← The Rent Roll with Jay Parsons
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And welcome to episode number 55 of the rent Roll, your podcast on all things rental housing, apartments, single family rentals and Build to Rent. Coming to you this week from beautiful San Diego here in town for an event. And so taking the at least the solo portion of the show on the road here. Well, it's that time of quarter fresh data and therefore a fresh take on the state of the US Multifamily market. And you know, it's tough out there if you're an owner, an operator, developer. It's a renter's market. And of course we knew going into 2025 it'd be a, a renter's market, but probably not to this extent or for this long into the year. And I'd certainly count myself among those who expected to see at least modestly more rent growth by this point of the year. But the key story nine months into the year has been mixed signals. Demand strong, rents weak, just like it was last year. So so much for survive till 25. Now everyone's rallying around. It'll fix in 26 and maybe if some of you have already pushed to, it'll be heaven in 2027. So why are rents so weak? Do we have demand side softness? Any sign of the weakened economic growth translating to weakening demand for apartments? Any sign affordability related, related issues? You know, talk about this a lot. I think anytime there's any problem in the rental housing market or the any housing market in general, everybody always wants to point to affordability. So is it that or are there other issues at play or is it all about supply? Well, so we'll get into all that today. I'll give you my take and then we'll dive in deeper with this topic with our guest today, Allison Boddy, the senior vice president and for research and data at Ketler and also the vice chair of the National Multifamily Housing Council's research committee. And Allison's a highly respected voice in the world of apartment researchers, so stay tuned for that. All right, before we dive into the data, I want to give a big shout out to our sponsors. First, big thank you to Madera Residential, a leading apartment operator and owner in Texas expanding into the Southeast. Check them out@maderaresidential.com and and also shout out to JPI, a leading apartment developer with a stated purpose to transform building, enhance communities and improve lives. And jpi, of course, is active in Southern California, Texas, and now in the Pacific Northwest and the Southeast as well. Check them out@jpi.com. all right, so let's jump into it with here's a chart. This is when we dive into latest data. And again, today's episode is all about the state of the multifamily market. And the key theme for this year so far has been uncertainty. And we've used that word a lot. I've used it a lot. I'm sure all of you have as well. I mentioned this last quarter it was the big theme of Blackstone's earnings call. Of course, more broad than just multifamily as they're talking about the state of the market in general. Uncertainty and the Q3 numbers add to the uncertainty with some very mixed signals. There's something for everyone to latch onto in these Q3 numbers. There's some chew toys for the doomsdayers and there's some positive indicators for Optimus too. But really just mixed signals. That's the best way to say it. On the negative side, it's obviously all about rents. And here's the key Data point for Q3 rents fell 0.28% for the quarter for new leases and you might think, well that ain't so bad, you know, 0.28%, that's nothing. And certainly it's not a big number, but it is a significant number. There's difference between a big number and a significant number. This is a significant number because the first time we've seen a Q3 rent cut since 2009 and we all remember 2009 was not a good year. Typically rents rise seasonally about 1% or 1 1/2% or so in a Q normal Q3. This year they fell. And now also the year over year number for year over year effective rent change for new leases on a same store basis. That's negative for the first time this entire cycle, that is or at least going back to the COVID period. It's NET now negative 0.3% of according to RealPage. Other data for other data providers are showing slowing rent growth as well. COSTAR is still a positive number, but it's pulled back closer to zero. Similar trends among the big data providers. So clearly this is the big story. So you might ask naturally ask because I know some have is 2025 another 2009 and I'm seeing a lot of folks want to make that comparison and I want to make this point regardless of how bad you think 2025 is. Realistically comparing 2025 to 2009 is a dumb comparison. And that's not to downplay the weak economic signals we see at the moment. Particularly with the weak, particularly with the job growth evaporating of late. And right now we don't have numbers right, because of the, because of the federal shutdown. But the latest numbers we did see and other private indicate private data tracking we have the market shows a weak job market and that's obviously problematic. I'm particularly concerned about something Jerome Powell noted a few weeks back, which is that recent college graduates are having a hard time finding jobs out of school. And that's obviously a key demand pool for apartments and maybe pent up demand for apartments if the economy picks back up. But Also I remember 2009 very well. I got into this industry in 2009. It was undeniably a first, a worse year, I should say undeniably worse year in 2025. So let's just compare a few key stats from 2009 versus 2025. Just for, just for argument's sake here let's look at supply trillion basis. 2009 we had 184,000 units to 2025, 415,000 units, huge difference. Absorption on trailing twelve month basis. 2009 negative 70,000, 70,000 net move outs. In other words, 2025 we're plus 600,000 units or 500 to 600,000 depending on which data source you want to, you want to use. Either way, huge difference. Unemployment 2009, 9.8% 2025, 4.3%. Again, huge difference. Additionally, unlike in 2009, here in 2025 we see still a flight to quality over a flight to affordability. People are moving up. We see in the COSTAR data demand is up. Market demand is chasing, you know, they're chasing deals for sure. These are qualified renters chasing better units that are been well priced right now, often with the concessions. Secondly, we're not seeing really any sign of renters doubling up, at least not any scale. We're seeing very low renter turnover still and we're still seeing improving rent income ratios. Those aren't the typical indicators you'd see in a real slowdown. And again, don't mishear me, I'm not saying it's all sunshine and rainbows out there by any means. There certainly are some signs of softening demand drivers, particularly in certain markets. We'll touch on that in a moment. But curiously it hasn't yet translated to absorption issues. You know, back in 2009 we had real absorption issues, obviously net move outs. We had absorption issues in 2008 too. And maybe 2026 could bring a real recession and actual absorption challenges. I sure hope it's not. And that's not my base case outlook, though it's certainly in the realm of possibility. But again, my point is 2025 is not 2009, nor does it rhyme with with 2009. Today's challenges appear to be far more related to high supply, remember at the highest levels of new apartment supply in nearly a half century. And that's clearly a bigger factor than potential demand side issues. Now, there is one major economic indicator that's worse today than it was in 2009. You know what it is? It's actually consumer sentiment, which is really hard to believe given what was happening in 2009.
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And I have a hard time thinking.
