Navigating The Shifting Rental Market - Part 2 with Jay Parsons, Economist, Strategist, and Housing Industry Expert
Willy Walker: Good afternoon and welcome to another Walker Webcast. I've just come from the Urban Land Institute Conference here in Denver, Colorado, where I had a number of people walk up to me and say how much they love the Walker Webcast. I was with my friend Owen Thomas, who's the CEO of BXP. I got pulled away for a number of selfies, which I think Owen was sort of like, “I don't get the selfie thing,” but to those of you who I did a selfie with, thank you for sending those back to your colleagues who wanted to see that you were actually with me at the conference. I'm thrilled to be with my friend, Jay Parsons, who is in town for ULI, and I did not want to miss the opportunity, Jay, with you in town to sit down and talk about your great data and insights into the multifamily market.
Jay Parsons: Yeah, I'm excited, Willy. Thanks for having me back.
Willy Walker: Let's start here before we really kind of dive into the specifics. By the way, anyone who doesn't follow Jay on LinkedIn, there's a plethora of data and insights that Jay posts out on LinkedIn all the time. I would strongly recommend to anyone who doesn't follow Jay take a look on LinkedIn for him and you will see all of his work. It's an interesting time. When I went to speak this morning at ULI, Jay, I didn't update my slides from the agreement we got done with China in the last 48 hours because they thought something else might show up when the President arrived in Saudi Arabia this morning that would have changed things back in another way. It certainly seems like things are moving at a very, very fast pace. Movement in the 10-year since Liberation Day, we were at a 398, then we moved up to a 450, then we were treated back down to a 417, and we're now back at a 450. I sort of mused this morning, speaking to a group of people about whether the trade deal we got done with China, from a real estate standpoint, was actually a good thing or a bad thing, given the sell-off in the long bond. What's your take on where we are from a macro standpoint?
Jay Parsons: Yeah, I think that the keyword right now is uncertainty. I think the development with China is obviously a positive. That gives us a little…I think it's paused a little bit of the volatility of the concern for the moment. It's stalled some of that a little. If we don't have a deal that's reached with not only China but all these other countries, we'll be revisiting these same questions in the next 90 days. So I think the overall environment right now is we're seeing a lot of investors still love the sector, and they still have the long-term stories, but they're kind of in wait-and-see mode to see how all this plays out.
Willy Walker: What's your take on the CPI this morning? If you net out housing, and rental, rent was up 4%, non-rent, which is owner equivalent rent, which nobody on the face of the planet has ever actually paid. So it's an interesting one that it's still in there, and it was up over 4%, but you net those two out and we were way below 2%. You're at 1.6 or 1.8%, I think, of core inflation. Does that give the Fed the opportunity to potentially gut?
Jay Parsons: Well, I think so. In fact, I've been saying this for a while. If you go back these last 18 months, it's been around 2%. We take out shelter costs, which as you noted, are not real metrics, I think, from what a lot of us believe in anyway. So I think that this is just my hypothesis. My guess is that if the Fed could go back in time and kind of revisit its targets with taking out the lagged shelter metrics versus everything else, they may have put a little nuance there because it'll certainly make the story a lot more favorable.
Willy Walker: Yeah, it's interesting because Jerome Powell last week was pretty adamant that they didn't see any reason right now to move, but then that was also a pre-China deal. So, if you continue to knock down some of these trade deals and you get some more stability on that, and I use that term cautiously because even if you got all the trade deals done, I'm not sure that there's “stability” in the markets post the trade deal. I think something else might come out. But that would potentially allow them to cut, no?
Jay Parsons: I think so. There seems to be a little bit of a stare down match right now between the White House and the Federal Reserve. So I don't know who's going to win this. It's really tough to pick the movements of, I mean, even the Federal Reserve's own survey. They don't predict their own decision-making for the next year. So, I don't know, but I do think they'll have more and more reason to cut rates. Frankly, I think that again, we take out the lag shelter data. Everything else has been signaling for a long time that we've had, say everything, in the aggregate, the non-shelter metrics have been signaling stability for quite a while.
Willy Walker: So I'm gonna do a quick one as we're talking about CPI, that I did with Owen this morning, which I asked him on stage and now I'm going to ask you on camera in front of hundreds of thousands of people when that all gets viewed. But we've talked about eggs and the cost of eggs and eggs being this inflationary component that's kind of continued to go up. Jerome Powell’s been blamed for the cost of eggs, and Joe Biden was blamed for the cost of eggs. There was a really interesting article in the Wall Street Journal last weekend, which went into the cost of eggs and why egg prices have gone up so much. So I've got a couple of trivia questions to put you on the spot. There's no reason for you to have any basis for this, but how many eggs do you think the average American eats on an annual basis?
Jay Parsons: I have no idea. 50?
Willy Walker: 278. Wow. Okay, so the average American eats about 300 eggs a year. How many eggs does the average hen lay in a year?
Jay Parsons: A lot less than that.
Willy Walker: So an average hen lays 300 eggs, on average 300 eggs a year.
Jay Parsons: Wow, okay, that tells me what I know about chickens.
