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

In this episode of the Invest Like A Billionaire podcast, join host Ben Fraser as he welcomes Jay Parsons, the SVP, Chief Economist & Head of Industry Principals at Real Page, a leading data analytics firm specializing in rental housing. This conversation is a must-listen for anyone involved in multifamily or single-family rentals or those considering venturing into these asset classes. Jay dives deep into the complexities of the real estate market, unraveling supply and demand dynamics, rent growth deceleration, and the driving forces behind these shifts. He also explores consumer demand, the current supply crunch, and offers a forward-looking perspective on housing market trends over the next two to three years, touching on capital markets and even making a bold prediction regarding CPI. Discover which markets and asset classes are outperforming the rest, with a comprehensive breakdown that’s sure to leave you well-informed. Despite its extended duration, this power-packed interview promises invaluable insights, so be sure to tune in, and if you’re enjoying the podcast, help us share this wealth of knowledge with a broader audience.

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Ben Fraser: 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 noises going on in this 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 two to three years, where are we going as a market, what is going to be the housing demand. Scenario like he talks about capital markets, talks about the impact of rent growth on CPI and actually makes a pretty bold prediction for CPI, fast forward six 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 his interview. It’s a little bit longer than other episodes we do, but you definitely want to listen to the whole thing. It’s a power pack. So I hope you enjoy it. And again, if you are enjoying this podcast, we appreciate it if you’re sharing it with friends, helping us write reviews, and 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.

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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 Jay, just set the stage here. Our investors are mostly passive investors, they’ve been investing in real estate for a while. And, multifamily has been this big behemoth that’s one of the biggest real estate asset classes.

And it was very popular over the past several years for investment, but there’s a lot of things that are creating headwinds, concerns, people are getting capital calls, there’s maturing debt that’s creating a lot of pressure. We were potentially even seeing rent growth declines, all these different things that are happening.

And, we need you, the expert, to come in and break them down for us. And so with that, give us a little bit of your background and, give us more context for what RealPage does, who you serve, and then we’ll get right into it. 

Jay Parsons: Sure. 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. Real page is predominantly a software company to the rental housing and commercial real estate industry. So our clients are owners and in operators and property managers of commercial real estate our largest client bases and apartments and In my role than 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 It’s like ADP with payroll data, getting to see things in more real time.

And we’re the same way we’re able to, 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. 

Ben Fraser: Yeah. That’s great. I’m a little bit of a data geek too. I’ve been going through all your posts recently and just.

I have a list here of about 50 questions. I’m sure I’ll get all of them, but I’m very excited. Break down for us just at a high level, where are we at right now and how do we get here? And I’m really talking specifically mostly on multifamily would be the main focus here.

But, set a little bit of the stage for us, the supply demands all that. 

Jay Parsons: Yeah. I think if let’s, quickly go back a little ways and you mentioned that in the top that, multi family 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 out of the great financial crisis. We’ve seen real growth in the asset class of both multi family and single family rentals. Obviously they both existed previously, just to give you some numbers. 15, 20 years ago, apartment sales were half of what office sales would be in a given year.

Today it’s the complete opposite. Apartment sales are two X what office sales are. And so apartments are now really the and SFR, but the rental housing overall is now probably the primary asset class of commercial real estate. And a lot of that had to do with just really favorable demand fundamentals.

We’ve been in an environment where home ownership rates are 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 that they can all do well at the same time and they usually do.

They don’t really compete with each other. They all are 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 drivers are still in place. The demographics are still seeing good job growth.

We’re seeing good wage growth. We’re not seeing wage growth. That’s outpacing rents. And longer term. Those things are still in place and we’re going to get more into the headwinds here, but that’s what good people do 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.

Ben Fraser: So real quick, before we get to that breakdown, a little bit more of the demand drivers, right? Because of that. It seems like, oh man, this has run out of steam. It’s, it is, we’ve had a great run, but now you’re seeing rent growth declines. So we’re oversupplied and we have negative population growth and all kinds of easy headline narratives.

