← The Rent Roll with Jay Parsons
The Rent Roll with Jay Parsons
EP#53 Bobby Fijan | The Case For Family-Friendly Class A Apartments
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It's episode number 53 of the Rent Roll, your podcast on all things rental housing, apartments build to rent and single family rentals. All right, so I like to think I have a pretty, pretty decent memory, particularly of important events and important people in my life. But I am embarrassed to admit I did miss a birthday recently. Totally forgot, blanked on it. And it's our own birthday. The Rent roll podcast turned one on September 19th. One full year, 53 episodes in. I think we've taken just two weeks off since the first one aired. Episode one with Bob Simpson aired on September 19th, 2024. So it's been a full year. It's been a fun year. Thank you to everyone for cheering us on. Thank you for the five star reviews on Apple and Spotify and YouTube and Amazon and please keep those coming, if you would. It'd be so kind. It helps us out. Thank you to all of you giving us encouraging words along the way. And thank you also to our producer and the man behind the curtain, Tyler Lambert, who's been with us from day one. And now here we are and fortunate to be regularly listed in the Apple Top 100 Investing Podcasts and the top rated podcast specific to rental housing. So thank you to everybody and here's to another good year ahead. All right, so today's episode, I hope, will be a fun one. We've got a lot of headlines to cover, a busy week of news on apartments at single family rentals. And then today's interview, I think is going to be a good one. I think you're going to enjoy it. Today's guest, he calls himself the Bill James of floor plans. Bobby Fean, when I first saw this nickname, and as I got to know him, he's really active on social media and I was really drawn to his work because, you know, you call, you have the Bill James of floor plans, every baseball nerd's gonna immediately know. And if you're a baseballer like me, I mean, you immediately know what he's talking about. Because Bill James, he's the original stats nerd of baseball. He coined the term saber metrics, using data to analyze the game instead of just scouting opinions based on the eye tests and old school kind of conventional basic data like batting average. If you ever saw Moneyball the movie or read the book Thanos Book by Michael Lewis, all of that was based on the foundations built by Bill James. So Bobby spent much of his career devoting that same sort of data heavy approach to apartment floor plans. And along the way, he's become A leading voice, leading advocate and now developer for family friendly class A luxury apartments in urban locations. And he's got a newly released research study to highlight the pent up demand for family friendly apartments and address many of the roadblocks to getting it built. A hefty research paper done in partnership with Arnold Ventures, which is a leading think tank doing a lot of great work on housing and other topics. This is legit research, not like one of these like survey monkey polls put out there and get a, you know, a couple people to respond like this is, this is good stuff. So you're going to enjoy. Even if you're not interested in building a family friendly apartment, you will enjoy hearing what Bobby has to say. All right, before we jump into today's episode, I'll get a big shout out to our sponsors for first and foremost, thank you to jpi, leading apartment developer with a stated purpose to transform building, enhance communities and improve lives. JPI is a top builder in Southern California and Texas and now expanding to the east coast and west coast as well. Also, big thank you to Madera Residential, a leading apartment owner and operator in the Lone Star State in Texas. All right, so as always, kick it off with, here's a chart and just one chart today. It comes from the American Institute of of Architects. Their survey of their monthly survey of architect billings. You know, I've talked about this one before. It's a good leading indicator of future starts because before there's a start, there's an architect drawing up plans. And those architect jobs for multifamily have been trending down for three plus years now. But the August survey released recently shows that multifamily architects are now saying that's, well, it's, it's not getting worse. I didn't say it was getting better. Sound like the floodgates are opening, but it's not getting worse. Their index came in at 49.9, which I'm going to round to 50. It's a 1 to 100 scale and a 50 means unchanged from the prior month. So if I want to get really technical, you could say 49.9 means it's actually still getting worse. You know, I'm going to say it's within the margin of error. Let's call it a good 50. We need some good news here. It's a 50. Okay. And 50 means it's basically unchanged between July to August and it's been below 50 for a long time. So we're right at 50 again. Below 50 means architects are getting fewer jobs in the prior month. More than 50 means are taking on more jobs in the prior month and we're basically at that break even number. So again, the floodgates are not reopening. Let's be very clear about that. Don't read this as a big ramp up, you know, in other words, you know, I think the census data, I've talked about this previously, I think the census data is still overinflated, but I do think this aligns with other indicators. I've hinted at this a little bit, but it gives me more confidence in the view that we're also, I think seeing a little bit from the private sector data sets as well, suggesting that apartment starts may have bottomed, could be leveling off and maybe we'll even tick up a little bit. You know, I think some modest improvement in starts later this year. That wouldn't really surprise me, in fairness, in part because it's coming off now a low denominator. I mean, they've been coming down for a while. But remember, it's still a very challenging environment to start new projects for all the reasons everybody knows. Don't need to repeat this, rents, rates, costs, equity, etc. And one last point I'll make is that, well, I think apartment. I know I shouldn't say, I think I know that apartment. You all know this too. It's not just me. Apartment construction is typically dominated by small local firms. And these are conditions that we're having, the conditions we have today. Again, they haven't changed. Debt's expensive, rents are still weak. These are conditions that are especially challenging for smaller local groups that don't have a lot of scale. Okay. And so in this type of environment, I would expect to see larger developers continue to gain market share, not necessarily due to consolidation, but because they're able to drive more efficiencies of scale and better access to capital. And so in that way, I've mentioned this before, I don't think it's going to be to the extreme we saw coming out of the great financial crisis on the home building side where the big home builders got even bigger and now they're just completely dominant in the national single family home building market. But I do think we'll see something like that where through this environment, it's going to weed out a lot of smaller players and the larger ones will, even if they don't do more in terms of total starts, but in terms of their share of the market will likely go up. I think, I think that's a safe hypothesis. Even if it's less than ideal. I mean, we want as many entrants in the market as as possible from a public policy standpoint. Of course, if you're an individual developer, the fewer competitors, the better. So we'll dive into more on construction trends in next week episode. Next week's episode, we're going to be talking about some of those advantages of scale in terms of technology and staffing and floor plans, building types, what those advantages of scale look like and what larger groups are now doing to drive cost efficiencies in an industry construction that has seen very little in the way of efficiency gains in recent decades. You know, this has been well researched. Construction is one of the few industries that really hasn't gotten more efficient or more productive, you know, per dollar or per head in recent decades. So I think that this in current environment is changing some of that and escalating or expediting some of the innovation. So got some special guests joining me next week to do that. So come back next week for a deeper dive on construction. All right. Next up, rental housing trivia. All right, so today's question is going to tie into our theme today. In 2024, 