Willy Walker: The number of eggs consumed by an average American and the number of eggs laid by a hen is one-to-one, which means that we need about 360 million hens in America to be able to meet the demand of U.S. consumers for eggs.
Jay Parsons: We need more hens. We need more housing then.
Willy Walker: We need more hens and we need more housing, except for one thing. This is what doesn't come into the conversation as it relates to why is the cost of eggs up so much. We have lost to the avian bird flu, 150 million chickens in the last two years. So our chicken population has been cut in half as demand for eggs has continued to go up. So everyone sits around and talks about these things in CPI, and there are all these supply chain issues. The bottom line is the bird flu has taken out almost half the chicken population in the United States, which is what has caused egg prices to go up. I just thought that was an interesting one. But now it's one-to-one on basically hens versus...
Jay Parsons: I've learned something already. It's great.
Willy Walker: When I was just with Owen, I was talking about the office market because he's chairman and CEO of BXP, the largest publicly traded office in the country. What I thought was interesting, Jay, that I thought would be a good dive in place for the two of us, is if you look at multifamily data and what drives investment decisions for Madera, for everybody who's buying, investing in multifamily, versus investment decisions that drive a company like BXP. It's really interesting because they are in Boston, New York, DC, Seattle, and San Francisco. If you think about growth and the MSAs that are growing, this slide that we're gonna look at right here shows the fastest-growing MSAs in America right now: Houston, Dallas, Phoenix, Atlanta, Miami, DC, Philadelphia, New York, Los Angeles and Chicago. So if you know where BXP is and by the way, they're also not broadly in office, they're in the premier office category. So they really wanna be, not only in the best cities, but the cities with the premier office needs of big companies, tech companies that are taking that space. One of the questions I asked them about was just, they're not necessarily following growth in populations, but you would think that growth in the multifamily space would track the jobs and you have a lot of data that shows where people are going to, and this slide clearly shows us Houston, Dallas, Phoenix, and Atlanta as being the top four markets as it relates to population growth. How does that then translate into both job growth, or are people moving to these cities because they just want to live there?
Jay Parsons: That's a great question. I'll give a couple of thoughts. First of all, I think the pandemic taught us that apartment demand is not tremendously correlated with office demand. That'll give you like the example of when you looked at New York City, for instance, got hit in the pandemic, obviously, but we saw apartment demand rebound a lot faster than office demand, and it turned out, not surprisingly, that people want to live in particular parts of New York, not for the job necessarily, not because they want to go into an office every day. Maybe they went a couple of times a week. But they wanted the lifestyle. So once the cities reopened up, the apartment demand came back even faster than the office demand did. Then in the Sunbelt, I think we see it's jobs, but it's fewer office job dependency for the investment-grade apartment market. The third thing I would add to this though, is that there has been, I think, a clearer correlation in Silicon Valley and parts of Seattle where we've seen major apartment companies, including the REITs like Essex have said, “Hey, look, they're seeing better traffic as a result of these tech companies bringing people back to work.” I think that's, particularly, being in a sub-market so they don't have the same appeal of a Manhattan, I think it does become a bigger driver.
Willy Walker: As you think about DC and the driver of the back to office and the federal government pulling people back in, but at the same time DOGE of efficiency and potentially layoffs, as you look at the data, does that make you bullish or bearish on DC?
Jay Parsons: I'd say I think DC is representative of this broader story of everybody. The broader market keeps underselling multifamily just to find out how resilient the sector is. We've seen through all the data, all the REITs who have properties in DC, how the earnings calls are getting peppered by Wall Street and the same thing. And they're all saying the same things, which hey, we've seen zero impact from federal layoffs. And there are a lot of reasons for that. Part of it's the makeup of the federal employee base, which tends to be a little bit older versus who lives in apartments, who's a little bit younger. There's also the return to office factor, which seems to bring people back in. So there's still demand, even if you have some folks who move out. But also DC's become a much more diversified economy. So we've seen the REITs have come out and talked about this. That said, they have maybe 9% of their resident base working for the federal government. It's been something everybody's watching. But it just hasn't been a real issue, and frankly, I think that the market, especially the district in Northern Virginia, remained very resilient. Now, the Maryland side has different issues, regulatory issues.
Willy Walker: Double click on that for a second, because I find it to be so interesting. When I was talking to Owen, the premise of Boston Properties is to own great properties in great cities. My first question to him was, “Are you in five great cities?” As a big owner of office in those cities and both from a legacy standpoint as well as from a gross standpoint, he feels very good. He said, “They're all great cities.” But I was, as you can imagine, trying to poke a little bit as it relates to the governance in those cities, the population growth in those cities and the red tape, which I thought Jamie Dimon so effectively called blue tape this past week when he was out in the Palisades looking at the aftermath of the fires.
Jay Parsons: He's not a hardcore partisan, by the way.
Willy Walker: No, he's not. I mean, quite honestly, I thought it a fantastic comment because it's… I just read a stat, Jay, that said that I believe that since the Palisades fires, either 40 or 60 building permits have been issued.
Jay Parsons: Yeah, that's crazy.