Jay Parsons: Yeah. My favorite one’s the last thing I mentioned, the population growth and the Twitter sphere loves this one where they’ll point out, 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, therefore we have oversupplied housing.

And I always point out back to these people, it’s okay, wait a minute 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 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. You could just, everybody can imagine 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, some common sense, just be smart about where you’re putting the money. 

Ben Fraser: I think it’s a great point, right? Cause if you’re saying population growth. As a nation, right? And we’re actually probably leading the way globally from a population 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 that particular market is doing. So we could theoretically have no population growth as a nation, but there could be parts of the country that have positive population growth, but it’s a net, right? So there’s, to your point, the real estate is local and understanding the local market is probably the biggest driver of understanding the demand.

Jay Parsons: Absolutely. And that’s the biggest factor to consider is there’s. There’s markets that are still growing and, 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 long term that demand’s going to be there.

I don’t think that all of a sudden, Austin, which is struggling right now, it’s not like Austin is going to stop growing. It’s still going to grow. It’s just going to have some growing pains along the way. Sure. 

Ben Fraser: Okay let’s get into some of the headwinds right now. This is what all the headlines are saying, right?

The doom dayers and we do have some real headwinds, so I’ll make light of it, but, break down what are some of these headwinds. 

Jay Parsons: Yeah so there’s a couple of different things. And the number one factor is supply and 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 knows that I’m a big fan of supply, build build.

And I think in the long term, it’s a win for everybody. 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 under supplied, which led to crazy highs, unsustainable rent growth.

And now that resulted in the highest supply volumes that we’ve seen in 50 years. And we’re building more than a million apartments right now across the country, the most in 50 years. And what’s happening is that while we’re still seeing good demand. Rain growth is really pulling back.

It’s basically flab 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, and balance.

Now, with supply, though, you, supply is the easiest thing to forecast. We know stars 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 a lot less supply. So we know that headwinds are short-term.

The probably even more significant headwind, we can get into some other factors too, but is going to be the interest rate environment. You have a very, small but very loud part of the market that relied heavily on short term floating rate debt with acquisitions and 21, early 22, two and three year terms.

And those guys are in some trouble. Looking at capital calls potential disposition in some cases that are, especially this is not, you see these headlines, but it’s not necessarily with joy, but there’s certain cases where the property is 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. 

Ben Fraser: I do have a sense of how much of the market is made up by that. I know, what you’re referring to is mostly these kinds of short term bridge debt facilities that were very highly leveraged from times 80 to 90 percent on acquisition.

And you’re buying, as if you’re in the Sunbelt, three and four cap deals, very aggressive growth plans. And, we’re not seeing the right growth we saw the past couple of years. And with the interest rate increases almost double maybe what the acquisition, a lot of squeezing on the margins.


Jay Parsons: Yeah. It’s, it is tough to exact how big that is, but I’ll tell you, it’s, we know that the bulk of the market, and I think, for those who are listening to this you may or may not know that, half the debt market and multi family is agency debt, Fannie Mae, Freddie Mac as well as some through, through, through HUD.

And then the banks they make a lot of the 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, multi million debt in our country.

And there’s about 4 percent 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%, even if you sued, all of that was at risk, it’s still a pretty small share.

Now there’s risk elsewhere in the pie too, don’t get me wrong, but the most elevated risk is a pretty narrow piece of pie, piece of the pie. 

Ben Fraser: What else? What other headwinds are we facing here? 

Jay Parsons: Those are the two primary ones. I think that, I’ll tell you on the bigger risk of course is what’s happening with the economy.

We continue to see, I think all of us snickered at the soft landing idea a year ago, but, so far that’s playing out. And so we’ve seen a lot of economists that are revising their outlooks and pushing out recession forecasts and whatnot. But, that’s still a real fear.