53% of all newly built apartment units were either studios or one bedrooms. So how does that compare to a typical year in the 2000s decade? Okay, now this data is based on the Census New Residential Construction Survey. So in the 2000, the typical year, what number represented the share of apartment units that were either studios or one beds? Was it A, 37%, B, 43%, C, 47% or D, 53%? So again, I've already given you a big hint here, you know, but that 53% in 2024, that is, you either think that was the same number 10 years ago or that number was lower 10 years ago than it is today. So four choices. Was it 37, 43, 47, or 53% of units in the 2000s that were studios or one beds? And I'll review that answer in a bit. But first in the news. Okay, in the news, this is when we talk about headlines that impact the rental housing industry. Renters and rental property owners and operators. Quite a busy week of headlines. I got a few things I want to cover, so let's start with this first one. It comes from NPR and heard on All Things Considered popular radio program. The headline is could a Silver Tsunami of Aging Americans Fix the Housing Crisis? Okay, so we hear this sometimes, this idea that, you know, the large number of aging Americans as they move along to either some kind of senior living facility or, or pass on to the next generation. What happens those units, could that become a release valve for the housing crisis and the shortage? So let me read a little bit of this article. It says the silver tsunami of aging Americans is often seen as a potential way to alleviate US housing affordability woes. But an influx empty nester homes into the market may not be that solution. So I'm going to read some kind of snippets. It's actually an interview with several people. So I'm going to, to cover this at a very high level. It says Zillow says about 16% of households in the U.S. were empty nesters. This is defined as households where people are at least 55 years old, do not live with any children and have at least two extra bedrooms, have been living there for at least a decade. And so it's about 16% of all homes are in that category. But most of these empty nester households are located in places that are relatively more affordable already and also have a lot of availability happening. The list was Pittsburgh. Over 20% of households there are empty nesters. Others high in the list include Buffalo, Cleveland, St. Louis and Detroit. Okay, so these aren't necessarily the places where we have significant housing shortages like we hear about in the big coastal cities or the place where a lot of the growth is happening like in the Sunbelt and the mountain states. So that means we have a little bit of mismatch here. You know, the potential, the potential availability around a silver tsunami does not align to where the supply needs are are most pronounced. Plus you have a lot of other factors at play here too, which is, you know, older adults now more likely to live in, age in place, with more, you know, in home care etc. But anyway, this is an interesting issue and something that I've talked about before. Anytime someone shows me one of these housing popular or population to housing ratio charts, so they'll say, hey, you know, look at this is why we don't have a housing crisis. We have, you know, this many people versus this many housing units. And it's, you know this from this 10 years ago, 20 years ago. And people particularly, you know, housing skeptics like to use that chart and it's a very misleading one. In fact, I think it's actually almost useless for a lot of reasons. But one of them is this, I think it's, it's actually quite simple, intuitive. We just take 10 seconds to think about it. The next generation of renters and home buyers, they don't necessarily want to live in the same cities and the same neighborhoods and the same housing units that were built for their grandparents and great grandparents. So we still need a lot to, we still need to build a lot more housing, especially in these high growth markets, but also even in low growth markets because in some places most of the homes could have been built 50 plus years ago and maybe well past their functional lifespan without a major infusion of capital. Or they're in neighborhoods within a place that, in a neighborhood that people just don't want to live in anymore. And so maybe that MSA isn't growing, but the population is shifting to different neighborhoods. So that nuance is really important. All right, our next headline comes from Resi Club. Headline says mom and pop landlords still dominate the single family rental market. Batch data fines. According to batch data's analysis, 89.6% of single family rentals are owned by landlords who own between one and five properties. All right, I've talked about this a bunch, but I think it's always good to see these articles. We don't see them enough that point out the facts. The punchline from this article is this. It says institutional owners who have a thousand plus homes in their portfolios. You know, the boogeyman characters they represent. Brace yourself here. 1.6% of the single family rental market in the U.S. so you know, I know the horrors of that. If not for that 1.6%, then the housing market would be so much healthier, right? Homes be affordable, everyone be buyers. Everyone's, you know, singing Kumbaya while signing closing documents of the title office. You know, obviously I'm kidding. You know, in reality is, I mean to me, I think if we even do it at half the energy we spend chasing boogeymans on this topic, if we spend it to an actual solutions, we might actually make some dent in the housing shortages we have on the single family side. But you know, actual solutions are some somehow seen to be less emotionally satisfying than blaming a boogeyman. Anyway, you can always count on Lance Lambert and his media outlet Izzy Club to focus on data over narrative. So thank you Lance. That research piece and article next headline, USA Today Rent control gets another look amid a national housing crisis. So I read this one, I posted it on LinkedIn and shared it over the, over this past weekend and I, I, I honestly was surprised to see this in a, in a news article and maybe I'm just being too cynical, but I, I don't typically read articles like this. So major kudos to USA Today for having the courage to bluntly spell out the science and research around rent control's ill effect on communities. You know, I was joking about this earlier. Typically whenever we see articles about rent control, at best we get these dismissive references like, you know, the evidence is mixed around rent control, you know, as if like 98% versus 2%. I guess you could say it's technically mixed, but you know, I think that's kind of misleading to say it's mixed when it's that overwhelming or one of my favorite lines is always the dismissive landlords say rent control is bad and kind of go back to the main thesis of the article. So let me read what USA Today published. Four things I want to read to you from this article that just, you know, things we know. But it's good to see in print, quote when while rent stabilization may feel like a holy grail for tenants lucky enough to snag such a deal, limiting how much landlords can charge is a blunt tool that won't solve the housing affordability crisis and might even make it worse, experts say. Second thing, rent control lowers costs for some residents, but it raises costs for more residents overall. That is a net negative for affordability. The most important driver of housing affordability is whether there are enough homes. And that's a quote that the writer brought in from someone the project from Alex Horowitz, the project director, policy of housing Housing policy at the Pew Charitable Trust. Third thing, also continuing with Horowitz said he says such arguments aren't just economic textbooks ideas. There are multiple real world examples. American cities experimenting with increased supply and having rents fall as a result. And of course, everybody in the apartment business knows about the case study of Austin, Texas, among others. Fourth thing, efforts to control rental increases have led to unintended yet serious consequences, observers say in the article lists things like gentrification, reduced supply and widening income or afford income inequality associated with rent control policies. So bottom line, if you really want to do the compassionate thing and you really want to help renters in need ensure broad access to affordable housing, quality affordable housing, then let's just trust the science. Let's build a lot more housing.