Willy Walker: It's 40 or 60. I didn't think it was that much. And I'll go to the high end: 60. 7,000 homes were burned down and they've issued 60 and it might be 40 building permits. I mean, it's just unbelievable. But with that DC is kind of an interesting one because, and again, sorry to refer back to Boston Properties, but I think it's indicative of where the growth is. They have a huge amount in Reston Town Center, which is growing and they love that. Downtown DC, they've just bought a building that they're gonna tear down over Metro Center and rebuild a brand new office tower for two big law firms and they are thrilled with that. Then we went to Chevy Chase and Bethesda and Owen was, “Nah, I don't know.” As a company that has our headquarters in Bethesda, Maryland, as you can imagine, I see a bunch of multifamily towers being built right next to our office building in Bethesda. It's located right near the Metro, which Owen is still talking about as it relates to fundamental to good office. What's your take on DC versus Virginia versus Maryland?
Jay Parsons: Well, there's a strong bent and favor toward Northern Virginia right now, and a lot of it has to do with the regulatory issues. The challenge in DC has been that Los Angeles became two cities where rent payments essentially optional for these last few years that obviously becomes problematic. In Montgomery County, we've seen rent control get passed. For a big chunk of developers and investors, that's a red line. Even if it's, I think, 20-something, maybe 20 years sent down the road after the exact number that were for new construction, you're selling that to somebody who has to factor that into their underwrite. That's a problem. So I think there's a lot of great parts of Montgomery and PG County, obviously, but I tell people all the time, it's as if you only think about your backyard, understandably everybody cares about their city the most, but you have to remember you're competing for development with other cities. Why would you want to go here if I go there and not have to deal with that headwind? So I think you're gonna see more and more interest in Northern Virginia over those other two.
Willy Walker: So as you talk about construction and people figuring out where they're gonna actually put shovels in the ground, it's a good segue into some of the data that you've been publishing. This slide shows us basically construction starts, which is the blue line, and then deliveries, which is the coin or brown line. We can clearly see on this slide that back in 2022, sort of seemingly everyone and their neighbor was putting a shovel on the ground to build multifamily. You had really strong cap rates, you had massive volume and everyone saw lots of rent growth at that time. We've had that massive amount of inventory be delivered into the market. At the same time, now we're seeing starts come down precipitously, setting us up for a wildly undersupplied market. Do you see anything, Jay, that comes in? Could anything change that? In other words, I mean, you look at this data and you just say that is an undersupply market waiting to happen. Is there any market that is still going to be oversupplied? I mean, the data just looks so big from a macro standpoint that you just sort of say you can bet on it.
Jay Parsons: Yeah, the difference between starts and completions now is the biggest since the mid-1970s. The last, by the way, massive construction wave happened in the 70s, followed by a relative… It wasn't actually that big of a drop off, as we see now. But it's significant, and we're already actually past the peak on deliveries. We peaked in Q4. Q1 was down. Q2 will be down more, and it's going to keep moving down until next year. It's down even more. I think, to answer your question, we're going to see the timing of undersupply is going to vary by market. I think you'll see even in the high supplied markets, you're going to see, like take Texas, Dallas and Houston, they're going be, by the end of this year, you'll see inventory growth rate, just new deliveries divided by the existing stock, below pre-COVID averages by December. In Austin, it's going to take another 12 months after that. And so in Nashville, downtowns take a lot longer than suburban Nashville. So the pace of recovery is gonna vary, but I think to your point, very quickly, we'll be talking about undersupply again, assuming that demand tailwinds hold up.
Willy Walker: Let's talk about the demand for a moment because you've got some really good slides on where the absorption is happening and kind of some narratives that say that the Southeast is oversupplied and doesn't have the demand and you're showing data that does. This slide actually shows the incredible absorption that has been taking place in 2024 into ‘25. The graph here is to the end of Q1, so the end of Q1 is analyzed. You can see on the right-hand side of this where we had record deliveries in the dark blue, but we also had record absorption in the light blue. We absorbed everything. To a slide that you put together, the Sunbelt Mountain, where the share of that T12 absorption was, you can see that the massive amount of it was in the Sunbelt and the mountains, Midwest, West, and then Northeast, far, far less. Again, sort of back to that issue as it relates to good office markets versus where the absorption is happening, where people are living. Anything on this slide, Jay, that you wanna point out to people as it relates to just this kind of insatiable demand in the mountain region and the Sunbelt?
Jay Parsons: Yeah, I think we throw around the word oversupply too much, especially within the industry. It's a temporary supply-demand imbalance that we're going through. But to your point, the demand's been great. When I share this sometimes with investors and operators, well, we're not seeing that. I'll tell you why you've not seen that. It's because you have a lot of supply competition. That demand is being spread across a far greater number of properties. So you may still have a higher vacancy than normal. Now it's not bad, it's still higher than normal, but that just reflects a lot of these lease-ups are filling up. That's where a lot of this net new absorption is going, is into these lease-ups. It's leasing up slower than even those developers want to, but they are leasing out; they're not sitting empty. There has been a lot of demand out there and it is all over the country, but it's generally been disproportionately concentrated to where we always see demand go in the last few cycles, which is the Sunbelt and the Mountain Region.