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Maybe we don't sometimes separate today some of the political noise versus what's actually happening in the economy. So only time will tell if those worries will translate into something more. But remember, that sentiment impacts pricing too. When operators are nervous, they're more likely to push down rents and less likely to push up rents. And we know operators of really all types, from institutional down to the, you know, more local small businesses, they continue to heavily prioritize protecting occupancy. And occupancy is cash flow over pushing rents. That's been the key story and continues to be the case. So let's look at rent trends by market. Here's a chart that shows rents are falling where supply is going. Rents are rising where supply is not going. And we've been saying this for a couple of years and it's still true. Rents are down more than 8% year over year in Denver, more than 7, 7% in Austin, more than 5% in Phoenix, Colorado Springs, Southwest Florida, all very high supplied spots. You know, Denver's been real tough for a few reasons, probably some demand side challenges too. But also I think even a bigger issue is that Denver is a bit unique in that and people don't talk about this enough, but Denver had an outsized share of its supply for this entire cycle. Just dump into the winter months in terms of completions, a much bigger share of its total stock, total delivery pool or delivery total in this entire cycle. Cycle just happened to all deliver this past winter. And that of course spilled into an historic wave of lease ups spilling into 2025, I should say. Now on the flip side, rent growth is still occurring. Rents are still rising. In low supplied markets like San Francisco, rents are up seven and a half percent. Providence, New York, Chicago, San Jose, Pittsburgh, among others. So when you look at the relationship between where rents are growing, rents are going where Sorry, supply is going and where rents are moving, they tend to be very correlated. Rents are still correlated with supply, but you know, again, mixed signals. I do want to acknowledge that rent growth has cooled in some lower supplied spots as well and there could be some demand side headwinds in some of those spots, even if it's not translating yet to the absorption numbers in Boston. That's been obviously a hot market these last few years. Rent growth is now basically flat. And some of that might stem anecdotally at least from softening demand from international students this year coming into all of Boston's colleges. Obviously Boston has a lot of colleges and universities and they fill up housing, it's not just student housing, but also conventional units as well. And given the reduction of student visas, that could be playing a role. We've seen some media reports about that. And of course Washington D.C. where federal layoffs have hurt the labor market and now the government shut down. And rents there, they've been solid for so long, they're, they've now fallen negative. And so that's been one to watch even though by the way, the absorption numbers are still pretty good, you know, not, not what they were, but they're, they're, they don't show signs of the, they don't reflect the weakness we see in the economy there, at least in the federal jobs. And, and by the way, the federal sector has been much harder hit than the private sector there. Another one to watch is Vegas, which doesn't get a ton of supply, but it is seeing deeper rent cuts. And that's where I think there is a clear hit to a demand driver. Tourism is down this year in Vegas through the first half of 2025. Visitor volumes are down more than 6, 7% compared to the same time in 2024. Hotel occupancy and hotel revenues are down 2. And that's according to the Vegas Tourism Convention Bureau. And of course, you know, tourism is a very sentiment driven activity. So it makes sense for tourism to be down when consumer sentiment is weak. And so again we see some pockets of demand side softening. And if your glass half empty, you can say these are leading indicators of a, of a problem that's going to spill elsewhere. If your glass half full, you could say, hey, these are isolated challenges. Maybe it's more akin to what Houston went through in the mid 2010s when oil prices crashed, but didn't really impact most other major markets. Only time will tell which. But again, mixed signals. Even in these markets where there are some concerns about demand drivers, we're still seeing decent net absorption. We're still seeing a healthy range of occupancy, not high occupancy, but it hasn't dropped off significantly. So it's rather curious that we actually haven't seen a bigger impact to occupancy. And the primary impact has really been to rent. So nationally, COSTAR shows stabilized vacancy, which excludes lease ups. It went up just 17 bips in Q3 compared to Q2. And believe it or not, that's actually pretty normal seasonally. In terms of a typical Q3, it seems that we usually peak in the kind of the summer, June, late Q2 period, and then it comes down a little bit into the fall. And of course, even if the size of the shift is typical, I should acknowledge, of course, the vacancy rate is higher than normal at 6 and a half percent in the costar data. The other providers show up less than that, but six and a half percent, thanks to all the supply. But interestingly, but maybe counterintuitively, most of that vacancy Spike occurred between 2022 and 2024, and people don't talk about that enough. So again, mixed signals. All right, so the only way you get that type of stability, relatively speaking, in vacancy so far this year with all the supply, is if you see strong demand. And that remains a big part of the story. And exhibit a and how 2025 is a year mixed signals, strong absorption so far this year. Not that it's going to stay that way necessarily, but so far it's been strong. And never before in recent history have we seen a period of such sustained strong absorption. At the same time, we've seen sustained rent softness. COSTAR reported absorption of 129,000 units in Q3 alone. Now, that is down a little bit from the recent peaks, but compared to a normal kind of the median Q3 period, historically that's still 50% higher than normal. And over the last 12 months, CoStar has net absorption topping a half million units. So those are huge numbers relative to history, even if they're moderating from the recent highs, which by the way, was fully expected regardless of having the economy, we expected to see absorption moderate from those very, very high numbers. Now for full disclosure and transparency and yet another mixed signal. I should point out that RealPages Q3 number is softer for those of you look at that data. I don't want to spend too much time today kind of nerding out our methodology stuff, but I do want to quickly point out, for those of you I've had a Couple of people asking about this. RealPage also showed a lot more absorption in the first half of this year than COSTAR did. And now their trailing toll month numbers are coming closer in line from the year ending September. And so I suspect some of that is just methodology differences starting to balance themselves out with the T12 numbers starting to look more similar, particularly given the differences in methodologies for how and when lease up absorption is counted. So even in the the real page data, 2025 year to date is on track to be one of the best years on record for net absorption, which is similar to CoStar. So regardless of preferred data source, the absorption numbers of 2025 have been strong. And by the way, whenever I say.
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That, I always hear and whether it's.
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On LinkedIn or at a speech or whatnot, people say, jay, we're just not seeing this in our portfolio. You say strong demand that drives our leasing teams nuts. Drives our Marshma marketing people nuts because they're not seeing it. So is the data wrong or are you underperforming? And the answer is neither. We're simply talking about different measures of demand. An apartment or BTR operator is going to think about demand in terms of leasing activity, right? Traffic and lease signings and vacancy. And that's perfectly logical and defensible. But data providers and data nerds like me, we usually measure demand in terms of absorption. Now, you know, technically you could argue absorption isn't really demand, but we use those terms interchangeably. Why that? We've always done that. I don't know. I inherited that. It's not my thing. It's just we've done that. Maybe I need to use the word absorption more and demand less. But absorption is defined as the net change, the number of occupied apartment units, also known as renter household formation. And both of these things are accurate ways of measuring demand, or at least a flavor of demand. And those two things are typically Leasing activity and absorption are typically aligned in most cycles. But the 2023-2025 period is no typical cycle. Why? Because supply is far more than typical. They're at the highest levels in nearly a half century, and that's going to mess up these relationships. So the truth is, there's a lot of demand out there in terms of renter household formation, and that's a positive trend. But there's even more supply. And so demand is getting spread out among a far greater number of properties. And that wave of supply is triggering a mass wave of filtering, which is the term academics used when renters move up market. As discounted newly built properties come available, you look the higher income renters from class B plus A minus move to the lease ups. The relatively speaking higher income renters from the, you know, C plus B minus move up to the B plus A minuses and on down the line it goes. And concession chasers are a real thing too. And that's a tough environment even for the very best property manager. So bottom line is, yes, it is a very challenging leasing environment today. And that's been true for these last three years, even when job growth was healthy. Let's not forget that high supply means units are sitting vacant longer. It means there's fewer leads there, means conversion is tougher. It means concessions are aplenty. And that's why rent growth is non existent and or even negative in a lot of US Markets. Property managers have their hands full trying to get occupancy back on target. As I mentioned earlier, they're prioritizing occupancy. So where does that leave us? What does road ahead look like? A few quick thoughts. At this point we're entering the seasonally slow leasing months. So barring and epic collapse or a surge in these next four to five months, you know, we're probably, these, these next few months are not probably going to tell us much about the direction of the market. And again, this is the seasonally slower period. We probably won't have a firm handle on the direction of the market until March, April, when the leasing season picks up again. And in the meantime, the big obvious question is how the economy holds up. And, and we'll see. I don't, I don't have a crystal ball to tell you what's going to happen. All I'm saying is, you know, don't look too far in these numbers unless they're just drastic. And I'll keep you updated on that. Now, I will say this though. I do think you're going to see absorption numbers slow down in these next few quarters. Even in probably to Q2 when the leasing season picks up, picks up. And I think that'll happen regardless of what happens in the job market and what regardless happens in the broader economy. You're going to see absorption numbers come down. And that's just because absorption tends to track supply. And so as new supply drops off, there's less avail to absorb and absorption totals will inevitably come down, down again. That's just a function of how we measure demand through absorption. Absorption is going to track supply. So don't read too much into an absorption slowdown unless it's a total cratering or goes negative a couple more points as we wrap this section up. Number one, if there's a silver lining, it's this. We've seen nearly three straight years of wage growth outpacing rent growth and that's widening the funnel for who can afford apartments. 