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Welcome to episode number 56 of the Rent Roll your podcast on all things rental housing apartments, single family rentals, and build to Rent. I'm your host, Jay Parsons, and today it's a very timely topic. Budgeting season. So here we are. It's a seasonal rite of passage. For better or worse, depending on who you ask. Some of you are deep into the throes of this already. Uh, it's always crazy to me how some of you guys are starting, you know, when school's not even back in session yet. But I get it. It's. You need to be thinking about the year ahead. And that process gets refined as we get further into, further deep into the calendar year. So our goal today is to offer up just a bit of guidance and perspective to equip you and your teams with some talking points and some data for budgeting the the year ahead. Now, I want to put this out there. Please know I don't claim to have a crystal ball. I don't claim to be an oracle of any sort. But I do think the market offers up clues and context, help us better plan for probabilities, and that's what we're going to try to dive into today. And helping me make sense of budgeting season. As someone who's had more than her fair share of budgeting seasons through the years, crossing multiple cycles, good times and bad times, strong economies and weak economies. Sue Ansel, the CEO of Gables Residential, an owner, operator, and developer of class A and class B apartments across the country. Sue is, as many of you know, she's one of the most respected multifamily leaders in the country. She's the past chair of the National Multiple Housing Council. And so we'll ask sue, how's she thinking about 2026? Do you think we'll finally see rents rebound as supply plunges to the lowest levels in 10 plus years? And one big question I have is, will all those concessions really, truly just burn off? Let's talk about concession burn off. Like you just, you know, snap your fingers and it just burns off and that lease expires. We'll get her take on that as well. And what about operating expenses? So that's been a roller coaster in itself these last few years. Seems like getting to some stability, but we'll get her thoughts on the OPEX side of the equation also. All right, before we dive in, a big shout out to our sponsors. First and foremost to to jpi, a leading apartment developer with the stated purpose to transform building, enhance communities and improve lives. JPI is A top builder in Southern California and in Texas now also in the Pacific Northwest and the Carolinas. And then also a big thank you to Madera Residential, a leading apartment owner and operator in Texas expanding into the Southeast. All right, so as always, kick it off with here's a chart and we got some data tables for you this week for focused on. Let's start with opex. OPEX inflation, it's cooled off dramatically of late. For those of you can see the screen, I've got a table here showing you some data from RealPage Market analytics that shows what was the peak growth rate in each of these expense categories in this last cycle. What was it last year or this time last year, I should say. And where is it right now in terms of year over year growth? And, and so if you can't see it, it's okay, I'm going to walk you through it. And before we dive in, as you think about expenses and revenue, the expense side is probably the easier one. And that may sound like an obvious statement, but remember, it wasn't that long ago when it wasn't that easy at all. Obviously, apartments and SFR are not immune and were not immune to the inflationary pressures that we saw across the economy from 2020 to 2024. But it has really settled down over the last year, I think for a wide variety of reasons. So some of those are of course macroeconomic reasons, just broader inflation, cooling down and then also just a very intentional effort among operators to operate more efficiently. So in fact, this was a key theme we highlighted during our REIT earnings calls recaps last quarter. It was one of the top five themes that I shared. Everyone was talking about how expenses were growing less than expected this year. A lot of the REITs actually reduced their expense growth outlook, particularly because of favorable movement in property taxes and insurance, which were, as many of you know, two of the primary culprits of expense growth at the peak. And they also talked about how prop tech centralization, AI automation, how all that's playing a role to help curb expense inflation as well. So the latest expense data aligns with those themes that we heard from the REITs. The latest data shows US OPEX in Q3 2025 was basically on par with levels from one year ago. And like the REITs noted, that shift is primarily driven by improvement in taxes and in insurance. In fact, both of those numbers came down a little bit in the real page numbers. Insurance actually more than a little bit, down 9%. And the insurance course is particularly interesting and we've all talked about this one a ton of late, so I'm not going to belabor the point here. But insurance costs have been skyrocketing really for the past five years with double digit increases peaking at a 37% year over year increase in 2023. And of course in some cases we've heard stories of insurance costs doubling or more in just one year. And so now insurance costs are actually declining down 9% year over year. And of course that doesn't get us anywhere near the levels that we had prior to Covid. May not even. I mean we're in a whole different stratosphere at this point compared to back then. But obviously any relief helps. It's trending in the right direction. That's a positive. And of course, you