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All right?
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So speaking of building housing, we've seen a novel approach taken to embrace social housing in some parts of the country. And, and so, you know, social housing is basically the idea that it's government built or quasi government backed housing as opposed to any kind of involvement from the private sector. And so, and I'm, I'm giving a very broad definition, there's a difference between public housing and social housing. But I'm so, I don't want to gloss over that too much. But social housing is going to be essentially run by public government backed nonprofits as opposed to the government itself. And more of a maybe that's not even the right way to say it's more of a co op approach. Maybe is a better way to say it that if I'm misstating that, I apologize. But let me this is a op ed from the Seattle Times editorial by the editorial board. And here's the punchline. It's a, it's I was again, just like the USA Today article. I was stunned to read this. It says social housing sounds good. In reality, it's like creating a big pile of progressive revenues and burning it. I mean, you know, wow, right? I mean that's, that's pretty interesting to see that basically the editorial goes on by the editorial board. It goes on to be talk about the inefficiencies of the program, talks about how it's entirely dependent in Seattle on payroll taxes. So it comes at a cost of taxing jobs, thereby discouraging job creation or pushing new jobs into the suburbs or other parts of the country instead of the city. And so it may not be the most efficient way to get the most housing in terms of the bang for the buck for affordable housing. And it also points out that social housing's rules around evictions are driving up the cost of operating it. They write nonprofit housing operators across the city say they are experiencing financial difficulties in part because strict tenant protections protection laws make it difficult to evict people who don't pay their rent. In effect, future financial instability is written into the social housing developer's DNA. So yeah, it's very interesting. And again, I just come back to this again, like, you know, if we want to do the most compassionate thing, we want to help the most people in need, why don't we do what's proven to work most effective and build as much as possible and look at programs that are most efficient and getting the most affordable. How do housing units built? All right, a couple more that we're going to move on. This one comes from Bloomberg City Lab. Tenants seek to unionize one private equity firm's entire housing portfolio by organizing renters across Capital Realty Group's affordable housing complexes. The tenant union federation hopes to bring sectoral bargaining to negotiations with large landlords. All right, so it talks about 1,000 renters and more than and across five states are trying to launch this first of its kind union drive and so just a quick thought here. You know, first of all, let's just state the obvious. You know, we all want as many people as possible to have access to good, quality, well maintained affordable housing. The question is, how do we best do that? And I think it's important for policymakers and housing advocates and property owners to work together in good faith to find the right balance of addressing immediate needs without triggering that law of unintended consequences. We want everyone to have access to affordable housing. So getting closer to that goal requires ensuring that investors and lenders are incentivized to invest in building and maintaining affordable housing. Otherwise, they'll invest in other sectors and our shortage of quality affordable housing is going to worsen. So I do hope those conversations continue and we focus on collaboration over demonization. And because if we don't and the sector's not liquid, the challenges today around quality affordable housing are going to worsen. And there's perhaps no better example of that than what's happened in New York over the last almost decade. So here's an article from BizNow. It says how New York City retirees got burned by bets on rent stabilized apartments. So I don't know if there's a more illiquid segment of the US Rental housing market than New York City apartments subject to rent stabilization. So this headline captures that. The, the, the, the, the irony here is now New York City's own people, city retirement accounts for teachers and police and firefighters are now reportedly getting burned by investments in New York City's rent stabilized apartments.
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So the first.