33 straight months. For those of you can see this chart in the screen. While job growth has slowed, wage growth continues, at least for now, most recently at 4.1% year over year, according to the Atlanta Fed's analysis of national data. So that's good. And related second point rent income levels are now down below 22% for the first time since 2019 according to RealPage data on market rate. Apartment households signing new leases and that's a real positive trend and again, not something you typically see in a true slowdown. And then of course the big boost to the apartment sector has been and continues to be on the renewal side of the ledger. So this chart shows you super high retention. Again, I've said this before, this upward trend long predates the rise in mortgage rates. It's been steadily trending up for a decade and we've topped 56% nationally in Q3.25 which is the highest Q3 on record outside of the 2021 crazy inflation period when vacancy was very little. People just have a lot of options to move elsewhere. So retention is above normal pretty much everywhere, even in high supplied markets as operators prioritize protecting that back door, protecting occupancy and renters continue to pay a premium to renew. This next chart shows you average renewal rent increases of about 3.6%, which is pretty much in line with long term norms. It's come down a little bit from these recent highs, but still a solid number. The big question though is can that continue not because of affordability but because of new lease rents? Meaning do we run into a gain to lease scenario or even an inverted rent roll issue where new lease rents start to come in below your in place rents and below your renewal rents. And if you have renters who are up for renewal and they look online and they see a new renter and get a better deal than you're offering on a renewal, that's going to really impede a property manager's ability to push rents on renewal. Even factoring in moving costs and whatnot, people just don't want to pay above what somebody new coming in the door has to pay pay, particularly if their renter in good standing. One last chart Supply. We talked about this a lot last week with the drop off in starts, we're coming around 250,000 units annualized, starts kind of stabilizing around that number. And so that, that, that, that, that supply story is playing out as anticipated. We peaked last year still a lot this year. We're going to complete right around 415,000 or so units this year, which compared to any year other than last year is still a big number. Okay. And so that gets us to the big if we know supply has been the big headwind these last few years, we know supply is coming down these next few years. So if the economy does hold up decently well, that sets up the apartment sector for a strong rebound on rents. But if the economy sputters into sustained job losses and if recent college graduates continue to struggle to find jobs and if, if, if, if, then obviously that could prolong the rent slump. Of course, the good news is that even in that scenario, relatively speaking good news, apartments and SFR tend to have a relatively high floor. So remember that Even during the GFC, apartment vacancy topped out around 8%. There's always a need for housing, but of course apartments are not fully immune from the impact either.
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All right, that's going to take us.
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To rental housing trivia foreign. So today's rental housing trivia question is and tying into our topic around supply, its impact on rents, this one is.
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A, is, is a little bit of.
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Exception to the norm. The question is among the top 100 largest MSAs, only one recorded supply growth of at least 4% and still saw positive rent growth over the last 12 months. Which was it? This is, this is a tricky one. I'll give you five choices. Is it Asheville, North Carolina, Colorado Springs, Colorado, Daytona Beach, Florida, Fayetteville, Arkansas or Huntsville, Alabama? Which one saw a lot of supply but actually saw a little bit of positive rent growth? Only one market in the top 100 MSAs did that. Which one was it? We'll get to that answer here in a bit. But next in the news foreign we review headlines touching on rental housing topics from the from recent weeks. This first one comes from Axios and it says housing is outpacing population growth. But there's a catch and I'll read from it. It says nationwide housing growth outpaced population gains over the last decade. Yet. And here's the catch. Affordability remains a huge roadblock for many would be home buyers. All right, so here's the deal. And this may be an unpopular opinion, but here it goes. Population to housing ratio is not a useful stat whatsoever. I would just ignore it altogether, particularly when the birth rate is declining, household sizes are shrinking, more people are living alone, especially renters. And just think about this. I mean, if population growth exceeding supply growth is a real problem. We would have seen over these last, over this last decade was this happened, we would have seen significant rent, significant rent cuts and significant cuts in home prices. But that didn't happen because population alone is not a proxy for actual demand. Okay, so whenever you see that stat, yeah, it's interesting, but don't put much stock into it. Next headline from business in Business Insider, the hot new real estate scam, a new wave of fraudsters is about to add a huge headache to your next home hunt and could even drive up your rent. Okay, so this is a great piece from James Rodriguez at Business Insider. Much more in depth and serious journalism we typically get than we typically get on this topic of leasing fraud. A lot of good details in the story, most of which won't surprise anybody in the industry, but it's good to see kind of wider awareness around it. And I'll tell you, I told James, who was kind enough to quote me in his story, I told him that leasing fraud is the big thing that no one outside the industry really wants to talk about. And I think that's because a lot of reporters and policymakers, they maybe think it's only happening as a result of affordability challenges, but in reality, it's just a lot more nuanced than that, as many of you know. And it's a lot more sophisticated fraud these days than just photoshopping a pay stub to try to qualify for a rental. So I told him, you know, hey, there are real challenges out there. I don't want to downplay that. We don't want to ignore the fact that there are challenges from folks, certain folks out there. I mean, as I mentioned before, 22% of multifamily renters make less than $20,000 a year. So there's, there's no amount of realistic market rate rent that can support incomes that at those levels and still still be able to operate a property. That's a real challenge. And I'm going to downplay that. At the same time, we do see things like fraud that are, that we do see some real fraud that's actually exacerbating those challenges in the form of take units offline that might otherwise be available, driving up costs for honest renters in the long run and also just making the screening process a lot more cumbersome and invasive for honest renters as well. As operators try to snuff out the very sophisticated fraud. All right, next headline is going to take us to the Texas Tribune. Texas suburbs resist new state law allowing more apartments. So some quick backstory here. Over the summer, the Texas state legislature passed Senate Bill 840. It was a bipartisan bill that allows apartment. So I'm sorry, allows developers of all types to build multifamily and mixed use projects on land zoned for commercial. And it applies to cities that are at least 150,000 people and counties of at least 300,000 people. And so in Dallas, Fort Worth, that applies not only to Dallas and Fort Worth, but also to Arlington, McKinney, Irving, Garland, Plano, Grand Prairie and Frisco, for example, and applies to other parts of the state as well. So while the state's elected leaders celebrated this, city leaders did not. In fact, some of them are doing their best impressions of their counterparts in cities in California, trying to skirt around the state law by putting a whole bunch of obstacles and regulations up that would make it harder and more expensive to build multi family housing. And so here's what the Texas Tribune reported that the city of Irving did. They said now that apartment. Now, with this new regulation they put in place, apartment complexes must have eight floors, which is a lot, right? Most of them are garden. Typically it must include a swimming pool, a dog park, a gym, a workspace for remote workers. Builders must also pick a menu of amenities to add, such as a yoga room, a place to wash pets or cars, or a station for cyclists to repair their bikes. So again, they're doing this just to make it harder to build Arlington. They increase the number of residential amenities like swimming pools or basketball courts. They're required apart that are required from apartment builders. They also enacted rules that at least 15% of parking spots must have electric vehicle charging stations. 15% in our lifetime. That's crazy. And again, this is only happening to discourage department development. You wouldn't just do this for no other reason. But the worst of these offenders is Frisco. Frisco. Reading from the article, Frisco has gone further than any of its North Texas counterparts, attempting a novel approach to size depth of law altogether. The new law explicitly forbids apartments and mixed use developments and zoning categories that also allow heavy industrial uses. That's the new state law. So you can't build apartments if it, if the zoning allows for heavy industrial uses. And, and so heavy industrial, that includes things like chemical manufacturing, oil refineries, mining, you know, steel plants, things like that. And so what Frisco did is they basically said, hey, we're going to allow heavy, we're going to, in theory, we're going to change the zoning to allow any commercial zoning allows heavy, heavy industrial. Okay? And they did that. And now you know, that that in effect blocks apartments being built in commercial, which basically negates Senate Bill 840 because heavy industrials allowed there. However, of course, the article goes on to tell us that the city council retained the right to approve heavy industrial use in those places, which is an unlikely move given the city's tony vibe. So how crazy is that? I mean, what a dishonest and dirty move by the city of Frisco. I mean, obviously they're not, I mean, I, I surely they don't really intend to allow heavy industrial in the town and the, the city of Frisco, but they're acting like, you know, kind of a smart, alky high school kid skirting an assignment and claiming innocence. So we'll see how this plays out. Lots of NIMBY behavior. Hopefully the state cracks down on it.