know, forecasting insurance is, is probably a fool's errand given all the variables at play here. But everything that we're hearing right now is that insurance renewals continue to come in very favorably. So as you lock in those rates in most places, you're probably seeing some relief into 2026 as well. Particularly if you're in a market that saw a lot of insurance growth in insurance premiums previously. Those markets seem to be curbing back faster. And some other slip markets maybe still a bit of catch up. But in most cases we're hearing about premiums coming in below where they were previously. You know, the growth in premiums brought some new entrants in the market. That's helped bring some relief. Now a couple of interesting categories that, well, I guess we look at our categories, let me just say this, property taxes, you maybe didn't see a tax cut, but obviously the property tax growth rate has really slowed down given what we've seen happening in property values and obviously not just for apartments, but really for all the real estate. Now as we look at other categories, most of them have reverted back to kind of steadier levels of growth. Admin costs, payroll, utilities, et cetera, all now in the 3 to 4% range nationally. And probably no reason to think those materially change in most markets, you know, barring something unexpected of course, which always happen. And those areas don't get as much attention. But remember, even in those areas we were seeing double digit increases at the peak. And so it's cooled off in these, in these other categories as well. Now a couple of categories I think are a little more interesting and might differ from the others. First one, marketing. So year over year, marketing actually led all categories with 7% growth year over year. And I think this one makes sense. It's obviously a hyper competitive leasing environment. And so even in the push to curtail expenses, everyone is understandably cautious about pulling back too much on marketing. And as we think about 2026, I think the, the, the, the prolonged sluggishness of 2025 likely means another year of higher spend on marketing. You know, we'll likely go into the spring and summer leasing seasons. You still need to get occupancy back on track for a lot of assets. So that's going to keep the throttle down on, on marketing. Of course, you know, we're seeing more and more of that spend too is going to not just the old school Internet listing sites but also, you know, new spend on more targeted organic direct marketing. We're seeing a lot of marketing concessions where it's not just a rent concession but it's a giveaway of some sort that usually hits the marketing line item. And so all of that is, is having an impact and likely continue to, will continue to have an impact, you know, marketing prop tech as well, but a lot of innovation in that space. So again that's one I would probably expect to see continue to see some pressure on second one turn costs. This one's been very interesting to me too and it could be interesting next year. Turnover costs have actually been flattish for a while now, but it's largely because the total number of turns has been going down. There's just less turnover as operators have really lasered in on retention, protecting that back door, protecting occupancy. So there's fewer units to turn and that reduces costs and that's, and that's positive. That's been an intentional strategy for a lot of operators. But this is where I think we could see some variability in 2026. In some of these lower growth, lower supply markets. It's probably more of the same in a base case scenario. But in these higher growth, higher supplied markets where there's just naturally more, more churn, it could get more challenging, you know, particularly if you're running close to an inverted rent roll. You know, where your in place rents start to exceed your new lease rents, your advertised rents or a gain to lease situation. We're trying to price renewals above, you know, what's what, what the renter could see online advertise for a new renter. You know, that's, that's, that's when we start to get to some, some challenges here potentially for, for turn costs. And we'll talk more about renewals in a moment when we transition to revenue But I know some owners just refuse to accept any kind of negative renewal trade out or even flat trail they always like. So a lot of them I've heard anecdotally just they positive renewal tradeout and that's going to get harder and harder unless you see new lease rent growth. So if that's you, if you're one of those people who just has to see positive renewal trade out, you're going to see more turnover in those cases and therefore you're going to have more turn costs and more vacancy costs as well. And so remember, if you're thinking about NOI and asset value, you should be thinking more than just about one metric like renewal trade out, renewal rent growth. And so if you think about in terms of the impact on turn on turn costs on, on vacancy costs, you know it, it, it probably should persuade you in those cases to be more cautious on renewals. So that gets a good transition to the renewal side of the ledger. As, as you know, as much as expense growth has been a roller coaster these last few years, obviously it's been even more so on the revenue side. So at this time a year ago, a lot of folks thought we'd be back to kind of a normalist range of rent growth in 2025, maybe 2 or 3% rent growth. And frankly I was one of those people and that obviously hasn't happened. We're currently around zero. New lease tradeouts remain negative in many markets, particularly in the higher supplied ones, retention and renewal rent growth. I