again, it’s not so much a boomerang effect, people going back into those cities, because those people didn’t really leave in the first place, right? But it was more of the people who are going to move anyway. So, it’s really been a fascinating dynamic. And certainly, one that’s been encouraging factor to see there’s really been no net losers in this equation.
Dean Wehrli:
So, is it really a situation where I guess, both boats are floating because you have limited supply and demand enough to fill up that limited supply in both urban and suburban settings, is that make sense?
Jay Parsons:
Yeah, absolutely. It’s a rising tide, boost all ships. And again, there’s a lack of housing at all price points, all housing types, and all markets. And so, that rising tide is suburban apartments, urban apartments, and single-family rentals it’s built to rent and it’s for sale homes. It’s everything.
Dean Wehrli:
How about some threats on the horizon other than anything fundamental? Do you see apartments, if threatened is the right word, do you see apartment sector being threatened by the burgeoning build for rent space?
Jay Parsons:
Well, okay. So, first of all, I do believe there’s real threats. And a lot of a good chunk of my time these days is talking to rental housing investors about some of those threats, but I’ll come back to that. In terms of build to rent, I don’t see that as a threat. I see as more complimentary, for the most part, a build to rent community is catering to a different demographic, the people who are a little bit older. They’re more likely married, more likely to have kids, more likely to have pets, they need a little bit of a yard.
Jay Parsons:
And also, there tend to be located in place, I don’t want to overgeneralize here. But for the most part, they tend to be located in different locations, but really, it’s the lifestyle factor. It’s a different demographic, and it’s still in its infancy. And so, I think a lot of apartment investors and managers, I mean, they see built to rent as a natural extension of their apartment portfolios. It’s just a way to retain their customers for a longer period of time.
Jay Parsons:
But a built to rent community, I mean, a lot of these are basically apartment communities but with detached walls and a little bit of a yard, like that’s really the main difference. But there’s a leasing office, there’s a community pool. There’s all this other stuff just like an apartment…
Dean Wehrli:
There’s maintenance, there’s services, yeah.
Jay Parsons:
Yeah, on-site service.
Dean Wehrli:
Yeah, that we find that’s a huge factor. Okay, how plugged in are you in the Phoenix market? Because I’m going to ask, that’s the one market we’re BFR or the build for rent has really just exploded. There’s a ton of activity there, more on the way, has it impacted the apartment market even in Phoenix?
Jay Parsons:
Oh, no. I agree, I mean, Phoenix obviously seen a ton of this stuff. But I mean, the Phoenix apartment market is one of the hottest in the country. I mean, we’ve seen 20 plus percent rent growth, consistently low vacancy, lots of new apartment construction. So, it’s definitely not been a negative factor.
Dean Wehrli:
BFR is not really a major threat. Do you see other potential threats to the apartment sector?
Jay Parsons:
Yeah, no, I mean, build to rent, and one last thing on that is, I think it’s such a great strategy, because it really meets a group of people. It meets a need that just isn’t well served today. People who want all the conveniences of living in apartment community, but also want more space and their own yard and detached wall.
Jay Parsons:
So, again, big fan of that. Now, in terms of risks, a lot of them, there’s kind of two main categories. One is policy risk. We’re seeing a lot of focus right now, and cities across the country on rent control which is amazing to me, because it’s one of those things where you survey economists on the left, the right, socialists, the far right, far left.
Jay Parsons:
Everybody opposes rent control. There’s no academic research of any substance that shows the rent control actually achieves its main objective, which is to make housing more affordable for a broader population. Obviously, protects a small share who are in place and rent controls enacted.
Jay Parsons:
And yet, we continue to see cities fall over each other to make the same mistakes, which ultimately, end up constricting housing supply, and making affordability even worse, which is why cities with rent control tend to be some of the most expensive places to rent for a new renter. So, that’s a major threat to affordability across the country and in turn to investors and operators.
Jay Parsons:
But also, we’re seeing things like screening limitations. You’re seeing cities and states that want to limit how we should regulate, how we review who should live in a community, like criminal background checks, things like this. And there’s some risks there. You want to have a safe community and you want to make sure you’re doing that, right.