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And, you know, it's funny, you know, one last comment.
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You know, I, I live in Texas and Texans like to joke about Californians coming out of Texas, coming into Texas. And they say, you know, hey, don't bring your politics from California into Texas. And yet here we have well entrenched Texans on some of these local city councils importing California like policies into their backyards. Speaking of California, I give them a hard time because they've created a very hostile place for not only builders, but also operators rental housing. But let's give credit to where credit is due because the state has taken yet another step to reign in cities like Los Angeles that just refuse to make meaningful steps toward allowing more apartments to be built, even while claiming to care about affordability and passing the blame. So from the media outlet Cal Matters, Governor Gavin Newsom signs new law overhauling local zoning to build more housing. So this is Senate Bill 79, which the article says means that apartment developers will soon be able to pack more homes and neighborhoods within a half mile of major rail, subway and bus rapid transit stops, overriding local zoning restrictions and any possible objections of surrounding neighbors. Buildings immediately surrounding these transit hubs will be entitled to max out as high as nine stories, with those further out topping out at roughly four. All right, so this is a signature win for California's YIMBYs. Yes, in my backyard they've been banging a loud drum on this one. Quick funny story about this too, Governor Newsom. There's some good media reports about this and I'm not making this up. It's a crazy story. Prior to announcing he would sign this bill, the governor was logged into to Twitch, which is a streaming app for gamers. And he was trying he was playing Fortnite and started answering questions from a streamer known as Connor Eats Pants. No joke, totally real. But anyway, the governor is not a very good gamer apparently. But this story was interesting because while he's logged into Twitch, he gets the chat gets flooded with with the IMB's pushing him to sign SB79. So pretty funny. So who knows if it did indeed move the needle, but sure enough, he did end up signing it.
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All right, that takes us back to.
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Our rental housing trivia Question of the week. The question was among the top 100 largest MSAs, only one recorded supply growth at least 4% and yet still saw positive rent growth over the last 12 months. Which was it? Was it Asheville, Colorado Springs, Daytona Beach, Fayetteville, Arkansas or Huntsville? And the answer is Fayetteville. And it wasn't by much, just 0.4% rent growth. But that gave it the rare distinction of seeing 4 plus supply growth, 4% plus supply growth and yet not seeing a rent cut. You know, that area also called Northwest Arkansas home, the University of Arkansas plus the headquarters of Walmart and a cottage industry of companies trying to sell stuff to Walmart. You know, hasn't really been an institutional grade apart market yet, but it is a cool spot. And you know, whenever someone asks the question about oh yeah, what's the next Austin? Some people say Fayetteville is a trend you pick to that, you know, albeit one that's certainly decades behind in terms of size, but cool market. All right, next up, it's time for today's interview sponsored by funnel, the AI and CRM platform 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, centralize operations and automate everyday tasks, visit funnelleleasing.com and today's interview is with my friend Allison Bode, the SVP for Research and Data Strategy at Ketler, which is an owner manager developer based in Northern Virginia founded by back in 1977. Allison is also the Vice Chair of the NMHC Research Committee and she is one of the most respected multifamily researchers in the business. We're going to get her take on where the market stands today and where it might be going. All right, welcome to the interview portion.
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Of today's podcast and I am honored to welcome in my longtime friend Allison.
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Bode, the senior vice president of Research and Data Strategy at Ketler. So, Allison, thanks so much for being here.
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Hi, Jay. Thanks for having me. It's great to be here.
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Yeah, we have, you know, us, you know, in the, in the rental housing research world, we get a lot of conversations, our little committees and groups and conferences and whatnot. But it's fun to get to put you in the hot seat here on the podcast. So thanks for letting me do that.
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C
Absolutely. Love it.
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So one of the things, you know, in our roles as researchers, you know, we're always asked to, you know, for some, you know, to tell people what's going to happen in the future as if. As if we know exactly. But if you go back to what your thoughts were last year, how has 2025 played out versus what you expected.
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Going into the year?
- [33:48]
C
Well, everybody was kind of chanting the hope. I think it was a started with a phrase and now, then it was a prayer, you know, survive till 25. So I was like everybody else thinking, it's here, 2025 is here. We're going to make it. And at the beginning of the year, you know, there was a lot of talk about policy changes and things coming down the pike and a lot of uncertainty, and that's the main word. If you had to build a word cloud for 2025, uncertainty was probably the largest, boldest word on that word cloud. So definitely felt a little trepidatious, a little concerned coming in, just not knowing where to point things and what the crystal ball was telling me. And then the first few months kind of like, okay, so we've got some really strong demand still. Okay, great. Awesome. So I think I came into 2025 thinking it would be pretty great back in the fall of last year. And then I was like, ooh, I don't know now knew we probably weren't going to hit those same demand levels that we had in 2024, because that was, you know, historic, mind blowing demand. But then, you know, we had a great second quarter and I was like, whoo, okay, you know, this. This is looking better. And then, you know, as, you know, the third quarter data just kind of dropped and dropped in more ways than one, and things are slowing down a little bit. So I think it's going to kind of be more or less what I thought. A little bit less demand, a little bit less supplement strong than maybe last year, but, you know, not so bad. So we'll see.
- [35:38]
B
Yeah, yeah, it's been a Little bit of a roller coaster at least. And we thought the roller coaster behind us when Covid ended and all that, but, you know, it keeps going. Someone's got to end this thing at some point. So what's been the biggest surprise, both on the upside and the downside for you? You mentioned the Q3 data. You know, to me, I think the rent numbers were, you know, if I go back to what we thought earlier in the year, maybe more surprising, the demand numbers. But what do you think?