kind of alluded this earlier. That's really been the revenue cushion that saved the day. And we've talked about this a lot on the podcast. But you know, the impact of how these retention rates have continually crept higher and higher over the last decade. And again, I've talked about a lot of. I don't want to get into all the reasons for this, but this, this trend started long before mortgage rates went up. In fact, we were seeing retention go up even when we had a lot more move outs to home purchase. So I keep expecting these retention rate numbers to flatten off or backtrack a little bit. But I've continually been wrong. I'll still make the point, as my friend Rich likes to say, that corn can't grow to the moon. So I don't know how much higher these numbers can get. But I do think we can safely assume this. I think this is probably fair. We could probably safely assume that the new normal for retention is going to be higher than the past cycles. It's just structurally higher. Than it was pre Covid and for a wide variety of reasons. And, and I think that's going to be true regardless what happens with home prices and move outs to home purchase. Even in a much stronger home buyer market. I think that's going to remain the case just because of better management, you know, better properties, more stickier living experiences, people, you know, waiting long to get married, have kids, all those things. Right. And we've seen high retention even with renewal rent growth in a normal ish range. We're at 3.7% renewal rent growth nationally, and that's about in line with the historic average. But it is ticking down ever so slightly. And as I alluded to earlier, it may continue trending down in some markets. If, and this is probably the biggest if as it relates to, you know, revenue forecasting, budgeting for 2026, if you can get some new lease pricing going. Because you can only grow renewals faster than new leases, obviously you can only do that for so long. Typically there's some loss to lease built in, meaning your current renters are leasing usually at rates below what they see advertised online to a prospective new resident. And there was some outsized loss to lease built up from the peak inflationary periods of 21 and 22, when new leases were growing a lot faster than renewals. Okay, so that gave you some cushion. But now we've burnt through much of that, and in many of these markets, we're probably getting to the point where gain to lease is potentially becoming a real headwind. And again, every asset's different. Some markets markets different, but you know, this is so I'm not speaking to everybody, but for those who are in this situation, it could potentially become a real headwind. Now remember, I'm gonna state the obvious here. It's really, really hard to ask a resident in good standing to pay more than someone coming in through the front door signing a new lease. Maybe you could ask for marginally more, and maybe the renter is okay with that. Maybe you're saying, hey, look, you know, we're pricing your renewal out two, three months in advance. This is where we expect new leases to be. And maybe the renter looks at that and they're okay with it because they're factoring in moving costs and obviously moving's a pain. Maybe they're willing to do some of that, but at some point the math just doesn't work anymore. And even if someone could afford the renewal, you know, common sense starts to take over. You know, maybe I can find a better or comparable property or unit in the same property for comparable or better rent. And this is where we hear stories of, I've shared this previously. We've heard stories of renters moving out of a unit and moving into a comparable or even larger unit at the same property and at a lower rent. And that's a real, I think, NOI killer for a property, you know, more turn costs plus a bigger hit to the rent roll. So to be realistic here, and you have, you know, to be riskier, I guess what I'm trying to say is you have to actually lower the rent. Otherwise you're incentivized people to move out even on your own property and let rent the unit you've advertised online at a better deal that you've already, by the way, done the turn cost for. So it's actually probably in maybe a little better shape than the unit that that renter is moving out of. So it's actually an upgrade for them, but you're giving them a better deal as opposed to just giving them the same rate or comparable rate for where they live today. So, so again, I think it'd be realistic here. And if you have an owner, if you're in the, if you're in the management business, you have an owner who just refuses to see anything other than positive renewal trade out, you know, send them this podcast, send them my way. I also wrote a piece on this in more detail about a particular case I heard about from a friend. I shared that on LinkedIn a while back. A real life example of a silly behavior by a property owner that led to the situation. Like I just described someone moving out of the same property into a larger unit at a lower rent only because the owner refused to offer a comparable deal for the the unit they currently lived in at the time. So the only reason to allow such a thing is if you really think the aesthetics of negative to flat renewals outweigh the negative impact to NOI and to asset value, which again to me is just silly. But hey, to each their own. You know, if that's your strategy, then more power to you. All right, so but now's the time for property managers, owners to be aligning on that renewal strategy. Because you want to avoid, regardless of your strategy, renewals and renewal pricing, retention, you want to avoid those unnecessary surprises in 