Jay Parsons:
And then, the other thing I put in there, the other category is two more. One, real quickly as fraud, we’re seeing a big rise in renter fraud. People buying fake IDs and renting under a false pseudonym, and then not paying rent. And that’s been a challenge. And then, you also have just general market force challenges. You have supply chain issues, you have inflation, you have staffing shortages. I mean, all of these things are certainly, big headwinds also.
Dean Wehrli:
Yeah, inflation too, that’s worth mentioning, I think, because that cuts into your federal income for your residents. And that combined with rising rental rates, that could be you could see that being a potential threat down the road.
Jay Parsons:
And particularly, if we get to a point where rent growth slows down because wage growth slows down, but your inflationary costs as a housing provider still go up. That’s when it’s a real concern. So, I would definitely put that in the risk category.
Dean Wehrli:
Okay, let’s do a quick hit on amenities, do you track amenities you see? What kind of the hottest amenities come in, or some new amenities that are becoming more and more popular in new apartment complexes?
Jay Parsons:
Yeah, absolutely. First of all, I have to relay a joke I heard from one of your colleagues on stage said, “The best amenity right now is an available unit,” and that’s definitely true. But that aside, when you look at new development, there’s a lot of talk about work from home space, and it’s not so much a dedicated office so much. It’s about having flexible use space.
Jay Parsons:
And so, an area where you look out the window and you’re not, it’s just a little more flexibility where it’s not again an office, but it’s more adaptable work from home environment. And then, the other thing we’re really because again, this is a structural change because you don’t want to bank too much on just do work from home, you just want to have that flexibility.
Jay Parsons:
But the other thing I think is interesting is, there’s these… Everybody talks about the so-called amenity wars that people… I’m trying to build fancier kitchens and bathrooms and flooring and on the list. But the other thing we’re really seeing is more focused on outdoor community amenities.
Jay Parsons:
And so, it’s not about the pool anymore, but it’s about having an inviting outdoor space where maybe, if you have the right tract of land for it maybe, a walking trail, and maybe an outdoor space on grassy area to play catch, or to do some outdoor exercise or just hanging outside and read a book and do some work. And maybe some desk space outside or some seating area.
Jay Parsons:
So, all of that, beyond just the old pool is a big focal point right now being outdoors, and I think that’s one where COVID… Everybody wants to be… They don’t want to respond to COVID. But they want to look for shifts that maybe COVID accelerated. And I think that’s a great example of what it’s like. It’s one of those things you’re like, “Well, yeah, pandemic or not, I want to be outside more. And if I had a better outdoor space, I would use it more.” So, I think that’s one that’s really here to stay.
Dean Wehrli:
During the really, the height of the pandemic, a lot of folks were talking about these indoor, outdoor spaces, these flex spaces, has the apartment world gone away to that and gone full on outdoor? Are you still seeing that indoor, outdoor, I hate to jinx the world, but for that next event like that, that may be in the not-too-distant future?
Jay Parsons:
Yeah, no, we’re seeing events. In fact, we did a webinar recently with one of our clients on this. And yeah, the events are back for sure. And so, people want to mingle with each other again. So, yeah, those indoor or outdoor flex spaces are great. I think the key word you just said there is that, flexible use space.
Jay Parsons:
In prior years, we saw big things about like, we’re going to build demonstration kitchens and bring in guest chefs who are going to do really cool stuff. We’re going to build dedicated community office spaces and those kinds of things. And movie theaters is a big one, those things that are very specific use spaces. Those I hear less and less about. It’s more about what you said, that flexible use space that’s more important right now.
Dean Wehrli:
That’s interesting. Okay. Our last topic will be about money. Why not the investors, investor interest in apartments? Is investor interest in apartments you mentioned earlier is huge right now, is that because they see it as a safe zone relative to other sectors?
Jay Parsons:
Absolutely. I saw an interview with CalPERS recently saying that they’re, with inflation. They’re focused more on real assets. And also, they mentioned private equity. But I think that people… The old adage is that, real estate is a good hedge against inflation. When you look at real estate, you see a more nervousness now about retail and office.