- [36:05]
C
I think it was the demand numbers for me. I think I came in thinking we're going to see kind of slow down here. There are a lot of headwinds. We're kind of going into maybe some rough waters here, maybe not. But I thought, well, okay, we're probably going to see a slowdown. And then we saw equally as good numbers as we've seen in previous years. So I was kind of like, ooh, that was great. It was very encouraging. And as you know, when we talked over the summer, I was pretty optimistic compared to some of our peers. You know, I was like, ooh, you know, we could get out of this okay. And so that was probably my biggest upside surprise, I would say. You think the rents.
- [36:52]
B
Yeah, well, I mean, the rents on. I'm sorry, I meant the downside. Like, I just think they have not. I thought we would see, like most people, not a lot of rent growth a little bit this year. And to see a Q3 rent cut, which we never see, haven't seen in 2009, like that, that was not in the cards.
- [37:07]
C
No. No. It makes me a little concerned for what's happening in the fourth quarter. Yeah, the downside for me downside was probably, you know, interest rates not happening necessarily as much. Just, you know, basic slowdown. So, yeah, I would agree with you. Third quarter is the downside, unfortunately.
- [37:33]
B
Well, everybody listening who's in the multifamily or SFR BTR investment community will agree with you on rates like the. If the Fed would only follow its own predictions and its dot plot survey, it would make everyone's life a lot easier. So that was definitely a downside.
- [37:50]
C
I'd love to see some rates come down. I wonder what's going to happen with the, you know, the data release being at least postponed. So we'll see what happens there. But love to see more rate cuts.
- [38:03]
B
Yeah, yeah. Not only we don't know if we can trust the data anymore, but now.
- [38:07]
A
We don't even get it at all.
- [38:08]
B
So that makes it extra hard.
- [38:11]
A
In.
- [38:11]
B
Terms of the Jobs, Data. Sorry, been a little rough for those of us in the data world, by the way, it's hard, you know, your title is data strategy. Hard to do data strategy if you.
- [38:20]
A
Don'T get the data in.
- [38:22]
C
Right, right. Well, it's hard to know where you stand if you can't measure where you are. You know where you're. If you're not sure where you stand at this very point, then how are you going to react proactively to things and how are you going to know what to expect? The crystal ball doesn't work if you don't have data.
- [38:42]
A
Yeah. You gotta be able to plug it in. Right, the ball.
- [38:45]
B
Yeah.
- [38:45]
C
There's some good private data sources that can give us something, but yeah, we'll see if this is a prolonged shutdown.
- [38:56]
A
Hopefully not.
- [38:56]
C
Hopefully not.
- [38:58]
B
Well, speaking of crystal balls, and I know we're, we don't have anything, we want to be able to predict these things, but obviously there's been a lot of. We both referenced this. We've seen very little rent growth this year. We've seen more concessions probably than expected. So if you had to, if you had to get pressed on this crystal ball question, when do you think we start to meaningfully burn off concessions and.
- [39:22]
A
See some rent growth? Is it the spring?
- [39:24]
B
Is it the Summer? Is it 2027? What do you think?
- [39:29]
C
Yeah, I think if you had asked me a week ago, I probably would have said spring. I think we're looking. Yeah, I think maybe we're looking a little bit closer to summer. I think it's always a possibility as you're going into high leasing season. So kind of in that early summer, late summer, spring period would be my best guess. But it's really going to depend on the market. It's going to depend even on the sub markets. Concessions are, you know, one of those things where if one community is offering them, then it, it's a virus, it spreads to all the other communities so they get really sticky really quick. It's hard to get out of that. But hoping that demand snapshot back. Could be one quarter, could be just a blip. We saw some demand fall in 2022 and then it came back around. So, you know, hopefully we'll see some more demand and we won't have as much need for those concessions. We'll see. I do think that it gets tricky because when you have new leases kind of slowing down potentially and you're an operator such as we are relying on renewals and you know, you hit that point maybe in the lease up where you've got the back door open, where you're a year in and those leases are expiring, then it gets less advantageous to have a large concession on. So I think as we move through that pipeline and people hit that earmark, maybe it'll be a little bit easier to pull those concessions down a bit. So that's what I'm hoping for.
- [41:13]
B
Yeah, but like you say, we need the demand, we need to backfill those units and the concessions burn off. And we look at past cycles where there's concessions, you know, the, you have to have, you have to be able to backfill the units and the concession burns off and then the effective rent growth, you know, responds to that.
- [41:28]
A
So.
- [41:28]
C
Right, right, exactly.
- [41:30]
B
Snowball effect.
- [41:31]
C
Tricky.
- [41:33]
A
What about, let's get into some markets.
- [41:35]
B
And obviously at Kettler you're in a bunch of different markets. So looking at some of the higher supplied markets, where a lot of the focus is right now, which ones do you think rebound first for occupancy and rent and which ones think are going.
- [41:50]
A
To be the laggards?
- [41:52]
C
Well, I do not typically shy away from high supply submarkets. I tend to think that supply is maybe not fleeting, but it's not nearly as dire as people expect it to be. So I don't mind playing in the high supply of sub markets, but. Or markets, excuse me, but I do prefer the high supply markets that have a good demand story. And so some of those, no one would be surprised who knows me to hear Raleigh come out of my mouth. Raleigh tends to be very resilient with job growth, with demand. And even though, you know there is a lot of supply for good reason, you know that supply gets absorbed pretty well. And I would say the same thing about Charlotte. So the Carolinas to me are really great markets. I would probably put Nashville kind of in the middle. I do worry about some of the drivers there, but they also see great, you know, demand in that market. So. And I'm going to go out on a limb and say that I do support Austin. Okay. I know, I know it's a little bit counter to what the rest of the world thinks, but I don't think it's going to come out first. I think it will be kind of medium to laggard area just because the, the sheer scale of supply is really difficult, but it is getting absorbed and I think there's a lot of potential for economic growth there. So that's really great. I would think. Let me see, laggards. Maybe Phoenix might be a bit of a laggard as a high supply market just maybe doesn't have quite the same growth. I think unfortunately Dallas might be a little bit of a laggard. I guess I would put that in the medium term because Dallas has some great possibility but it is kind of struggling a little bit all of a sudden it seems. So this. I think those are. Did I miss any? Those would probably be my. Out of the high supply markets. Those would be kind of my thoughts.
- [44:16]
B
Yeah. So wait, so you put Austin ahead of Dallas in the recovery?
- [44:20]
C
Not necessarily in terms of timing. I think Austin is probably going to see more actual demand on a percentage basis. Like absorb really quickly.
- [44:31]
B
Absorption rate. Yeah, yeah, yeah.
- [44:33]
C
So I wouldn't necessarily say that like Austin is going to head a Dallas off at the pass or at least the western metaphor. But I do think that it's stronger than people give it credit for. So I'm just being Austin champion for now.
- [44:49]
A
Yeah, no, I agree with that.
- [44:50]
B
And plus it helps that every investor who's investing in development is their ic. Their investment committees are not entertaining anything.
- [45:01]
A
From Austin right now.
- [45:02]
B
And so that's a bad word. Yeah. So you know, that's a good thing for the current market because there's going to be a, there's a drop off everywhere.
- [45:13]
A
There's gonna be a massive drop off in Austin.
- [45:16]
C
That's right.
- [45:17]
B
And I agree with you on Phoenix. I think the other factor for Phoenix and I, I have a lot of Phoenix friends, I'm gonna trouble for saying this, so if you're Phoenix people. Earmuffs, please. But it's also, I mean Phoenix is great, but it's also got a later supply wave than, than Texas and the.