2026. Have a plan before those scenarios come up and maybe think of it like this, you know, what's your priority if it's occupancy and retention, what I think is true for most of the industry you might need to ratchet down your renewal rent growth expectations a bit for 2026, at least until you get occupancy firmly stabilized back in the target range and you're getting new lease rent growth that you need to keep renewals priced at or below those new lease rent. New lease rents advertised online. So it's not necessarily for the whole year. But you think about okay, when do we, when do I make sure that my loss to lease is secured enough where I where I can continue to see that 4% renewal rent growth on average. But if your priority is to keep the renewal trade out number high, then you probably need to balance that realistically with expectations for higher turnover, higher turn costs and also somewhat higher vacancy as well. So that takes us back to these new lease rents, right? Again, it's hard to sustain renewal rent growth regardless of affordability. It's hard to sustain it if you don't have new lease rent growth. So do we see growth in 2026? And I think barring an economic collapse, I think we still do. We still need to see at least some modest job growth. I'd like to see at least some modest improvement in consumer confidence. We don't need to see a big economic boom, but we do need to see some stability, I think. But also of course as everybody knows at this point, the biggest headwind supply is going away in 2026, at least in most of these markets. And it's going to take different amounts of time to her markets. But for, but nationally supply with the lowest levels in more than 10 years. And that does set up the long awaited recovery. The question is just how long it takes to lease up this current wave of supply. And obviously even 2025 completions, that lease up is going to spill into 2026 for some of these and it's going to take longer in some spots than others. And a couple episodes ago I shared some of the supply time by market. We're going to get there faster in places like Dallas and Atlanta than we will in Phoenix and Austin. So again, assuming some economic growth, I think we'll likely see concession start to burn off. That alone is going to push up effective rent growth. And you know, because we saw this in early 2000s, early 2010s as well, command of the GFC, we had that, that was the highest period of. Those are the most concessions that we've had until where we are now. And so, and so you look at that period, we saw concessions burn off first and then after concessions burned off then we started to See the base asking rents coming up as well. Now I don't think we're going to burn off every two to three month concession right away in one leasing cycle, but I do think we'll make a dent in it. And because concessions today are higher at any point in a decade, there is some Runway though to get some of that effective rent growth. We're going to burn some of that off, even if not all of it. We should burn in a decent economy, we should burn enough of it off to generate some effective rent growth. And I talked with Alison Bod about this in last week's episode we did our Q4 apartment update and one of the things we talked about is you may want to build like a baseline scenario and an upside scenario. And your baseline in most markets probably a normalized, you know, 3% give or take. But you can very plausibly see more depending on the location and the asset where and where it is in the supply wind down. In fact, if you look at what Rens did the last time supply was the levels we're going to see in 2026 in a lot of markets you'd see the ren's growth was in the mid to mid upper single digits in some of these spots. And again I wouldn't underwrite that, wouldn't budget that for 2026. But if the economy finds its footing and demand holds up, it's certainly a possible upside scenario. Of course on the flip side for talk about the upside, also talk about the downside, you may want to have a downside scenario as well. And so if we see the R word, that dreaded R word, the recession scenario, we see job losses, especially if it's coupled with re accelerated inflation, which is a worst case scenario. We may not see any rent growth at all in that scenario. And because it's going to take longer to slow down, it's going to take. We have a lot of those lease ups from 24 and 25 that are likely now going to be in a further extended lease up stage. The impact of the B and C's still being felt through as well. So even though supply is dropping off, if absorption drops off before those units all stabilize and get some rent growth again, then that's going to be a tough cycle that obviously would also just extend the drought. Now in that scenario it also extends the supply drought. We're going to have fewer starts for even longer. And so eventually we'll still see that rebound, but we just don't know exactly when that's going to be all Right. One last comment on revenue before we move on. Remember that revenue growth lags rent growth, and so you have to see rent growth first. And then as more leases turn and adopt those higher rents, it gradually impacts your bottom line more. So given that lag and given where we are right now, we probably won't see a ton of revenue lift and NOI lift until 2027 or second half, 2026, in some cases, even in an upside scenario. And so, so again, 2027 is probably gonna be a better year for revenue growth in 2026. So bottom line, 2026 could still be a sluggish or lower growth year in terms of NOI and rent and revenue growth, but hopefully one that's now trending in the right direction. We'll see. All right, so now let's move on