If we potentially the Fed over pushes too hard on rates, or if jobs start to suddenly disappear, if wage growth disappears. 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’s going to look a lot more challenging. So that’s a I’m more glass half full by nature, but I’m also realistic enough to also recognize, Hey, there’s still a possibility that could happen over these next 18 months of supplies peaking.

So that’s the other potential big headwind to, to really be mindful of. Sure. Sure. 

Ben Fraser: And we’re, we obviously own a lot of assets and, and we’re seeing, across the board expenses increasing, right? So we, the past couple of years, have seen massive top line growth with especially the Sunbelt market, you’re seeing double digit year over year rent growth.

And expenses lag, right? So we’ve had this great top line growth, but all of a sudden, the expenses are also increasing quite a bit. Insurance is probably the biggest one that people keep hearing about. And so you’re having, rent growth declines in the short term, from the new competition of supply.

You have increasing expenses. And now you have higher interest rates potentially, so your margins are just getting really squeezed. Oh, yeah. But, let’s 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 market specific when you’re talking about rent growth decline, and it is obvious, but…

We’re seeing the most rent growth declines where there’s been the most new supply, right? And so you had this chart that shows all the new supply coming in relative to the markets and what the rent growth is doing. And so there actually are markets that are having very positive rent growth.

Like we’re in Kansas city. And, we’re actually seeing pretty strong rent growth, relative to maybe other Sunbelt markets. So break that down for us, give us the nuance there between, it’s not all bad from a rent growth standpoint. 

Jay Parsons: 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, property insurance premiums, but also just the cost of turning over units, labor materials have gotten more expensive. Plus there’s more turnovers, renters have more options. So that’s a real headwind.

Especially in the class 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 expense. And supply. And even I’ve always believed in the laws of supply demand, but just to see it in a graph was remarkable.

So basically what it showed is that in the sub markets that saw 10 percent or more expansion of their apartment supply, rents were already down let’s say 3%, something like that. And then in the areas where it was 10 percent supply expansion, rents were down a little bit less. In the areas where it was, say 5 percent supply expansion, rents are basically flat.

And then you could do the other side where there’s no supply. We’re still seeing. Two and a half, 3 percent rent growth, which is basically normal. And so it’s more just the normalization story in those spots. And yeah you’re right. And it really is, I think an important time to remember that, it’s real estate’s location, and it’s asset strategy and who’s your demographic.

And there is a, I think over the next 18 months, especially, there’s going to be a wide variability and 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 when the worst operator and made the worst decision and still done pretty well, that’s not happening right now.

It’s changed, right? 

Ben Fraser: Yeah. When I saw the chart, the inner data nerd in me, see, it’s not a correlation and just. Rejoiced, right? When you see data at that time, 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 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, we haven’t seen great wage growth. The more recent data has been positive, meanwhile, we’re having high inflation.

Consumers are getting a squeeze. They’re seeing their rents the past couple of years have gone up, some markets 20%, right? And so they’re feeling the pain, but now all of a sudden they have a lot more options. Talk about, from a demand standpoint, it seems like there’s still 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 say to 

Jay Parsons: that? Yeah, no, it’s not. Yeah, absolutely. And so I think what’s happened is we’re, it’s really an unprecedented event. The way we’ve not seen this in decades, is that 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, 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 percent 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 two 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 I said earlier, there are 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. High interest, high mortgage rates, high home prices, that doesn’t create more renters. But it does limit the backdoor exits to homeownership. And so that’s even if you have and so that’s protecting some of the kind of the overall occupancy as well.

Ben Fraser: Occupancy explains a little bit more, cause that’s not as intuitive as some might think. So cause my first thought would be, Hey, 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, the cost is nearly doubled on a monthly basis.

So it’s, it makes renting more appealing, but you’re saying that’s actually not the case. So break that down a little bit. Cause that’s interesting. Yeah. 

Jay Parsons: I think this is really one of my favorite topics. And because I think it’s a misunderstood issue.

So first and foremost, it’s important to understand that the rising tide boosts all ships’ effects. 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.