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Let me read this article a little bit. It says the investments were expected to have returns between 9 to 12%. But more than a decade later, they have lost close to half their value, According to a BizNow analysis of property records and city data. So half their value. And the article notes that a big reason for this is the 2018 change in state law that enacted a more extreme version of rent control vacancy control on rent stabilized apartments. And that was a big contributor in reduced property value. So sadly, the city's own retired civil servants have been collateral damage of titan rent control laws in the city. All right, let's get back to our rental housing trivia question of the week. The question was in 2014, 53% of all newly built apartment units were either studios or one bedrooms. How does that compare to a typical year in the 2000s and decade? So was it 37% back then, 43%, 47% or 53%? The answer is a just 37% of apartment units built in a typical year in the 2000s would have been studios or one beds. Today it's 53%. So that's a real meaningful swing of 16 percentage points. And that's a lot for a national data set like this one. So it breaks down to today. 7% of units are studios compared to 2% in the 2000s. 46% of units today are one beds compared to 35% back then. 2 beds, 37% today versus 46% back then. And so one is in two is a basically flipped in the pecking order with ones now most prevalent. And then the three or more bedrooms, they're just 9% of the units today versus 16% in the 2000s. And Bobby's got some good data on this. Our interview today. I'm going to get into this with Bobby, but one thing I think is worth calling out is that the pivot to smaller units was driven by a few things. For one, smaller units typically command a higher rent per square foot. Square foot. And so you may think you get more value from that. But number two, while it's a higher end per square foot, it's a lower average monthly rent, lower, you know, chunk rent. And so a big part of this is making your apartment more affordable, relatively speaking. But that's not always the best metric here. And Bob is going to make the case that we might be thinking about this in the wrong way. Maybe we're short sighted in the conventional thinking and maybe we're missing a lot of pent up demand. So we're going to dive into that today. So that leads us right into today's interview. It is sponsored by funnel, the AI and CRM software trusted by four of the six major REITs and many more leading operators like BH and Cortland. To learn how Funnel can help your property centralized operations to automate everyday tasks, visit funnelle leasing.com so here's our conversation with Bobby Fion. All right, welcome to the interview portion of today's podcast and I'm honored to be joined in studio by my friend Bobby Felon. So Bobby, thanks so much for being here.
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Thanks so much for having me, Jack.
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So Bobby, you are the co founder of the American Housing Corporation, like it says on your hat. So you are building family friendly housing units and urban locations. So first of all it's great to see and but talk to us about, you know, one of the things that way we got to know each other and how you've built a name for yourself is you have a real passion for family friendly Urban housing and apartments making it easier for families to stay in these urban locations. So tell us about the origins of that passion, your personal background, what got.
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To interest in this topic, personal and professional. So I'd say the personal one is, has gained prominence. Right. Like or meaning for me over the last, I don't know, however many years. But it started because I met my wife in the city. So I was a, I was a super senior and she was a freshman and we met at Bible study and we got engaged the next year. And so we got married while she was still in college. And so we were still going to live in the city. And so I stuck around and started and started working there and then we joined a church that was also downtown because we got some really great advice from an older couple who said if you as part of pre marriage and as part of like early marriage, you should practice other people's children. So there's only one other church in our entire city of Philadelphia that was large enough to have a children's ministry. So we started going there and meeting other families here in the area. And then when we finally had kids of our own, we just, I guess fell in love with being in the city and having our, having our child there, being able to walk to church and things like that. So it was, it was a wonderful experience. There's a lot of challenges about living in the city, but I'd say the thing that we consistently found is that I just would like more people to view that as an option. So it was wonderful and meaningful for us and I want that choice for other people too. And also I want more people to think of that as a choice.
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Sure. And I think also have the, this leads to your survey. You want, I think more people. Don't want to put words in your mouth, but have those people have more options as well.
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Indeed.
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So talk to us. So you just completed what I think is probably the biggest survey ever done on family friendly apartments and floor plans.
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I think, I'm not sure anyone else has ever done floor plans either.
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Yeah. And you are the Bobby James of floor plans. So tell us about, give us a little bit before we get into the results. I'm going to share some of the highlights. You'll walk us through it. But talk to us about the survey and how you did it.
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Sure. So this is something that had been tickling the back of my mind for a very long time because as you mentioned, I've wanted to build family oriented housing within these different markets and I've been a developer or an investor for a long time. But as someone who's also fiduciary, right. Like you need to build what the market actually wants. And I would say that is the, I'd say that is the one of the biggest impediments to building family friendly housing. And there's a few different ways we can define that, but at any, the main difficulty is just like, where's the data for it? Right. It doesn't exist. And it's one of the hardest things to get investors and especially lenders on is investing in some new kind of like innovative thing, whether it's technology or software. Real estate is just not set up for, in those kinds of like new things. So to answer that question, it, it felt like something that ought to exist. Like, I know people who have children who are in like very high income areas, who have the ability to stay, who want to stay, who express the desire, who said like, wow, Bobby and Bethany, we love your apartment. If something like this was available, we would, we would take it. And yet that somehow wasn't getting picked up in the numbers. Yeah, so that's, I would say that is the origin of how I wanted the survey to begin. And so I'd say how it actually happened was I think almost 18 months ago now. I was at an event that was sponsored by Arnold Ventures, who's a really terrific think tank that likes to sponsor different types of research. And I met another fellow researcher there, Lyman Stone, who's at the Institute for Family Studies. And he studies a lot of things on demographics. And he also cares about families and people having children. And so he and I sort of pitched together the idea of working on something where we could design a very like tailored study, I think to get at the core problem or try to get at the core impediment of like why people don't build the product. And so I think, I think we did a really good job of designing something that was really narrow, that didn't try to get too pie in the sky of what, what could be really great or what different type of zoning we do change or we need to like change the number of stairs, but rather in the housing type that we are already building now, how could we make changes that would be slightly family friendlier and if they were done, would people actually want that? And I think that was, I think that's what, I think that's what the survey did. So the survey was designed as three pairs or six floor plans and three pairs. 750 square foot pair and 1100 square foot pair and a 1200 square foot pair. And we chose those because those are the fairly standard sizes in almost every market, both like urban and suburban, among like new type 5 apartments that are going up and even some, you know, garden style as well. So we picked those boxes to say if people have preferences within these boxes, then it's actionable. And the small intervention that we showed or that we tested in the survey was do people in these boxes prefer to have an extra room essentially or a closet for the secondary bedroom or for the master bedroom in a really small measurement? So that's basically what we're testing. And it turns out that there were a lot of people who said that they preferred that orientation.