Willy Walker: On this slide, you pull out the specific MSAs on the Q1 ‘25 net absorption just in the first quarter. You can see on that, basically, the markets that you have identified as it relates to the most absorption is quite something that Dallas picking up 10,000 units. I mean, look at that in comparison to New York City, just from a population standpoint, and how much absorption is still happening in Dallas.
Jay Parsons: Yeah. No, I mean, I think Dallas, Fort Worth, I live in the Dallas area. It seems to be the number one core market for liquidity and obviously demand. I mean it's been the number-one market for a while in terms of sales volumes and demand. A lot of supply, but I think it's more resilient than Austin's and elsewhere. And I think it has been a pretty good story.
Willy Walker: Any other market in that list that surprises you as it relates to the resiliency or one that you didn't think would have that type of demand driver recently?
Jay Parsons: I'm not saying it surprises, but I think just the story has been how diverse that list is. I mean, we're seeing some good numbers, not just in the Sunbelt, but we've seen it in some of these coastal markets; we've seen it in the Midwest. We've seen Chicago. You know, everyone's always sleeping on Chicago, but Chicago's been a really strong market. So I think that's it.
Willy Walker: But is Chicago turning into Columbus or Cleveland in the sense of just no new development and therefore the existing stock is getting rent growth, but there's no momentum there. I mean, is that a fair statement or am I?
Jay Parsons: Yeah, it's a low-supply story.
Willy Walker: It's a low-supply story, right? So the health of it, I mean, it's nice because if you own there, you're getting rent growth and you probably feel pretty good about your cap rate if you wanna go sell today. At the same time, there's no new inventory as it relates to development and growth.
Jay Parsons: Well, not only that, the big story for Chicago and all the Midwest is that you could be a no-growth market, and they are still growing, but you could be in a no-growth market and still they can see good rent growth because they built most of their inventory 30, 40, 50 years ago. A lot of that's been aging into obsolescence. So there's a dearth of quality rental homes for people who are willing to pay higher rents for quality apartments in good locations. You're going to see those markets, I think, be really well positioned, even with no population growth and limited job growth.
Willy Walker: So talking to this one about the Sunbelt migration slowdown is grossly overstated, because I really liked this slide.
Jay Parsons: So this is kind of a pet peeve of mine because people love to hate on the Sunbelt. And by the way, I think you can make an investment case for any part of the country. I'm not trying to say just the Sunbelt. You can make an investment case for pretty much anywhere except for a handful of certain urban cores of certain MSAs that are just tough from a regulatory standpoint. But the story that I see a lot these days, Sunbelt is slowing down. Population growth is slowing. Migration is slowing; jobs are slowing. I look at this and a lot of it's like short-term memory. You can't just compare this last year to the best years ever for migration and population growth, which came after the pandemic boom. So it's more of a normalization. So I put this chart together. What I really tried to show is, “Hey, look. And if you can see this chart on your screen, what it's showing you is if you're above that red line, it means that these migration numbers last year, total net migration, were still above the 2010s average in migration numbers. The ones that were below were Austin and Atlanta. And those are two within the margin of error. It's barely below.” And so in most of these cases, if you are left of that red line you're down from the peak of these last few years. There are actually a few markets like South Florida, Charlotte, and Vegas that are still quite elevated. Being down from record numbers does not mean you're slowing down. It's just a natural normalization that we all expected to happen. But these are still where the growth is going. They still have massive affordability advantages. In real time, hey, home prices and rents have gotten too expensive. Here's a stat, your average Sunbelt apartment rent is still 40, 50, 60% cheaper depending on your MSA than living in a major coastal MSA. So that coastal, the Sunbelt advantage relative to the rest of the country, Midwest too. That affordability story is still an advantage relative to where people are moving from.
Willy Walker: So then the other one was migration. Because you're diving in here and saying what markets are really dependent on immigration and which markets are gonna continue to grow without the immigration play. A lot of people, not a political statement, lots of people having opinions about the border being closed, far, far less immigration coming into the country, haven't seen the legal immigration side pick up commensurately with the shutoff in illegal immigration. But you're trying in this slide to show which states, which cities are most dependent on migration, and immigration versus in the United States migration. So talk about this for a second.
Jay Parsons: Yeah, so I think intuitively to your point, we all tend to think, (I probably, before I looked at this, would have thought the same), “Okay, well, most international immigration, a lot of it at least, has to come through the southern border.” So you think southern states seem most impacted by that. And sure, you look at places like Texas and Florida, the Carolinas, and they do have a lot of international immigration. But when you look at the other side of this, domestic migration, the darker blue means more domestic migration. Well, Texas, Florida, the Carolinas, and Georgia, Tennessee, they also have a lot of domestic migration. The places that have a lot of international migration, but are actually net negative on domestic migration, are the spots that potentially are most impacted. Now, having said that, I think it's gonna be at the lower end of the market. We're talking about multifamily. I don't think it can impact the Class A market that much, but when you look at this data, it shows that in terms of population impact, it's really more to California, New York, and Illinois are the three states that are primarily impacted in a full shutoff of international immigration.
Willy Walker: Talk for a moment about that migration of US population from in that, in this chart, it shows very clearly out-migration from California in migration to Texas, to Florida, to the Carolinas, kind of trying to, are they following jobs, Jay? Are they going to where they just want to live and that there's a…or is it taxes and they're just moving because of tax rates?