Jay Parsons:
And so, that really leads you to rental housing. And so, of course, a big part of that is apartments. And so, and as well as industrial, I should say. And so, there’s a lot of capital that is attracted to apartments. And for those reasons, you want to be involved in the real estate. And you see rental housing as an attractive vehicle, with long-term staying power, as well as the ability to pass through inflationary costs in the home or rent.
Jay Parsons:
And so, all of those things are viewed as positives among investors. And the other thing you point out too is, a lot of it’s a structural shift as well, I mean, if you go back 10 plus years in pre-GFC, apartments are viewed as higher risk profile relative to office, and certainly less core. And we’ve seen a big shift in that over the last decade where now apartments comprise the majority of commercial real estate sales. And again, I think COVID really just accelerated that trend further. It wasn’t so much it changed it, it just accelerated it.
Dean Wehrli:
Do you see a BFR, which has had this groundswell of investor interest in the last couple of years and beyond? Do you see that competing with the apartment world for capital? Or is there enough for everyone?
Jay Parsons:
Quite frankly, there’s more capital than there are opportunities right now. And so, it’s really the investors competing with each other to get into either one. Now, that won’t always be the case, of course. I think, over time as the markets normalize, we’re going to see more competition between the sector’s for that capital in certain areas and becomes more site specific.
Jay Parsons:
But right now, we see a lot of dry powder out there, a lot of investors who want to be in frankly, either one having a hard time just placing that capital into getting the deal. So, no, they’re really not competitive, the competitions between the investors really.
Dean Wehrli:
Yeah. We talked earlier, and you mentioned the relative size of the two sector. So, what is the measure, or if measured by capital, apartments versus BFR, what kind of size difference are we talking about?
Jay Parsons:
Yeah, I think y’all put out some really fascinating data showing something like $55 billion in capital is being placed into build to rent single-family right now. And to no fault of your own because it was a great data point, it got miscast. And the media is like this, “Oh, my goodness, build to rent is absolutely on fire. There’s a crazy money going into the sector.”
Jay Parsons:
And, of course, for any of us regular people $55 is a ton of money, unless you’re Elon Musk, right? But in comparison, it’s still tiny relative to apartments. I mean, we’re selling $250, $300 billion in apartments in a given year. That’s just on the acquisition side. And I say in a given year, in recent year, in the last year, and probably for this year. And that doesn’t even account for the new development.
Jay Parsons:
We’re building 700,000 units right now, which if you extrapolate that out, I mean, that’s… I don’t know, how many 10s of hundreds of billions of dollars that is. I should do the math. I mean, there’s a lot more money in apartments right now, as a function of that sector being a lot more mature and more developed.
Dean Wehrli:
Yeah, I think you’re right. I think that does get lost. Yes, BFR is exploding, but it still isn’t to near the size of the apartment world.
Jay Parsons:
Yeah, again, to go back to that low denominator factor. It’s like, it’s exploding from near zero. I mean, I keep giving you all credit, because you all keep the good stuff. But y’all have a really good pie chart that shows the existing, I think it’s a total of something like 200,000 build to rent units across the country, and which is nothing.
Jay Parsons:
And something like half of it was built in the last five or 10 years, something like that. I mean, it’s crazy. I mean, it’s still a tiny market with a ton of opportunity. Again, not to be redundant, I think there’s just a ton of upside. We’re nowhere near being overexposed to build to rent.
Dean Wehrli:
Jay, I think I know the answer to this. But where are you based right now?
Jay Parsons:
I’m in Dallas.
Dean Wehrli:
At Dallas, okay, because I started hearing about four or five y’alls there in quick succession, I like it. Started to sneak out there.
Jay Parsons:
I’m a Carolina native. So…
Dean Wehrli:
Okay, okay.
Jay Parsons:
… inherited that, yeah.
Dean Wehrli:
So, I’m going to end with two questions that are going to annoy you. And this is intentional.
Jay Parsons:
Oh, good.