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Yeah. Having their experiments. We'll get into that. But one thing I'll make clear for everybody listening then is like you guys, this is a legit study. This isn't like some survey monkey poll you put on social media. It has some real rigor to it. It does. It does, yes. That's great. Obviously Arnold Ventures is a big name and they do strong research. So one of the conclusions I found striking. I'm going to read to this to those of you listening. It says building more family friendly apartments would likely increase birth rates for young Americans. And so Bobby, you know, our, our friend Moses likes to say he's pronatal. You feel the same way for pro babies. And so I get excited seeing this. You know, I have five kids of my own. So explain this to me. What makes you so confident that Americans would have more babies if apartments were family friendly?
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Well, I have to confess that some of the confidence is, I think like anyone who tests things in statistics, it's something that I want to be true. And I think the data doesn't deny that.
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Yeah.
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And I think that if you decide that is true, then it does in fact confirm it. So what makes me think that? Well, within various. Within it. I'd say it's very clear prior to this study that there have been numerous other studies in the past on tracking fertility based on bedroom count of other housing types.
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Yeah.
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And there was a very large jump between one bedrooms and two bedrooms that the total fertility that is achieved like on. On your specific living situation is affected by the number of besion pad. Again, it's fairly common sense. Like you need somewhere to put in order to put the child. So I would say that the thing that makes me confident that this would in fact do that is one, if we make these changes within these boxes, large numbers of people within the shave indicated that they were more likely to be willing to have a child.
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Right.
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And we even asked them between these two departments, which would you rather have another child in? Then there were clear choices for someone saying that they would rather have the extra room again, somewhere else where there's a closed door. Whether that closed door is for your office, so your kid plays in the living room while you have like a closed door and doing some work at home, or whether that's like the, or whether that's your one child's nursery. And so I, I also believe very firmly that one of the reasons why the fertility rate is declining in cities is just because there are not as many people who have children there. And I think anyone who's lived in those different areas knows, like, once you get in a little sort of cohort of friends, once someone has a baby.
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Then a lot of other people, Babies are contagious.
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They are contagious.
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They are.
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And so I think that, like, what makes me so confident that it's going to increase the fertility rate is, like, it only takes one to just be willing to do that. And then if you see a baby in your building, then I think without it being preachy, without it being some overly moralistic thing about babies, it's just, it's, it's, it's, it's nature, right? It's the way we were created. Like, if you just see, if you see another baby in your building, I think you're just far more likely to say, well, I could do that too. And so to me, I think the, the pronatalist, like, thing that we want people to do is to be able to, I think to be. Is we want people just to pull the goalie. I think that's just, it's a, it's just making people feel comfortable enough to say that, like, I would be willing to have a, to have a kid.
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Well, I think we could fairly say that babies are important to the future of civilization. All right, so another. You've touched on this a little bit. I want to dig into this in the study. It says among apartments with a similar square footage, some apartment layouts are systematically better for family life than others. Open floor plans with fewer rooms per square footage had far lower ratings by Americans interested in starting a family than identical square footage apartments with more subdivision into rooms. And those ratings translate into willingness to pay higher rent for more bedrooms. So this is really interesting for the same square footage, if you can just repurpose some of that space for another bedroom, people will pay more for it. So why Is that I'd say that's.
- [34:17]
A
Just what came out in the survey. So like it was as simple as like. Again we showed people two different plans, same exact box. One has the typical like split two bedroom layout and the other one has the same layout but there's an extra room in there. Again it's basically swapping a door that enters into the living space for a closet that would be entered from the secondary bedroom. The other side of the room, the master we actually left unchanged in order to make the comparison be as straightforward as possible. So it's just one side of the building. One side of the apartment is the same and the other one is either bedroom bathroom closet or bedroom bathroom extra room. And there was a, it depends on the different, on the specific floor plan type. And I encourage everyone to go read the report in depth. But like it was as much, it was as high as like as a 50% like greater like increase of choosing one over the other. So we took all these different like floor plans and basically put them head to head like like a chess match so to speak or like sort of a war game. See which would you prefer? Turning lots of different dials and other sorts of variables too. But what ended up coming out was across urban, suburban, across the entire like 6000 person sample which was distributed across like the cohorts from I think like 18 to 50 all in the US there was a. Among people who had or open to having a child, there was a marked preference for that extra room. And when that was paired against other kinds of actuators, they preferred the extra bedroom weighted higher in terms of where they listed important amenities in terms of higher where they listed different important attributes over every other amenity.
- [36:03]
B
So they'll give up a little bit some of the closet space those in the layout. But would that we sacrificing all in the open living space kitchen area. Is that minimally?
- [36:12]
A
Minimally so some.
- [36:13]
B
But they're willing to get a little bit of that too.
- [36:15]
A
There's like maybe might have been a foot but like maybe six inches to a foot. But it was primarily, it was primarily just.
- [36:23]
B
So we have that much wasted square footage in the standard floor plan then in some of these units.
- [36:28]
A
We do, we do. And the two things, the two things that waste that the most are in the typical split two bedroom. The secondary bathroom usually has two entrances. One so it's ensuite for the second bedroom and the other one which is the public entrance. So with the different accessibility requirements there and then the larger closet in the secondary bedroom you're able to get a. If you get rid of those two different sort of design requirements, you can add an 8 by 10 room.
- [36:58]
B
That's amazing. Yeah, that's amazing.
- [37:00]
A
Everyone go look at the floor plan. But it's very simple. You can look at it side by side. There's really nothing to it.
- [37:05]
B
Wow. All right, so on a related note and read again from your, from your report here, it says apartments represent a growing share of new housing and the average apartment constructed is getting smaller over time, which is a problem because people in small apartments have lower rates, progression into, of progression into marriage and fertility. And Bobby, I, you know, I agree on this one because what I've noticed, and I think this gets even beyond the family dynamic here, is that a lot of developers we saw, I saw this coming out of the GFC in the early 2010s. I'm seeing this now. There's this, there's this tendency to want to go smaller to make things more affordable. But what I would come back to is, hey, we're talking about new construction. Unless it's subsidized or workforce tax credit of some type, you're not affordable. This is class A. And affordability is not the challenge. You have high teens, low 20% rent to income ratios on most of this. And so you trace it. And so let me build on some things you said in the report. You said builders use erroneous conventional assumptions about vacancy rates which ignore the fact that smaller units have higher vacancy rates, higher turnover and higher rates of budget constrained residents who may miss payments. And so, you know, the smaller the unit they becomes, you know, you're getting the rent lower, but they're going to pay more of the rent to it. And so let's unpack. I know I just read a lot, but let's unpack this. You know, why are developers getting this wrong?