Jay Parsons: I don't know if there's any one reason. Again, I live in the Dallas area, and so we have people moving to different parts of the country all the time. And so I ask people just anecdotally, I hear stories about a restaurant where a waitress from Southern California said, hey, “What brought you to Dallas? Well, I just couldn't afford the rent in Southern California.” And then I talked to a friend, my guy who has a plumbing business said, “Well, I just, I couldn't, my business, I actually didn't run a business in California anymore.” And so that brought them, he basically started over with his plumbing business in Texas. So I don't know if it's the cost of living, it's the job, if it's kind of a chicken or the egg thing. No, that being said, obviously there's still a lot of people, California is still a big place. And especially the-
Willy Walker: It's still the fifth-largest economy on the face of the planet.
Jay Parsons: Yeah, so I don't want anybody to think that I'm just saying that California is not going to be well, do well. I think obviously there's groups that are going to, especially the top part of the market, I think is going to be fine long term. But I also don't think that the migration train into the Sunbelt is going to slow down anytime soon.
Willy Walker: So final slide on immigration growth, and you're pointing out on this slide, that coastal markets are more dependent on immigration growth than the central ones. Talk about this slide for me.
Jay Parsons: Yeah, so when you look at domestic migration, plus births, minus deaths, and you take out, let's just in an extreme scenario, take out all international migration from last year, you would still have positive population growth almost all across the Sunbelt.
Willy Walker: In Atlanta, Charlotte, Phoenix, Austin, to be the four that are up there to the right. And then you've got Chicago, San Francisco, and Boston as negative.
Jay Parsons: Yeah, well, and DFW and Houston are both positive, too. And then, yeah, you're right. And so those are the spots that are negative. Miami sticks out. It's the Sunbelt, but has a lot of international immigration in Miami. So yeah, I mean, it's a pretty telling story there about not that international immigration issues won't affect every city, but it would potentially have a bigger impact in places like New York and California.
Willy Walker: It's really interesting, when I was, again, back to my conversation with Owen this morning as it relates to BXP, one of the reasons he likes being in New York is because 6% of college graduates in the United States moved to New York once they graduated. He gave the anecdote that his daughter's graduating from college right now. He said to her, “What do you want to do?” And she says, “I just want to move to New York.” New York is by far the location for 6% of college grads, which crushes everyone. Chicago is number two at 2%. Okay, so I mean, but you look at some of these places like Boston, which I'm sure a lot of graduates from the schools in Boston just stay in. They moved to New York, they moved to Chicago. But I'm just interested as it relates to the kind of drivers of that cohort, clearly, they're in well-paying, white-collar jobs, driving the knowledge economy, if you will. Yet, we have the Sunbelt just with all of the net migration going on in the country, and it just feels like it's two different worlds.
Jay Parsons: No, it really does. And I will tell you that you bring up a good point. It reminds me of what happened in COVID when people were moving out of New York. There's all these questions about, well, when are people gonna move back out of the Sunbelt? They're gonna boomerang back up to New York? And I always thought this was a misunderstanding because, and I'm gonna get to your point about the 6%, because the people who moved to the Sunbelt, that probably accelerated the move that's gonna happen anyway. The problem that happened in places like New York and the reason it's actually gonna be fine long-term anyway. The problem in that period was that inbound train of those young adults you just mentioned who get a college degree and move to New York, stopped for a year, 18 months, whatever. Once that train reopened, they're fine, especially again in the investment-grade part of the market. But that doesn't, there were no boomers, that wasn't people coming back out of the Sunbelt to New York or San Francisco or Chicago or whatever. It was just normal things starting to happen again, which is for a stage of life, people want to live in those cities, which is perfectly understandable. There are jobs there, this lifestyle. And then, they get a little further in life, have kids, and they want to be somewhere else. And so I think we're starting to see a little bit of just kind of return to that normal pattern again.
Willy Walker: So let's talk about single-family versus multi-family for a moment, because we just talked about the absorption and how we had record supply as well as record absorption last year. When you think about that, you sort of say, “Wow, I mean, what's going on as it relates to record absorption off of record supply?” Typically, you'd think that you'd have a lot of supply and we'd be upside down on it. As you and I have discussed before, a lot has to do with the cost of single-family housing. And so as this slide shows, I call this slide right now, Jay, the money slide. I call it the money slide because I look at this slide and just to walk this through for those watching, the blue arrow on the left-hand side shows that the median-priced home in America back in March of 2020 cost $285,000. And if you had a mortgage on that home, it's the blue line on the bottom, which is the principal and interest payment on that home back in 2020. The coin or the brown line up above shows you what the median rent in America was at that time. So if you own that $285,000 home and you were paying principal and interest on your mortgage on it, you were somewhere around $200 to the good in your back pocket of not renting the median-priced apartment building, but owning the apartment, but owning that home. So now you go to the right-hand side and you can see on the bar chart that the median cost of a home in America has gone up to $385,000. So $100,000 added to it. And you can see the coin line, that's the median rent that has gone up but not nearly as much as principal and interest on the mortgage on that $384,000 home, which today has got you $400 in the red to rent the median-priced apartment building. I look at this and back to that one of supply and demand and say to you, “is there anything that could get in the way of that?” And you're saying, “Probably not. We're going to be wildly undersupplied.” I look at this chart and I say, unless the home builders decide to somehow go from building 900,000 to 1.1 million new homes a year and take it up to 1.5 or 1.6 million homes, which they did do one time way back when we read the GFC. But unless they do that, which I don't see them doing right now, this thing continues to say that single-family housing is way too expensive for someone making the median income. They are gonna be renters for the foreseeable future. What's the curve ball to this graph?