Both are dependent on household formation. The other thing, even by the way, peak home prices, like a home to home buying and it’s mid two thousands, he’s still a great apartment. So I will do the same thing in 2021. That’s part of it now as it relates to the current market. What we’re seeing is that 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 I always see this even in news articles. Its college will have a price to purchase, people are choosing the rent instead.

No, they’re just renting long, they’re already rented. They didn’t just come out of nowhere and said, hey 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. That’s the initial household formation, kids coming out of college, getting a job for the first time, living in a mom and dad’s place. They’re typically going to be renting first, no matter what home prices almost no matter what home prices they’re doing.

And again, it’s really that backdoor effect that’s more impacted and the 

Ben Fraser: 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. Yeah. So basically it’s creating pent up demand for home ownership. Until costs kind of normalize. Is that what you’re saying? 

Jay Parsons: Yeah. But I also don’t think I still do it 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, I think you want to see home prices be, or I should say mortgage rates be more accessible to home buyers. 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 look at them as like one or the other. I think that it’s, that’s what they typically are, you want both because if my view is that in period, 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.

And that’s the missing variable here. So we’re still seeing good demand for apartments, but it’s not like even like I see people like in the REAP earning calls, like they get asked this all the time and the numbers are like, nine, 10, 11 percent of move outs to home purchase and then it drops down to percentage points.

Like it’s 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 moving out to other apartments, especially with all this new construction going on.

And that’s the factor. I think it’s much more important for apartment investors to look at their own properties than these macro trends of people leaving to buy houses. 

Ben Fraser: Got it. So it’s a factor, but it’s just. It’s de minimis relative to the other bigger factor, which is competition of other rental 

Jay Parsons: properties.

Yeah. No, it is a factor. But I’ll give you one good example of this. It’s so like some of the Wall Street narratives had historically been that you want to avoid suburban areas because there’s more risk and move out to purchase. 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 the easel as an investor about moving out to purchase, you’re missing the broader point, which is you have less turnover. Who cares why they’re leaving? They’re leaving. And so that, that’s irrelevant to, to, 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. 

Ben Fraser: That’s such a great point. Yeah. That’s really interesting.

Let’s talk about, okay we’re here right now. Where do we go from here? We got all these forces that are squeezing The properties on an income level basis, potential. We have some distressed properties coming into the market, right? A lot of the maturities of these bridge loans are starting to mature at the end of this year into next year.

Maybe that creates some turmoil, right? We’re just some of these distressed property sales. We’re heading the market, but I just, we just actually had a podcast on this. We just released 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 while there may be some turbulence, some speed bumps, our thought and thesis is that it’s probably going to 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. Talk a little bit about the capital market side of this.

Is that what you’re seeing as well? What’s your forecast on, Q4, Q1 as we 

Jay Parsons: go forward? Yeah, no, I generally agree with you. I think this is extremely unscientific, but gives you a pulse of a little bit of the market. So I put a post to the poll on LinkedIn, and had 1100 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 distress acquisitions. And 75 percent said that the buyers are going to outnumber actual distress. And, if that plays out, we don’t actually know. But everybody I talk

I want a lot of money lining up for this. But, it’s also a market where, number one, I think lenders are more rare, and with some prodding from regulators, are more likely to work. With borrower sponsors and they haven’t, and maybe the great financial crisis, but also the thing to think about, and because I generally agree, I don’t think we’re going to see some, all of a sudden cap rates for percentage point higher, some crazy number.

If you’re waiting around for that to happen, you’re going to be holding, your bank accounts are 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 stick speaking specifically to multifamily.

A lot of the capital is lined up looking for class a and b already value added mean post renovation or, nicer product and good locations or looking for distress lease ups. And I imagine you look at some of the syndicated distress that’s been the news to where some of that exposure is where there could be some real, hairier deals in the market.

I’ll even be on the Sunbelt, a lot of those 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. 