- [38:23]
A
So I think, I think generally like it was a rational decision when was made at the time. Like, I think, I mean starting in, starting in the early 2000s, right. I think like, who was it? Richard? Florida first, like mentioned like the rise of the creative class. I think that was written in 2002. That's when there first started the interest in, you know, coming back to cities. But post GFC there was a significant like movement of jobs like towards cities. Right. I think like, I think like half of all jobs like were like in the top 20 metros. Right. Like post GFC. And so there was a lot of people moving these into areas and those Katsu moved with a lot of High income. And so I'd say why were there, why were studios built? I think because in a low interest rate environment where you were protected by stably low or high depending upon views at like cap rates, the thing that people were chasing was high reppers per foot. And it is always the case that like a marginally smaller unit will have outsized like increase in like rent per square foot. So I think like as, as competition for land got fiercer, right. And as cost of capital got like more intense, the way to differentiate was to build smaller sparring units. So I think like before junior one bedrooms weren't really a thing. And then, and then they've like sort of stormed onto the scene across like every, across every market we're like so, so in D.C. like half of all like the mid rise buildings they have, there are all like these shared light like junior one bedrooms. That product type is coming, is not all the way in Texas, but is in many Texas markets now. And so I think it was just the, the constraint of, of chasing pro forma rent per square foot because that was the part that I think is easy to say, to look at comps and say, well if we shrink units by 10%, the rent is only going to fall by 5% and that's a fairly straightforward underwriting exercise that you can do. And then those other downsides around operations and turnover and vacancy. Well one, I would say I don't think that many people underwrite those into untrended yield and cost in general. I think most people just take market rate per square foot, multiply it across the different unit types and then vacancy is what, just 5%?
- [40:42]
B
Right?
- [40:42]
A
Because yeah, it's like that's your, because that's what your lender is going to give you credit for right now. And that's where I think that now that we're in a different environment, there are certainly buyers who are not taking that into account the same way. So I think they weren't making those adjustments because when the agency lenders on the permanent takeout loan were going to give you 5% anyway, then there's no reason to be more concerned, conservative. But now we're obviously in a higher interest rate environment and there are, as I'm sure you've met too, like plenty of buyers who are passing on different assets because they don't think the operations are going to make sense based on the unit mix or they thought that the developer got too aggressive with the parking ratio or things like that. And so that I think is what did it. So anyway I don't mean to critique people too much because I think it was just people responding to rationally to the incentives that were there at the time. Yeah.
- [41:39]
B
And as you alluded to too, I think lenders sort of drive developers to what's been tried and true and all that. But I'll give you on the extreme side though, I remember about 10 years ago there was a study done on studio, I'm sorry, micro units, so small studios. And so we see this, hey, in Asia, we all seen the pictures of the toilets built in the shower and things like this. And people are like, oh, then we can do this in America. We'll make things more affordable. And so basically what this study showed was that people like this in theory, but in reality, in America, we like our space. And these units ultimately had extremely high turnover and they're harder to backfill because it's just, you know, yeah, you're getting location, but just it's not a desirable, you know, place to live. And so, so then on the flip side of this, Bobby, you know, we, I think the perception among a lot of developers and owners and operators is that the larger units of three bedrooms, they take longer to lease. And some of them will say, hey, you know, Jay, I see this. My rent rolls, they take longer to lease. And so, Bobby, I want to ask you, because I know you've done a lot of work on this, even prior to this recent study, how much of this is families not even knowing about the three bedroom apartment unit as a realistic option because, you know, they're, they're not being marketed to.
- [43:00]
A
Yeah, it's a chick. I mean, it's a literal chicken and egg problem.
- [43:05]
B
Yeah.
- [43:06]
A
It is certainly the case that like, families are not marketed to in the same way that other renter cohorts are. And we were joking before, earlier, but like, I don't think there's any more cohort that is more marketed to than, you know, renter than a single person with a dog. Right. Like that is the, like the gold standard, like type renter. Everybody wants those. And it's very clear, like you can't walk by an apartment building without saying like, pet friendly.
- [43:27]
B
Right.
- [43:27]
A
You would not, you would not see a sign that said kid friendly. Even though they're all required to be kid friendly and they just, they don't, they don't put that forward out and mark it that way.
- [43:36]
B
Oh, no, they're required to be able to have kids, not be kid friendly.