Jay Parsons: No, I think, well, a couple of things. I think personally, I think about inflation, like to me, there's a fascinating case study here about how home prices jumped versus, which was significantly more than rents. Part of that is like the bidding process of selling your house versus an apartment or single-family rental manager that sets a rent and leases it to the first qualified person. That just accelerated pricing a lot more in the home market than the for sale market than it does and did for the rent. The second thing I would say is it's significant. I think also when you look at home buyers, it's not just about being able to afford the median-priced home in a metro area; it's about being able to afford a home in the places they actually wanna live. The neighborhoods actually wanna live, the submarkets actually wanna want to live which are typically more expensive than the metro median. So that's why I think we've seen growth in things like the build-to-rent sector where you get a single-family home that's brand new, newish but you're not having to pay the mortgage for it. The last thing I would say too, is I think there's a lot of stuff to unpack around low turnover right now. I think this is part of it, as people are renting longer, the median age of first-time homebuyers has gone up. I don't think it's the only factor in high retention right now, but certainly, longer is kind of going forward. It's unless those numbers significantly come down, which can have to start with mortgage rates coming down a lot. It's going to remain financially favorable for people to be renting.
Willy Walker: Yeah, that's the other piece to it. When I showed Peter Linneman this slide, Jay, he said to me, “Well, if they can't afford the $385,000 home on the corner of the block, they'll move to the cheaper-priced home in the middle of the block.” And I turned to Peter and I said to him, “But Peter, the guy or woman who owns the house in the middle the block has a locked-in 30-year mortgage that they put on in 2022 that has a 2.75% interest rate for the next what, 24, 26 years, and they're not gonna sell it because they don't have anywhere else to go.” So even though you might wanna move down the market to not have to spend the 385k and you wanna spend 325k, the 325k house isn't for sale. So then again, you don't have any options, but you're gonna go and rent.
Jay Parsons: Well, not only that, again, I think it's also just neighborhood-specific. People who I think we've seen again and again are people who don't want to own a home. They want to have a home in a certain neighborhood, and so they're going to wait until they can afford that. A lot of times, schools matter, location matters, and just being able to afford some house isn't enough.
Willy Walker: So you talked a moment ago about the bidding process to push the cost of home ownership up. All of us in the housing industry heard Elizabeth Warren kind of get on her soapbox on the Senate Banking Committee and sit there and talk about the fact that private equity firms owning all these single-family rentals is what has driven up the cost of housing. You've shown analysis on that, that the private equity firms own less than 1% of the single-family housing stock in America or something. It's ridiculous. I think I saw a slide of yours on that.
Jay Parsons: Yeah, low single digits.
Willy Walker: Low single digits, 2 or 3%. Sorry, I under-set it, but it's at least directionally correct. You also have done some analysis here which shows the fragmentation in the multifamily industry. So we just looked at slides that say owning multi over the next several years is gonna be a really good thing given the dynamic between single and multi and supply constraints, which will push into rent growth. You'd sit there and say, “Okay, great. Well, then that means that apartment owners are gonna go out and buy inventory and they're gonna buy buildings and off we go to the races.” A lot of, I believe, politicians will sit there when they start to see rents go up again and they're going to say, “Oh, these big bag landlords are the ones who are making housing unaffordable yet again, and aren't Blackstone or others responsible for all this stuff?” I thought your analysis preempts that line of thinking as we see rent growth come back. You show in this slide the incredible fragmentation that exists in the apartment space on the left of apartments and on the right of single-family rentals. Talk about that for a second.
Jay Parsons: Yeah, no, this issue has always come up and I see these headlines saying, behemoth landlord. And I want to just look at it and say, “Look, there's no behemoths in this industry. There really isn't. They're bigger, but no one's really that big.” So this chart shows you that these are the NMHC top 50 owners. They had Greystar as number one. They're less than half a percent of the market. MAA, 0.44% of the market, is the combined top 50 largest owners. We're something like 11 or 12% of the market. So it's incredibly fragmented. Not only that, but it's also, I think, incredibly accessible for a lot of new entrants to come into this market to be able to raise capital and be a player. I can't think of any other industry of significant size like this where you can really do that in real estate.
Willy Walker: We'll talk to that because this slide shows exactly that point. Yeah, so this a great one. I love this slide.
Jay Parsons: Yeah, this is one that I was thinking about for a long time and eventually got around to putting together. What it shows you is the market share of the largest U.S. provider by industry. All these people again perceive that groups like Greystar are so big. But you know, all due respect to my friends at Greystar, you're not that big. Even the biggest players in multifamily and single-family rentals are just not that big. I mean big is when you look at…
Willy Walker: Who controls a quarter of the groceries at Walmart, a quarter! I mean, J.P. Morgan in the banking sector is at 12%. We all think of J. P. Morgan as being too big to fail. They only have 12% of total banking.