Ben Fraser: Very interesting. Very interesting. I want to get into that here in a little bit. Let’s shift to just back on the supply demand standpoint, right? You mentioned a household formation, housing shortages. We have record supply hitting the market, but we also right now have new starts, new construction.

Really falling off a cliff because of the prohibitive cost through interest rates. And a lot of people don’t think about it. It was obvious that a lot of the housing and the properties that are hitting the market now were started, two and three years ago.

And now they’re just hitting the market and they’re getting occupancy and leasing up. So you, to your point, you can fast forward a little bit and where do you think we are 18 to 24 months from now. From a supply demand standpoint, regardless, let’s suspend the idea of a recession, maybe we can layer that in, but, a little bit of magical order.

No, but what do you see for forecasting just from a pure fundamental standpoint? 

Jay Parsons: Yeah, so as I joked there, but it’s very, obviously no one really forecasts recessions every, very accurately. So you take that part out of it. Supply is the easiest thing to forecast because as you said, you’re really just looking at stars and you’re looking them out, 18, 24, 30 months.

And what’s happening is we are seeing a rapid deceleration and it starts this year. I think we’ll end the year with stars about. Maybe 50 percent or more below where they were last year. It’s just because of this, 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, 26, there’s going to be a lot less supply. So assuming the economy is still in good shape, it’s very, yeah, it shouldn’t be that complicated.

You should be able to see occupancy rates rebound and 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. 

Ben Fraser: And obviously it’s harder to predict the demand side of this, but do you forecast, when the rent growth kind of rebounds back to more normalized numbers or does it, 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? 

Jay Parsons: No, I’m of the view, I think what, and maybe someone will show me this video in three years and show me I was wrong, but I’m of the view that what we just went through in 21, 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’ll retire by the time this happens again, but it was a perfect storm of factors that led to double digit rent growth. That’s not normal, and I don’t see how you can re accelerate back to that very easily, especially with the supplies coming in. And by the time you hit 25 and 26, there’s still supply.

It’s not like it’s just evaporating. But it’s and all this new stuff, too, is gonna go through prolonged lease outs. And I don’t think we’re gonna be in a, it would take a lot of other factors beyond slowing supply for us to see rent growth anything like what we just went through.

Ben Fraser: Talk a little bit about rent growth as it relates to CPI, right? So the consumer price index, this is a big measure of inflation and the Fed uses different measures, but obviously the higher interest rates are. It’s intended to stymie inflation and you’ve made a point in some recent posts that these kinds of rent decelerations we’re seeing are lagging in the data.

And so we, what are you seeing from a CPI standpoint? Is this start to 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. 

Jay Parsons: Yeah. Yeah, this is a great topic. It’s one that I think no one would pay attention to the last couple of decades because frankly, CPI was so steady and predictable and I didn’t really even look at it.

I, people in the industry always looked at the CPI version of rent and shelter. It’s just snickered yeah, this is, it’s just an overly smooth metric. You look over history from basically like the late eighties and through until until the inflationary run up.

It was basically, I think, in the two to 4 percent range all the time, except for one brief period, it got to about zero in the great financial crisis. And so we always snickered at it as this kind of overly smoothed out metric. And obviously what happens is that it didn’t really run up initially when rents were jumping in 2021, we didn’t see it until 2022.

And so what we as we dove into kind of what’s happening here there’s some interesting history. The last big inflationary period in the late seventies or mid to late seventies, early eighties. Back then, home prices were part of CPI, Considered Price Index. And back then the economists and policy makers from the Bureau of Labor Statistics and the Fed and whoever else was involved said, Hey, home prices are too volatile.

We gotta pull this out. And so we’re going to replace it with rent, and this concept of owner’s equivalent rent, which you may have heard of OER, it’s a controversial metric, but it’s still, it’s 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 everybody thinks of that as the as something like measuring home prices, but it really doesn’t.