- [45:33]
A
Carolinas and Florida as well.
- [45:35]
B
So that's gonna I think prolong their car, particularly on the west side of Phoenix more than like the Scottsdale area, whatnot.
- [45:42]
C
Yeah, yeah, I would agree with that. Yeah.
- [45:45]
B
So you mentioned the Carolinas. Let me ask you about that. So Charlotte, you know this reason very well. I think a lot of groups that invest there don't fully appreciate the differences.
- [45:54]
A
Between Raleigh and Charlotte.
- [45:56]
B
So I want to put you in the spot. So like for those who don't, because I feel very passionately about this and I think you do as well. But like what are the differences in a Charlotte vs. Raleigh?
- [46:05]
A
The same state but very different market.
- [46:07]
B
Right.
- [46:08]
C
So I would say that Raleigh is kind of more geared toward tech and it, it honestly a lot of real estate in Raleigh in the Triangle revolves around Research Triangle park and, and what's going on There, for better or for worse. The downtowns are a little. It's de. Downtowned a little bit. You know, you have the Research Triangle park running a lot of the show, and some of the drivers there, like biotech, pharma, things like that, that are, I think, have a pretty long Runway and have a lot of growth potential as industries, and therefore, you know, we'll be adding more jobs. I think where Charlotte is is. It's a little bit more centralized. You know, you have a lot of the growth downtown or in South End, to be clear, but in the urban areas and some suburban nodes, but driven a lot by finance, you know, driven. And that's why I think they've been doing so well there, too. The stock market, you may have heard, is a little bit active lately, so seeing a lot of good finance jobs and stability there. So they really are very different markets. They have slightly different demographics as well. So there are a lot of young people in the Raleigh metro area, but some of the areas that are big development hotspots are a little bit more geared toward younger professionals and families. There's a lot more housing. I guess there's also housing in Charlotte being built. But Charlotte, I feel like, is that young professional that, you know, just graduated from college in. In the really active submarkets. That's kind of the demographic that you're looking at there. So is that along the lines of how you feel about it?
- [48:06]
B
Oh, yeah, yeah. I think. I think people don't know those markets. First of all, you to know that people from Charlotte Hill, from Raleigh are different types of people, you know, regardless of, you know, incomes, other factors like that. Just. It's a different personality. You know, the Charlotte, personally, is young professionals more cosmopolitan, Raleigh a little more grungy, you know, so you can. Everybody's got.
- [48:27]
A
Maybe.
- [48:28]
B
Maybe it's the wrong. Maybe it's not the right word for.
- [48:30]
A
The current generation, but it's just. It's a different.
- [48:32]
B
Maybe some people call it more authentic, right. Versus new and shiny in Charlotte. But also, you know, Charlotte, Raleigh's got so much. You know, it's the eds, the meds, the state capital, the schools. You know, Charlotte, I think you mentioned the finance, but also, I think there's like eight Fortune 500 companies based in Charlotte, and I think it's like seven different industries, and it's a lot of, you know, business, services, jobs, a lot of different sectors from, you know, Lowe's to Bank of America to the Duke Energy.
- [48:59]
A
I think it was Nucor.
- [49:00]
B
I mean, there's a bunch of it's a bunch of different companies that have.
- [49:03]
A
Massive presences there, plus regional headquarters as well. So.
- [49:06]
C
Right, right.
- [49:08]
B
You have those massive demand drivers and versus Raleigh, still good demand drivers, but it's, it's got I think also the, a little bit more of the, the steady Eddies in its economy as well. Maybe not the same hydrocharged economic drivers, but it's got the steadier components to it.
- [49:24]
C
Well, and it's interesting. I feel like we, I've seen, you know, return to office is much more of a thing in Charlotte than it is in Raleigh. We've got a lot of tech people, you know, working from home still, that kind of thing. When I used to look at the demographics for the, for the Raleigh metro area, I was still up in D.C. and it kind of shocked me that there was this very Southern city that almost mirrored the demographics as far as educational attainment, income levels and the rents were half, you know, it was like, very interesting. This seems like an opportunity here. So, yeah, I, I think Raleigh and Charlotte are great markets.
- [50:09]
A
Yeah, great, but different. Yeah, absolutely.
- [50:14]
B
All right, so let's, and apologies to those of you who don't operate or care about the Carolinas, but thankfully some that do. So I enjoy, enjoy talking some, some Carolinas and, and by the way, I guess one other thing is, you know, the South Carolina market's getting cool now too.
- [50:28]
A
In the last 10 years, you know.
- [50:29]
B
Charleston, Greenville especially, you know, those have become attractive spots.
- [50:35]
C
Charleston is always like a step ahead. You know, in the pandemic, it was like that one took off in like April of 2020. It was such an early mover when everybody else was still kind of like, what are we doing? Charleston just took off. It's such a unique market, smaller than most people think. It is a little choppy because of that supply, because it is small. Any little bit of supply can move it a little bit more than some of these other markets. But it's got cachet. Love it.
- [51:09]
B
Yeah. And it might be the most, you know, walkable Southern city it as well, so.
- [51:15]
C
Yeah, absolutely.
- [51:16]
B
Smaller. Yeah.
- [51:17]
C
Yeah.
- [51:18]
B
All right, so let's, let's, let's, let's go back to the forecast a little bit here. So, you know, I, I, I talk to a lot of different investors these days that they have. Everybody's always got scenarios, but like, it seems more than ever you have like, here's what I think's going to happen and here's, I'm going to underwrite because nobody wants to underwrite what they think's going to happen because people are naturally bullish, particularly if you're buying or building. And, and there's some good.
- [51:40]
A
There's.
- [51:41]
B
There's justifiable reasons for that, whether you.
- [51:42]
A
Agree with it or not.
- [51:43]
B
But.
- [51:43]
C
Right, right.
- [51:44]
B
An upside scenario. Rents could be applying more meaningfully. Again, they don't want to put that.
- [51:48]
A
In their model or maybe they can't.
- [51:51]
B
But some of them really think that's where we're going. So I'm kind of meandering this question here. What I really want to get to is what do you think would drive a scenario? Maybe not your baseline scenario, but in what scenario do you think we would.
- [52:05]
A
See a stronger rebound in rents?
- [52:08]
C
I mean, I think you're absolutely right. We can't underwrite those very strong rent growth numbers that we actually might see in some sub markets. I would probably take it from the market down to the submarket level and say there are some submarkets that seem like amazing opportunities that have really kind of outsized rent growth opportunity. And those are going to be where it all comes back to microeconomics where, you know, there's a low supply mark submarket with a lot of demand. And that demand can be, you know, some of these resilient employment sectors could even be that it's popular place for retirees to move or, you know, people who are near retirement, semi retired. It might be that it. So demographics come into play too. I definitely look at demographics there. So it might be that, you know, you have some renters who are trying on a city where they want to retire or something like that, or their, their children moved here and now they have a grandchild. Now are those, you know, 55 and older renters a huge chunk of our demand? No, but it's not insignificant. And it can definitely move the needle when you have lower employment, things like that. So I definitely look at the demographics and you try to look for the middle of the Venn diagram where there's low supply and high demand demographics and all of those things really could lead you to an outsized return on something. But yeah, I'm having this conversation a lot of what, where's the opportunity there for this really outsized rent growth?