Jay Parsons: You have CVS, 26% of pharmacies, and Amazon. We all have Amazon Prime, 40% of online retail, Apple, 53% of smartphones, Visa, 61% of credit cards. AI chips are now a hot topic in the trade wars. One company, Nvidia, is 80% of it. So these are some of the biggest companies in the world. So when we see our little landlords being positioned like they're some kind of behemoth, it's a total misrepresentation of the market, which is far more fragmented than any other major industry in our country.
Willy Walker: So as you think about where we sit today with the trade deal that clearly at the onset said, we might have inflationary pressures coming through because of the trade war. The cost of goods were gonna go up, which would put downward pressure on starts, which already have massive downward pressure on the beginning. So you sit there and say, “Okay, well, that's good for owners of existing inventory.” Then you look at what is happening with employment, unemployment growth, and general GDP. The world has changed so much in the last 48 hours that as I'm kind of formulating this question, Jay, I'm sort of well, that was true 48 hours ago, but I'm not exactly sure whether it's still true today. But I guess as you look forward now, given what appears to be a normalizing, not normalized, but a normalizing, trade setup and you think about it from a housing standpoint, are you more bullish or less bullish today than you were at the beginning of the Trump administration as it relates to GDP growth, the need for housing, and all the various things that you track? Do you feel better today, worse today, or about the same?
Jay Parsons: That's a good question. I think of where we are. I think you have phrased it well. If you asked me that last week, I would have said worse. Right? I think now I'm maybe neutral to that question, maybe a little better. But I think with inflation remaining cool, I think, but there's also, I mean, there's so much uncertainty still in the market. And as we, as I know, you have a lot of the same conversations. I talk to investors, my perception is everybody believes in these supply-demand fundamentals, the undersupply, but everyone's just nervous about what's around the corner and what might drop next. So I think in that sense it's still just some cautious optimism maybe that the market will get better but ultimately everyone's waiting, as you well know, to see more capital come back in the space and put the money where the mouth is.
Willy Walker: We'll talk about that capital situation for a moment. I'm gonna pull up a slide here if I can find it for us, which I thought was a very interesting slide that I just saw this morning. Jay, you were talking about capital and capital formation. I think that this is a really interesting slide that we pulled this morning. The data on the left is from Preqin. The data on the right is from StepStone. I wanna give them credit for this. I picked this up off of LinkedIn this morning, but I think on the left-hand side, you look at global private real estate fundraising, and you can see that from 2021, where you had over $200 billion raised in private equity funds for commercial real estate, that has fallen like a stone, and that fundraising on the equity side has gotten difficult. On the right-hand side, it's just a fantastic chart that shows, first on the left-hand side of that right-hand chart, $650 billion of unrealized returns in commercial real estate that needs to be returned to investors but hasn't is sitting there. Then on the right-hand side of that graph, you have in the green, the amount of dry powder or equity that was raised that has yet to be deployed. So one of the things that we're seeing right now as it relates to the sales market, which actually has good levels today, given where rates have gone and a lot of uncertainty in the world. Kris Mikkelsen just said earlier today to me that we've had $1.4 billion of sales transactions since Liberation Day to today that have been sold and not a single one was re-traded or someone walked away from. For us, that's a very healthy volume and it's a great stat. But I think that what's so interesting about this slide is it's saying that time is up. Time is up in the sense that if you've got an asset that has value in it, you need to actually go sell it, realize the value, and return it to your investors. On the right-hand side, if you got capital that you raised and you've been sitting on it for the last couple years and you need to actually go and actually deploy it, you're looking for that buy. You're looking to put the money to work. That's a trillion dollars of both unrealized gains as well as dry powder that somehow needs to get pulled out of the market and put back into the market. After a long pause period for 2000 and half of ‘22, all of ‘23, all of ‘24, there are a lot of people sitting there going, to some degree, “The clock has run out on me.”
Jay Parsons: Yeah, well, a couple of thoughts. Number one is there's an article a couple of weeks ago that you probably saw in the Wall Street Journal that was about Brookfield raising a record fund for distress. I think it was a lot of warehouses and apartments and the tone of the article, which was a very good article, but one thing I kind of took issue with it, it said maybe this could be a signal that the capital is ready to come back. When these final numbers from Q2 come in, my guess is that we're gonna see fundraising stalled out in Q2 or at least paused a little bit because of what I've heard. Again, I'm sure you're the same thing. International investors are worried about the impact of their countries. Domestic investors are in wait-and-see mode. Endowments, which are big capital sources, are in defense mode. So I think there's gonna be some noise there. But that being said, on the other side of this, you're right. There's a lot of dry powder here with us all the time. Especially what's interesting is that everybody wants the same stuff. Right now, it relates to multifamily, which is generally newer vintage, well-located assets. In those cases, everyone's kind of showing the same thing, which is that the pricing hasn't gotten any more favor. It was kind of baking in future interest rate cuts and future rent growth into the kind of going-in cap rate. So it's a competitive market, I think, that reflects what you're showing here, which is there's a lot of dry powder, all chasing some of the same things.