Dean Wehrli:
I am going to ask you first to look into your crystal ball, how long does this last? How long does this very strong apartment market and a lot of interest from investors last?
Jay Parsons:
Yeah, no, that is a tough question. We all like to say, it depends, right? So, honestly, I mean, I’ll give you my best guess. But I don’t know, and I’m very skeptical of people who claim they do know. And so, I want to be on record saying that I don’t really know.
Dean Wehrli:
Yeah.
Jay Parsons:
But no, I think that there’s still… I still think there’s a lot of runway left here. My view is that, we’re going to have some hiccups along the way, where you’re going to see some kind of stops and starts and some slow-downs, and some valleys. But overall, we’re going to continue to march on an upward trajectory. And the big reason is the demographic factors. I think that the demographic factors are very positive for the next 10 to 20 years on just baseline demographic growth for young adults. And maybe beyond that.
Jay Parsons:
So, again, I’m not saying that we’re going to see continued boom times for the next 10, 20 years. But I think the challenges are going to be more short-term economic challenges which we see stumbles along the way. I don’t foresee any massive factors of real long-term slowdown.
Dean Wehrli:
Yeah, I think that’s fair. So, I mean, yeah, when and if the recession hits, because we always have, and those economic cycles have called that for a reason. Yeah, obviously, demand is going to be decreased. And but, that fundamental underlying demographic demand fueling is going to be with this for a while.
Jay Parsons:
Yup, absolutely. Demand is going to come up and down, but the long run is going to be a positive story.
Dean Wehrli:
Now, my last question is the one that has annoyed me many times when I’ve been on the reverse side of this, and media folks will say something, I swear to God, but sometimes they’ve ended the interview by saying, “What haven’t we talked about that, I should know.” So, I’m going to ask you that, in the apartment world, what haven’t we talked about that we should know?
Jay Parsons:
Yeah, I took some journalism classes in college, and I remember this as something I was always taught. I think the one thing I would point out is that, we get asked a lot about, rent versus buy and how one sector is impacting the others. There’s a Wall Street Journal that came out. I mean, here we are, again, mid-to-late April our article just came out about, there’s HOAs across the country trying to ban rental providers from acquiring homes.
Jay Parsons:
And so, I think, one other thing I would just generally throw out there is, I think that there’s too much worry and focus about renting or buying, homeowners or renters and what’s causing one or the other. The real I think, just punchline to all this stuff is that, we need more housing and if you look historically, rentals and for sale homes, with the exception of 2010, early stages of the GFC recovery. They’ve generally moved in alignment with each other.
Jay Parsons:
They’re complementary, and they both rise and fall with the same demographic and economic tailwind. They don’t compete for the same people, for the most part. They serve different life stages. They each play an important role. And so, I think that’s important. And it also too, I think, you look to broader rental policy, I think that all of these, any kind of movement that these talks about, “Hey, we should look at rent controls. We should stop investors from buying homes and renting them out.”
Jay Parsons:
All of these things, I think are very, negative tail, negative headwinds against long-term affordability. Meaning, the fact is that, we just need more housing. And I think a lot of times we’re barking up the wrong tree when we get mad at investors who provide housing, as opposed to getting mad at our policymakers, who made it ridiculously difficult to build new housing, and particularly at more affordable price points, they’re underfunding affordable housing.
Jay Parsons:
So, that’s the big thing that I’ve been trying to harp on lately is just that, hey, the biggest challenge we have is undersupply of all types of housing, and we need cities across the country to tear down the red tape and the NIMBYism and the zoning restrictions that limit new housing construction. And ultimately, that build, build, build, that’s the best antidote to affordability and accessibility challenges we’re seeing today.
Dean Wehrli:
Okay. And the reason folks ask that question, what have we not talked about, is because they want their next article or the next story, you’ve already given me a future podcast, The Trammell Crow thing. So, you’ve done double duty here today. Jay, appreciate you coming on. It’s been great.
Jay Parsons:
My pleasure. Thanks for having me.
Dean Wehrli:
Awesome. All right. This has been the New Home Insights Podcast with your host, Dean Wehrli. We’ll see you in a couple of weeks.