- [54:00]
B
Yeah, yeah. And it's tough because you can't bank on that. But it's certainly there's an upside, particularly if the economy, as you kind of alluded to, I mean, if the economy kind of finds its footing and grows, then supply is down. Then it's not hard to see a.
- [54:14]
A
Scenario where that happens, right?
- [54:16]
C
Oh, yeah, absolutely. I Mean, if we kind of bump through any sort of headwinds and pick up really well, then yeah, there are a lot of places that things underwrite, particularly on the development side, because supply is less of an issue at that point.
- [54:33]
B
Yeah. All right, so let's switch gears to the switch sides, to the less favorable possibility, and that is downside risks and a potential slowdown. What could take the winds out of the sails. And, you know, it was, like you said, didn't. It was supposed to be survival 25. Now it's a little fix in 26. Under what scenario does it not fix.
- [54:56]
A
In 26 and further prolong that recovery that everyone's waiting for?
- [55:01]
C
Yeah, I mean, I think it all points to macro factors for me. I think much like the past couple years, there really hasn't been anything wrong fundamentally with real estate, aside from oversupply. And so it was really the financing that was causing deals not to pencil, especially in some markets that didn't have a supply problem. But now I think we're moving into a period where it could be some of these macro factors that are just making it really difficult. Whether because it, you know, moves interest rates up or it moves unemployment down or whatever that might be. I think we're. It's really too early to tell, but certainly the sentiment is already kind of an indicator here. And, you know, I think you've noted several times, a lot actually, that consumer sentiment has that correlation with absorption and apartment demand. And if, you know, we keep being depressed like we are, then, you know, we're gonna have lower absorption. So I could see just the macro picture being the biggest risk right now.
- [56:19]
B
Yeah, I agree with you. It is definitely the biggest downside risk. And on the one hand, apartments, sfr, btr, they have a higher floor than a lot of sectors because people still need a place to live. I tell people all the time in the GFC, we bought them about 92% occupancy, which isn't terrible.
- [56:32]
A
It's not grape.
- [56:33]
B
It's not terrible. But what's your take on the macro environment right now? A lot of uncertainty, like you said. That's the key word. You know, you mentioned consumer sentiment as well. Like, what I'm struggling with is consumer sentiment today. As looked at this morning, it's lower than it was in 2009. And in 2009, we had 10% unemployment. Right now, we're closer to 4% unemployment. And I know there's not a lot of hiring happening. There's Chairman Powell, not in the last FOMC press Conference.
- [57:05]
A
There's also a lot of, lot, a lot of, not a lot of firing happening either.
- [57:09]
B
And so I, I'm wonder like, I know I, I, anybody looking for real clarity for me is gonna be disappointed. But like, what I'm confused by is like, are we, there's been a lot of surveys showing that things like, hey, I'm fine, but I'm the rest of.
- [57:22]
A
The world is not.
- [57:23]
B
Is that kind of, is that possibly.
- [57:25]
A
What we're going through or is it.
- [57:26]
B
A real beginnings of a real slowdown?
- [57:29]
A
What's your take?
- [57:29]
B
Do you thought on that?
- [57:31]
C
So I have lots of thoughts. We could have an entire hour on this. But I'll try to, I'll try to edit myself here. But I think that what I have focused on really doing is not paying any attention at all to the aggregate numbers and really trying to think through, okay, if I'm in the multifamily business, if I'm a developer or a class A owner, or a class B owner or class C or an affordable owner, what am I concerned with? Who are my residents, who am I thinking I'm going to need demand from, et cetera. And you know, you really do see this bifurcation of the market. You see high income households doing really well. Stock market wealth effect is great. You know, all of the savings from the pandemic and a lot of the aid, you know, things like that that was invested and so still continuing to do well, whereas some of the lower income groups are really struggling with, you know, now we're hearing anecdotes about rising inflation, particularly in groceries, things like that. And then we're starting to see service employment as of the employment report that we got last time, starting to see service employment, service wages in services rather than good production, really kind of start to go below inflation or start to shrink a little bit more. So seeing more headwinds on the lower income households than the upper income households. So maybe that would be good because, or maybe it's good that the class A households, the upper income households are seeing some of those headwinds because then that demand continues to eat through that supply. That could be a scenario that we see. But I'm starting to hear from people in the industry anecdotes that, you know, some of the Class Cs, some of the affordable properties are starting to struggle a little bit more. Occupancy is creeping down a little bit. And so we'll just have to see. I do think it's not as clear cut, shockingly as everybody thinks. And it'll be hard to see. But I think that inflation is going to continue to be present and probably impact some of those lower income households, maybe have an impact on those affordable units and things continue to have that impact. And interest rates are just going to, if we see big interest rate pop, it's just going to delay all of our developers and all of our deal guys and really bum them out. They've been a little depressed for a while now and so that would keep that at bay. So that's unfortunate.
- [60:37]
B
People outside the space don't understand. Builders love to build and deal makers love to do deals.
- [60:43]
A
It's just, it's, that's what they do.
- [60:46]
B
They get paid too.
- [60:47]
C
I always say developers develop. If you're going to give them money, they're going to develop and that's great. That's their job. So capital, it depends on the capital.
- [60:57]
B
Well, and that's another thing too because I think people outside of our space, like, I see this, I know you're way too smart to be on, on X slash Twitter like I am and take the beating in that environment. But like people in social media world, they don't understand. They're like, well, developers should build more. Well, developers would love to build more. Yeah, Developers don't have, you know, they can't write checks for nine figures and they have to raise capital and that's easier said than done. So.
- [61:26]
C
Yeah, yeah. Particularly in such an uncertain environment and so many of our pro formas are like right on the brink of penciling. You know, it's just like, what can we dial up that's actually not crazy, you know, that people will laugh at us about. But it's right there, it's so close.
- [61:50]
B
Well, it's a little bit of rent growth probably. And then by the way, you'll appreciate this. I was trying to somebody on Twitter the other day, I said developers don't self fund these deals. They have to raise investors.
- [62:00]
A
Investors that believe in the market.
- [62:01]
B
If they don't like your city, if you don't treat capital well and then the guy responds, well, that's the problem. They need to put their own money in these deals.
- [62:08]
A
Like, well, they're not building anything.
- [62:12]
B
So you're building some duplexes, I guess.
- [62:14]
C
Yeah, exactly.
- [62:16]
B
All right, so let's, let's, let's talk about development. We're touching on that right now. So obviously, as you know, starts have been down. Maybe we bottomed out. In fact, I think starts have probably bottomed out. I think we're going to be, I think it looks like to me like we're hovering around the 250,000 unit range most of this year on an annualized basis.
- [62:35]
A
You could tell me if you just agree.
- [62:36]
B
But what do you think it's going to take to. You mentioned a lot of deals are kind of right in that, on that cusp right now. And I think that's probably true for a lot of groups that are like Kettler. I think that the groups that are smaller that do one or two deals a year, 75% of the market was those guys.
- [62:51]
A
I think they're probably even further away.
- [62:53]
B
But what do you think for groups like yours and your peers, what do you think it's going to take and when do you think that happens?