It’s all that to say that shelter is the biggest category of CPI and rent is the most important variable in the biggest category of CPI. And as a result of all that, rents have outsized importance. And 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 ranch, or the industry calls the embedded ranch, or in place ranch. And so because of that, there’s always going to be a little bit of a 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 20, until early 2024, maybe late winter, early spring, before we really start to see more normal CPI shelter numbers as a result of it. 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. 

Ben Fraser: No, I think it’s a very important topic because it’s something that is, inflation is this big sticking point, but we are seeing a deceleration.

And so when that starts to show up, that really impacts Fed policy. So do you see, obviously it’s, no one can predict what’s in the mind of Jerome Powell and at all. What’s your think? Does this start to relieve some pressure from, just inflation that we’re seeing and potentially make a good case for actually dropping rates?

Jay Parsons: Yeah, 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 a Jay Powell there. But, I will tell you that. I think a lot of people, they see the headline inflation numbers and they, obviously a lot of economists know this and some of the nerds really dive into the CPI, but in this last month, 90 percent of CPI inflation was driven by shelter.

So you take out shelter and year over year inflation has been basically flat these last two months which really tells you that, the things that you could really impact more readily. Those things where I’ve 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 they had the leading data, the asking rents, the leading indicators show us that’s being impacted as well. And I will tell you, it’s 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 it’s being fed up the ladder, but I’m sure that Mr. Powell has a lot of pressure to, to to be overly abundantly cautious and how he interprets it.

But. It’s a near certainty that that shelter is on a rapidly downward slope over the next year. Wow. Very interesting. 

Ben Fraser: Very interesting. Let’s shift a little bit here. You’ve alluded to some of this, what markets. Are performing best right now. And where do you see, fast forward the last couple of years are the same markets that were the darlings of the past few years continue to be that?

Or, where do you see opportunity from an investment standpoint, given some of the data you’re seeing? 

Jay Parsons: Sure. I’ll tell you just long term, I’m a big fan of following people. You want to follow the demand and the demand is still going to the Sunbelt and to the mountain regions.

But over the next 18 months, there’s going to be a short term supply, demand and balance. So for long term investors, if you see deals that make sense and you have a longer term hold period, you could get, you’re not worried about exposure for, higher rates or whatnot, or you’re able to buy at a good price and read and 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 still coming, like those demand drivers are not going away and most of these key Sunbelt markets now, short term, what we’re seeing is these lower supplied markets are in much better shape because that’s primarily the Midwest, the Northeast.

The only market in the sun 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 those are good markets, I think, for especially long term holders.

There’s less, there’s markets a little bit less liquid historically, but I think they’re going to be more appealing just because they’re a little more slow and steady. There’s some, if you’re a 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.

Ben Fraser: The same question relative to, class of properties, so A, B, and C, you alluded to this earlier, but you know what we saw over the past couple of years like the class C properties is the cap rate compression, relative to other classes seem to be the most aggressive.

And maybe that’s partly due to some of the, quote unquote syndicator bubble that kind of happened. But do you see? Normalization of cap rates to the long term means of these different classes. Do you see one class outperforming more than others?

Another layer of this is, if there’s a recession, a lot of people say, Hey, class B’s a good place to be because the class A renters, downgrade to or class B properties, break that out a little bit just from kind of class of property. 

Jay Parsons: 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, just like an OpEx standpoint, seeing better NOI opportunity, knowing that you have a newer asset, not having to worry about the maintenance costs as quite as much of it and generating a higher rent.

I think you’re right. I think that’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 and that segment. The other thing to consider is class C. We’re currently 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 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, one of my pet peeves, I hate when I see like broker packets, it’s like class B slash C. And there’s no such thing as B slash 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 means, you can’t build that stuff at those price points unless you get some tax credits to do long term, I’m a big fan of the B to A minus category.

Ben Fraser: Got it. What about new development right now? So one of the things, we’re looking at a lot of development projects and they are a lot more difficult to pencil out. You’ve got to build in a little more margin for a potential slower lease up. If your delivery is going to be two years from now and a lot of this short term supply has been absorbed potentially, does that mark a good kind of recipe for development?