Willy Walker: Yeah, I will tell you the kind of the wait-and-see attitude as it relates to, “I'm gonna get the rent growth, or cap rates are gonna come down.” I look at where spreads are right now as it relates to financing on multifamily, and spreads are razor thin. I just sent a client yesterday a chart of where Fannie and Freddie's spreads have come. I'm sitting there going, “Spreads are razor thin right now, and to try and grab that rate where it is today, even though 450 feels elevated, given where we just were a week ago.” But it feels like there are a lot of people sitting around playing the rate game, and it is obviously impossible to tell where rates are gonna go. Scott Bessent being focused on the 10 years as Treasury Secretary is a good sign. At the same time, he's got a couple of other things on his plate as it relates to trying to figure out what's going on—doing things that will materially move the long bond down. There are obviously only a certain number of levers he can pull. One of the ones that's been socialized a little bit is whether they would change the bank regulatory standards to allow it so that treasuries didn't need to have collateral against them and you could just buy treasuries and hold cash treasuries if they were cash. If they were to do that change, banks would run out and buy tons and tons of long-dated paper and that would obviously get a real rally in the long bond. Whether they do that and is that setting us up for more SVBs, Silicon Valley Bank of banks going upside down on their balance sheet is a whole different issue, but that's something that has been talked about a little bit. There was another headline, Jay, that you kind of, I guess, poked at a little, which was the Wall Street Journal headline that said, tariff war or trade war comes out at exactly the right time for multifamily owners. Talk about that one for a second.
Jay Parsons: You and I were both in Chicago when this came out, speaking at a YPO event. I kind of jokingly asked the room with all the multifamily owners in there, “How many of you feel lucky right now because of tariffs?” Of course, everybody snickers. I mean, no one's feeling lucky because of the tariff, right? But I think what's interesting, and it's not honestly, we can pick on the Wall Street Journal, but even some real estate publications like Redfin come out and put out a press release saying, “Hey, rent's going to go up because of the tariffs.” Well, wait a minute, let's think about this. You're saying because there could be less construction rents going up, sure, but supply has been, construction has been dropping as we just talked about for the last year and a half for reasons that have nothing to do with tariffs. We're not even talking about tariffs; supply was down. So any potential impact from tariffs on construction, which I actually think is fairly minimal, (Every builder I talk to says it's a low single-digit increase in terms of construction costs), is two plus years away, given the time it takes to start a project or get a project approved, funded, built, leased. So I think that again, it's not just well-strengthened. I think the perception that it’s going to lead to higher rents is very premature. Any rent rebound associated with lack of supply has much more to do with interest rates than it will with tariffs. I think we talked about this a little bit last time, but the irony to me in all this whole story about inflation and rents is that it was all this rent inflation that helped spur this biggest construction wave in 40-plus years, which in turn helped tame rent growth and push rents negative in some of the hottest growth markets in the country. Then in turn, rates have gone up and the construction spigots have been shut off, which ironically is what's gonna trigger rent inflation back up again out of sight.
Willy Walker: And oh, by the way, to your lagging indicator point, rents being up 4%. I mean, if you and I today down at ULI had said, “How many of you got 4% over the last year?”, you would sit there and one person would raise their hand and say, “Yeah, I got that across.”
Jay Parsons: Can you imagine me speaking as an economist in a room and saying, “Hey, rents are up 4% this year?” They would boot me out of the room. No one believes that.
Willy Walker: 100%, it's really interesting. Jay, as always, it's fantastic to dive in the data with you and talk about where the markets are. Any parting words as you think about being here at ULI, on the outlook, the trade agreement that was just reached with China, anything? What's the next thing you're gonna look into? What's that next chart we're gonna see from Jay that says this is gonna tell you where to go?
Jay Parsons: I don't know if there's any kind of next thing, but I'll tell you one thing we really talk about is, I think what's going to be interesting is we talked about the Sunbelt, talked about the Midwest, are some of the coastal cities really hard hit. They are core cities, but they are not core investments anymore. They're opportunistic ones and we're seeing more investors who are willing to place that opportunistic bet on the long-term recovery of some of these markets. We've seen low collections and economic occupancy issues, things like that. Buying below replacement costs we're seeing, we're hearing more of that. We're seeing a little more of it. I think that's gonna be something I'm curious to watch the rest of this year.
Willy Walker: Your data on suburban coastal areas is exceptional. That has obviously been one of the hotspots as it relates to the coastal, the suburban coastal, not metro coastal.
Jay Parsons: Absolutely. It's really important to separate the suburban coastal story. To your point, that it was much more stable through COVID. And it's been much more than that. It's been one of the best-performing segments of the market in these last few years as well.
Willy Walker: Great to see you. Thanks for taking the time. Thanks for all the great data. Thanks everyone for joining us this week. We are back next week with the same panel I had two months ago talking about the potential privatization of Fannie Mae and Freddie Mac. A lot has happened since we had our initial discussion on the future of the GSEs. I hope you'll join us next week to hear the four of us dive into what's the state of play today for the GSEs and potential privatization. Thanks again for joining and thanks again, Jay, for being here.