- [43:38]
A
That's correct. That's correct. Yes. Good. Yes, that's True. Right. So they are required to accept children. But, and that's I think, where the other part about design does. I would say that like design necessarily discriminates and I don't use that term like in a legal sense, but more of just like it. It prioritized to certain types of uses. Right. So I mean the obvious example kind of going back to the floor plans is I don't know any parent who thinks that the appropriate layout of space would be for their bedroom to be the same size as their toddler's bedroom. And yet that is how two bedrooms are generally laid out to be approximately like equally sized. Again, that's perfect if it's two roommates splitting rent. But it's not ideal for other sorts of, for family situations. Now it is certainly a challenge and my company's dealing with us now, but it is a challenge to learn how to navigate appropriately, proactively marketing towards families. I think that can be done. There are a few developers who are going forward with that now and if you look at their collateral, they are far more forward about the fact that they are just showing that they have a juggle gym like in their menu space or they are just showing that there are children milling around on the top floor of the rendering. And it isn't just young adults. So I think, I think it's, I mean it is possible to do because people are doing it. But I think that the design of the units, again, when you have in particular bedroom bathroom parity, like when you have a three bedroom that has three bathrooms, it's going to inflate the size of that unit to a degree where it's really only going to make sense when the rent is like divisible by N, like where N is the number of inventories. It isn't really going to be great for a family. So that's why I think those units are going to be smaller. They're going to need to have like, it's going to be like a 32 or 31 and a half or a 21 or something like that. It's those types of units combined with prospective marketing that I think like make something truly family friendly. Amenities could make a difference. But, but if there's one thing that I learned from like, I mean my family and I lived in an institutional building for seven years with all three of our kids and it wasn't designed for children and yet they just made it work. Right. My kids climbed on and played on the pool tables, right. And we moved like the, the couches out of the way for the movie theater room which no one ever used to watch movies we moved to. We used to like walk around and or the kids used to like run around and and jump from cushion to cushion. So I think the amenities can be good but it's mostly the combination of making it clear in the unit and then there just being children there that it's friendlier for children. Yeah.
- [46:23]
B
I don't know if any class A buildings will put pictures of kids jumping on the French shirt, but I feel like every time I see children on a website for property it's usually affordable housing or that's when you'll still see a playground as well. But on the class A stuff like you're talking about, you just don't see it. I don't see it it very much so I'm glad you're doing it.
- [46:40]
A
I'm trying.
- [46:42]
B
One of the key recommendations here probably I'm going go back to this again is I know you talk about about this a lot in some of your postings and whatnot. Exempt family friendly units from floor area ratios. And so first of all, just for those listening, can you define that? What does it mean to exempt family friendly units from floor area ratios?
- [46:59]
A
So this is the section of our report where we talk about possible policy level solutions. So I, I mentioned this one because there are a few others because there are a few jurisdictions that are suggesting that they're going to do this this, these kinds of changes in laws where for certain types of units it will just be exempt from counting in the total bulk. So first of all, floor area ratio is the multiple of the lot size times however large your building is. So a two floor area ratio means if it build if your lot is an acre then you can build a total rent or gross square footage of two acres inside. And there's different. One of the fun parts of being a local developer is there are different definitions on what counts as floor area in different areas. Sometimes it includes stairs, sometimes it doesn't. Sometimes it includes the parking garage and sometimes it doesn't too. But that's a fun game to play in getting the weeds as a local developer. But the I think the principle is that you get more of things that you, that you proactively want. And I'm, I certainly appreciate the work that a lot of other pro housing people are doing. That's not my calling and I, and I appreciate that and I appreciate that work they're putting into it. I think that a way if there is a desire for a local city to be More family friendly or to have more couples who could have a child there. It would be to take those units out of that total calculation in a similar way that like people are taking affordable units out of that calculation. So if it meets a certain threshold of income, then you can build as many of those as you want or you can get extra like height requirements there. So I would like to see something similar for units that were designed for families. It would be have to be very, it would have to be very carefully done. I don't exactly know a solution, but I think it would be that intent.
- [48:58]
B
Yeah, this goes back just the general idea of hey, you know, if cities want a certain outcome, you have to incentivize it or encourage it. You do. And so I think that's a, an interesting idea of how cities can play a role in. And ultimately, I mean that makes cities more vibrant to have kids inside their living in the city, right?
- [49:14]
A
No, but I think it's, I think it's actually, I think it's critical. I mean the cities have this incredible magnet of like drawing in and I think they will always do that regardless of whatever issues that have. It's always going to be the place to be. If you're 22 and young and ambitious, like you're going to go to the city, right? Like even if you're going to go back home eventually, like the call of New York or Chicago or San Francisco or Dallas or an Austin, it's just different. And so I think people are going to want to go there first. And it is a. You are. It is a waste if people who fall in love with that city, with that neighborhood are unable to stay. It makes, it makes cities far more reliant on, on commuters, on public transportation and they have to get other things right rather than having some percentage of the population who can stay, which I think then makes the rest of the different things get better. There's no better way that I can think of for public education to be reformed than for there to be a lot more four year olds, right, like who live in the. And then a fam. Like series of families can come together and hold hands and say, well we'll all send our kids to this kindergarten because we live here because we love the playground, we love the neighborhood and we'll try it out. And so I think that's the, it's the way that incremental improvement can be made. And if they don't, it's going to unfortunately just turn into this a less, much less interesting churn. I Think we've all, I mean, we've all been in neighborhoods where it's only one like demographic type and that works in college, but it gets boring after, like, after that.
- [50:47]
B
Absolutely. And once you're not in that life stage, you don't feel like you belong.
- [50:50]
A
No, exactly, exactly. It's like I had a child and you move. Right.
- [50:52]
B
Yeah, that happens all too often. So let's get back to floor plans, amenities. What are the other keys to you? If like someone says, hey Bobby, like I want to build a family friendly apartment, like, what are you telling, like, what's your kind of quick pitch on what a family friendly apartment looks like?
- [51:08]
A
Well, I think there's a. I'd say, I think the easiest way is to look at the few examples that do exist. So I think the easiest one practically on something that could like pencil and make sense is where you have amenities, square footage. Add a child's playroom. Right. It doesn't require. There are plenty of the Glen said don't even have windows. Right. It's the same place that people put space like for excess gyms, for movie theaters, for all the other sort of amenities that like, frankly are just there to check a box. I think like, that is a powerful signal to someone who's walking through the building that like children are welcome here.
- [51:48]
B
Yeah.