What’s your thought on development projects right now? 

Jay Parsons: Yeah, 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. And now’s the time to. And not everyone’s successful with that strategy.

And 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 locations where a, 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 up in that period of time.

So I think for the right assets, in the right strategies that, that, that can really pay off nicely in, in the next couple of years if you can actually get a deal done. 

Ben Fraser: One of the pieces of this, so obviously a big driver to your point is the rising tide lifts all boats for different demand standpoint and one of the biggest drivers of housing demand is household formation.

We’ve seen that kind of thing happening later on. What are you seeing as far as going forward, 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. There’s some other nuance factors there, but how does lifestyle, culture of different generations impact some of this future of demand if you zoom out even beyond just the, two to three year period, but five plus years as different generations are moving 

Jay Parsons: into housing.

Yeah, so a couple thoughts there. I think number one is that the good, everyone’s, I think pretty much well aware at this point that, we’ve had declining birth rates, the population growth is slowing, for the apartment demographic, your key is that, twenties to thirties category, your median renter is 31 and a half years old in an apartment.

And so that grew while it’s not going to be the same boom that we saw the millennials. You also don’t have the same drop off effect that we saw in the nineties 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, steady growth, modest growth, or even some flatness in that demographic over these next, 10 to 20 years.

And so that’s a good thing. Now what I mean 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 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 say the differences in general generations. And one of the things we found is that Gen Z, at least for now, and I’m, I’ve, to be honest, even as a rental housing, I’m a little, I’m a little bit suspicious of the long term view of this actually sticks long term, I should say, but Gen Z is, Like people are, Gen Z, the generation Gen Z is most is most, I should say, least confident about home ownership.

A slight majority of them actually in the survey saw renting as a better financial choice than home ownership. And they probably have seen and grown up with the volatility in the home price market over these last few years. I’ve seen that now as they get older and reach the age of getting married, having kids, maybe that view changes.

But I do think we’re going to extend this trend of, this prolonged stage of renting where it’s not just so much about cost, which everybody gets to focus on a lot. It’s about lifestyle. It’s about flexibility. It’s about not being tied down. And this generation, even more than millennials, really values flexibility.

And with renting and typically one 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. 

Ben Fraser: Okay. 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 affordable housing and just trying to help move policy forward on this, but, 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 what needs to happen for that to really be solved or some of your thoughts. And if you had a magic wand and could write the policy, what would you do?

Jay Parsons: Thank you for that question. Yeah, it’s an important one. And one thing that I’ve become educated on over these last few years is starting to realize that. Now, even if you’re an investor watching this and you have no interest in investing in affordable housing directly, 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 if 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 are affordability. Really stem from misunderstanding about who lives in market rate apartments.

Anytime you see these, I see these stores 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 is only this in this market rents are that therefore they can’t afford rents.

That’s not who’s living in these apartments. It’s people who have middle and upper incomes, those who live in market rate apartments, but that narrative, in fact, which 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, wrong headed 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 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. You aren’t going to build with rent control. And that’s true, right? We see that. There’s less supply in rent controlled markets. 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.

What they didn’t 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 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 too limited. And we, with these programs, have unfortunately been underfunded by both parties for decades. And now we’re seeing the consequences of that.

I could go on and on with this kind of stuff. But, 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 there’s 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 and the cost of production for a 300 unit property.

The cost is the land and labor 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. 

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

As some of these things play out. So what’s the best way for folks to 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 get into the ecosystem of RealPage? 

Jay Parsons: Yeah. So primarily the real page serves owners and operators 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 a real page. com slash analytics. We post a lot of articles and blogs and data. As you mentioned, I post actively on LinkedIn. You can search my name there and on Twitter as well. We hopefully are not too hard to find.

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

Jay Parsons: for having me. I appreciate it. Enjoy the discussion.


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