- [63:01]
C
Well, we are ready. We want to go, we want to develop. But yeah, it is, it's kind of right on that edge. And I think, you know, some of the, it's funny, I'm like we're, we're kind of slaves to the pro forma, right? So we need it to pencil, we need it to be, we need to find investors who have conviction or have patience or both. And you know, the things that help us make that happen are, you know, the rent growth stories, certainly the supply story. But again, I'm not necessarily as a researcher afraid of supply. You can see supply coming and it is relatively fleeting. We'll get through it. We'll get through it in a few years. It takes a really long time to develop, particularly in some of our markets. I'm always the countercyclical one who's like, we need to start as soon as supply peaks, then we need to get going. Like, let's go. So the rent credit story is really a big one. Expenses have been crazy through the roof. And so where we might be seeing some of those expenses come down, some payroll costs. Back right after the pandemic, it was really, we had a labor shortage. It was really difficult to get some site teams, some service professionals who we love opex.
- [64:33]
B
Right.
- [64:34]
A
Just to be clear, what's that? The operating.
- [64:35]
B
You're talking about operating expenses, particularly not construction expenses.
- [64:38]
C
Yeah, operating operating expenses. Yeah, absolutely. And you know, stuff like insurance and things like that was really truly some of those insurance cars just single handedly killed, killed deals for us. So. And interest rates, certainly everybody kind of understands that if we could just get a break on those interest rates and some, some, you know, some interest rates come in a little bit, the financing looks a little bit better, then that'll be very helpful. So those are the kind of things that make us all kind of right on the brink. And I know some of the really big guys have these economies of scale where they're able to, you know, not worry about construction costs as part of the tariff situation. And, you know, they have purchasing power in that environment to develop something at a lower cost, or they just have money, like family office money, they have reap money. You know, things like that, where you're going to hold it for 20 years, it's fine, go ahead. You know, it'll all work out. Time is your friend. So those are the kind of situations where I can see, like, some of the rates are already ramping up their development. Oh, yeah, I see that continuing.
- [65:59]
B
So, yeah, I've had a bunch of developers on this podcast, and no one said that tariffs are a major concern, primarily because they're building, like, you know, stick frame deals with American lumber. But are y' all seeing anything different?
- [66:09]
C
We haven't seen anything just yet. And so what I would say about that is, you know, there were tariffs on lumber, and then there weren't, and then there were, and then maybe there are now, and there's still ongoing discussions. And so I think that a lot of GCs kind of bought ahead or, you know, got ahead of it. And I don't know that those costs have impacted any of the on the ground costs at this point. And also, there's been a slowdown in construction on the single family side. So that means, you know, there's just the same amount of supply with less demand makes it makes the price a little easier. So I would say that those things are probably impacting the fact that we haven't seen a direct impact on costs necessarily. I could see it impacting labor since we're seeing kind of a slowdown of immigration and, you know, just the labor supply, it seems to be shrinking. So that could be an area where we're going to see some impact on the cost side. Possibly.
- [67:22]
B
It seems like. Like, for now, that seems to be offset by the factor that you alluded to, which there's more projects completing than starting. And so that sort of masks the.
- [67:32]
A
Issues on the labor side.
- [67:33]
B
Right. Until we ramp up again, then it's an issue.
- [67:35]
C
Absolutely. We saw that in the pandemic where the supply chains were a little bumpy, and then we saw this supply wave as the supply chains kind of loosened up again. Saw this big supply wave as everybody started construction. They were able to get going. So we'll see how that works out.
- [67:56]
B
Yeah, absolutely. So what's going on in Kettler Right now, in terms of development, are you all ramping up? Are you doing more or less than a year ago?
- [68:07]
C
Well, we've delivered some projects and we are ramping up on a few more. We are hopefully getting started first quarter with one of our projects. So we are very, we've, we've been very busy the past couple years getting things right to the finish line and just, just waiting for it and getting shovel ready just like everybody else. And so as soon as that pro forma hits the pencil kind of point, then we are off and running. And we have gotten to that point on one of our projects. And so we're going to hopefully be moving forward really quickly on that. And then we have a few others that we're just, you know, waiting, hoping for rent growth. The third quarter numbers are not helping right now, but we'll see how it looks in the first quarter.
- [69:03]
B
Yeah, we probably won't really know much till March, right When the leasing season starts again on our ends.
- [69:07]
C
Yeah, right, exactly. Take a minute.
- [69:11]
B
And then at Ketler is. It is Yalls View, like others right now, which is that. And you kind of alluded to this, you're being kind of contrarian. You know, hey, now's the time to build. Just because there's less starting and so you want to complete when there's lesser completing in the market.
- [69:25]
C
Absolutely. Yeah. That's, that's my personal philosophy. And I think I've talked enough to everyone at the firm that they're on board with me. So I think that the two hardest things in real estate are timing and scale and understanding the scale of supply that might be an impact to your project. And understanding how that affects timing is really important to getting started in development. And, but I, I do have conviction that now is the time to get going. So we just have to convince all the investors. Right? No big deal.
- [70:05]
B
Well, and that's, that's right. It, that's it.
- [70:07]
A
Right.
- [70:07]
B
Because like, I'll hear the, the cynics will sometimes say, well, every developer in America believes the same strategy they're all trying to build. It's like, well, yes, that's true. Everybody does believe this, but like you said, Allison, you have to convince investors. And, and, and, you know, my personal conviction is that again, 75 to 80% of starts come from smaller local groups that build one or two products a year. Those groups are going to have a really, really hard time accessing capital. I think the bigger groups think Kettler and other large developers and operators are.
- [70:39]
A
Are going to be able to ramp.
- [70:40]
B
Things up a little bit, but it's still not going to be like it.
- [70:42]
A
Was at the peak.
- [70:43]
B
So I mean, is that, is that fair?
- [70:46]
C
Right? Yeah, I agree. I think, I actually think the only thing that I would see as a risk, and this is completely unrealistic, but I don't see a lot of risk in starting developing now. But what I would see as a risk is suddenly the Fed lowers rates by a full percentage point. Right. And everybody pencils and everybody floods the market and then all of a sudden all those shovel ready deals are ready to go right next to your deal. That's the only thing. But I highly doubt that's going to happen. So I mean, that's kind of a tail scenario. But the rest of it, the most probable thing is that it takes a few years to develop something. Depending on the jurisdiction, you've gotten it a little bit closer. Right? So maybe it's 18 months to two years. And I think in a lot of markets the supply will have at the very least come way in from where it is right now. So it's, it's okay, everybody, if there are any investors listening, it's, it's okay. Development will be fine. We'll be okay. You know, don't worry too much about that.
- [72:05]
B
Yeah, yeah. Well, yes, and even in your worst case scenario, if the fed cuts by 100bps, it's probably because the economy is in, in bad shape, which would, which would slow down any wave of construction as well.
- [72:16]
A
So.
- [72:17]
C
Right.
- [72:17]
B
Like you said, it's probably unlikely.
- [72:20]
C
Very true.
- [72:21]
B
Well, well, Allison, this has been a lot of fun. Thanks for, for taking the time to, to record the podcast and, and best of luck in finishing out 2025 and.
- [72:30]
A
Getting more projects started.
- [72:32]
C
Thanks, Jay. It was great talking to you and I'll see you at a conference soon, I'm sure.
- [72:38]
B
See you soon.
- [72:59]
A
And that's a wrap on episode number 55 of the rent Roll. Big thanks to Allison for being our guest today. And thank you to Funnel to JPI and Madera for sponsoring today's episode. And thank you to all of you for making us part of your week. We'll see you next time.