- [51:49]
A
And hopefully there in fact wouldn't be families who were there. Clearly like, you should, I think, like any good product think about how would I want these units to lay out? Right. I mean there's, there's very different kinds of. I would say so as the way we've approached designing units like we have in all over different areas a place like where strolls just grow like near the front door. And that isn't generally something that you see in other sorts of apartments, mainly because the interest straight into the kitchen. So there's no sort of like drop off area. But anyone with a toddler knows that like wear boots and muddy like strollers and other things like that go. Ends up taking over like that entire space if you're not. If you're not careful and can end up up functionally sort of evicting you from your own house if there isn't those sorts of things to do. So I would, I would mostly just suggest someone to, you know, think like a young mom or dad and say, like, how would you want these things to be laid out again, given the strictures of the basic like apartment layouts that we have.
- [52:50]
B
That's such a great point. In fact, it makes me think like there's so many times I'm in a, not even apartment, like a retail complex. I'm thinking the same thing. It's like you idiots don't think about all the moms with the kids who are trying to figure out how to navigate.
- [53:00]
A
They want to spend money, right?
- [53:01]
B
They want to spend money. Yeah. So they're going to go where they could operate with their kids.
- [53:05]
A
One of my favorite things about traveling a bit to like Austin is like I love like, I mean that place is chock full of just like the breweries that have just like the playground. Right. Like more cities should have that. Those are phenomenal. And just that little bit of family friendly thing makes it like awesome. You drop off your kids.
- [53:21]
B
Oh yeah.
- [53:21]
A
They run around and play and, and you, and you get to have a drink with your wife.
- [53:24]
B
Yeah, no, I've seen more of those pop up in the DFW suburbs and even Dallas in the city. So those are, those are good places to be. You want kids to be happy and you want to actually get a good meal. You know, like you can only go to fast food so many times. So let me ask one more question, Bobby, and that's the question. Most of us, we were talking a lot about the cities, but the reality is in our business most apartments would probably, we'd call suburban garden apartments that are built in somewhat of a concrete jungle. So is it still applicable in that setting? Is there a case for kid friendly, family friendly units in a traditional garden apartment property?
- [54:02]
A
Yes. So I would say that the, the clearest example was that like you know, in the sample that we surveyed it included many people who lived in and wanted to live in suburbs rather than the city. So we'll, we'll eventually break out the cross tabs to show that like explicitly. But I would say like there was still an under supply of both one and two bedroom like boxes where people wanted that extra room in both the 750 square foot version and the 1100 square foot version. So the one bedroom den and two bedroom den like doesn't exist in almost any market, urban or suburban. So I would encourage every developer investor to take I'd say seriously the data that we've provided to just look at your markets because I'm pretty sure they're severely undersupplied of this particular type. Whether or not you care about families and you just want to be a good fiduciary. I think, I think it behooves people to, to look at, to look at that, to look at that part. I'D say. But to be even more specific about certain places where family oriented housing does work, I'd say like it is clearly the case that, I mean, I think you probably know this better than I do, but I think the fastest growing, like new asset class, like within real estate is like, is the build to rent.
- [55:23]
B
Yeah.
- [55:24]
A
Family rent.
- [55:24]
B
Absolutely.
- [55:24]
A
Right. And so I would say like the thesis is basically the same but just with like a slightly different product. So you need to think like, all right, all the people who we know who are moving to these different, like build to rent townhome product or single family product, they're usually mid to late 30s. Right. High income, very high. All right, was it, is it very high or very low? But like their income to like rent?
- [55:49]
B
Yeah, low rent income ratio is, is very strong. Yeah.
- [55:52]
A
And since these people didn't come for a home for they came from apartment somewhere and they have a child with them. So to me, like, I think the case for that in the suburbs is they're willing to move there. So the only question is, is it possible to make changes to the floor plans or to the apartment type such that that that person would have stayed longer in their previous apartment. I know maybe there are things like either school district or being near family that are going to obviously play a part, a strong part in that as their child gets older. But I think like there is huge amount of value to owners in extending the occupancy of tenants who want to stay, who you would want to stay too. Like high income, stable couples who have a kid. Right. Like, should not be someone that you want to like see leave. Or it should be a sad day when. So if there's something that you could do from either a service perspective or from the physical unit design perspective, like that seems like a good business.
- [56:50]
B
Now I would assume too, like with these floor plans you're talking about an extra bedroom even if you don't have a kid. That's probably going to stand out in the market to those who just want the office space or something else. Right?
- [56:58]
A
Absolutely. And I think like the best, the best name for these units, I, I heard from a, from a friend at Related who said, who just called them baby maybes. Right. Like, so it's a, it's just a unit and it has a space and it is a great home office or it's a great place to put your ski gear or something. And then if you have a kid, you can keep them there. Because to me, I think like the, the main actual anecdotal decision point at which people are losing families is when they find out they're pregnant. Right. So your first call is like, mom and dad, we're so excited. Best day of our life. This is wonderful. And the second one is like, we gotta go look on Zillow.
- [57:38]
B
Oh, shoot.
- [57:39]
A
We can't find a house. All right, I guess now we're gonna go call, like, you know, the build to rent, like, townhome or single family rental group. And if we could just delay that decision where someone could say, all right, maybe it's not ideal long term, but this is the place where we can come back from the hospital.
- [57:55]
B
That.
- [57:55]
A
That's a. That's a year of renewal.
- [57:57]
B
Right.
- [57:57]
A
And then after that, I mean, no one knows what they're doing for their first. Maybe it works. Maybe you can have your second. Right? I mean, I'm sure we both know lots of people who have. And my sister has three kids in a condo co op on the upper west side of New York in a very small apartment. A lot of people make that work. Right now, is that for everyone? I don't know. But, like, people can make that work. And the way they figured that out is they just try it.
- [58:20]
B
Yeah.
- [58:20]
A
So.
- [58:21]
B
All right, so try it. Kids in the city. That's right. Well, Bobby, this has been fun. Thanks for doing it.
- [58:25]
A
Of course. This is wonderful.
- [58:47]
B
And that's a wrap on episode number 53 of the podcast. A big thank you to Bobby for being our guest today.