to rental housing trivia. All right, today's rental housing trivia will pick up right where we left off. Today's question is property insurance premiums have risen more than any other apartment operating expense category over the last five years. What category ranks second? Is it administrative costs? Is it marketing? Is it payroll? Is it property taxes, or is it utilities? So give that a guess and we'll come back to that in a moment. But first in the news. All right, we got some interesting industry headlines this week in the news when we talk about key headlines that impact the single family rental, build to rent and multifamily market. And this first one's going to come from multifamily dive. And some really good reporting by Les shaver. Headline says, FPI makes layoffs with rumored asset living merger. The nation's sixth largest property manager is eliminating 105 positions. And then it goes on a little bit. So for some reason, you know, this has been rumored for a while now. Les did a really good job of this article. For some reason, FPI and Asset Living have not publicly confirmed or denied the acquisition or merger, whatever you want to call it. But Les put some pieces together to suggest something might be happening. Three things he highlighted. Number one, FBI posted with the state of California a notice to lay off 105 employees. And let's note that the filing came under the name of the person who's actually Asset Living's head of HR, not FBI's head of HR. Les also noted that if you go to FBI's website and look at the job openings, it's redirecting applicants to Asset Living's website. And then he also noted that the website for Florida's Division of Corporations lists the CEO of FPI as the same guy who's the CEO of Asset Living, Ryan McGrath. So this certainly looks like an acquisition. I'm not sure why we haven't had an official announcement or confirmation. They also denied comment, declined to comment to Les for his article and for others as well. But if Les is right about this, I'm not sure why it hasn't been confirmed publicly. I'm sure they have their reasons though. There's probably a good reason for it. But nice reporting by Les at Multifamilydive. By the way, Asset Living is the number two largest property manager according to NMHC top 50 list FPI number six. The merger would keep asset living in the number two spot behind Gracetar, but would cushion its lead over number three, Willowbridge, the company formerly known as Lincoln. Our next headline comes from Globe Street. It says renters say their priorities have changed, but landlords aren't keeping up. And really talking about developers, not so much landlords. And this comes from a study done by Rockerbox, which is an interesting data analytics firm started by a group of folks who have a background in political polling. They're applying that science now to the real estate business and the results really align with something that I talked about with the episode about the case for family oriented apartments. And Bobby, our guest that week, was talking about this and he had his own study that said that people are willing to pay more for a two bedroom unit over a one bedroom unit. Even the same square footage in this study from Rockerbox kind of aligns that as well. Let me read a little bit from this article. It says apartment size is one key point of difference between what's wanted and actually offered. The study found a large untapped and underserved demand for two and three bedroom units at competitive and premium rental rates, a mismatch expected to increase over the next three years. It cited some examples. Just 4% of renters want the studio apartments while there was a 12% supply of them, meaning 12% apartments for studios. Similarly, there was a 41% supply of one bedroom units, but demand for just 21%. On the other hand, the supply of two bedroom units stood at 39% compared to 52% of rental demand. The mismatch between demand and supply of three bedroom units was even greater, 23% versus 8%. All right, so yeah, just another data point that we have more renters wanting larger units with or at least more bedrooms in their units. And I know that sometimes that doesn't align. What we see on the ground from the leasing velocity But I think what this is really speaking to is pent up demand for larger units from a group that may not be living in traditional apartments today, or maybe wanting just to maintain apartment living in more urban locations but not finding the floor plans they need to do that, which is kind of Bobby's thesis, which hey, we need to have more family oriented apartments in urban locations. Or it could also be not just families but people who roommate situations where they want to have more bedrooms in the location they actually want to live and would rather be an apartment at this stage of life than a in a single family home for whatever reason. So, so some that's just related to, you know, who we lease to could be reflection who are marketing to as well. Also another good stat from here, this was an encouraging one from the study. It said 46% of leasing prospects said they would increase their budgets when they move next. And so that's a, that's a great stat compared to 20% who stand to plan to seek lower rents. And so the fact that nearly half of renters are looking to increase their budget for their next move certainly is an encouraging sign about the state of renter financial health. And obviously anybody who follows my comments on LinkedIn and my other articles in this podcast, you know that I think affordability is actually more of a tailwind than a headwind, specifically for the professionally managed market rate class A and B market. So that's a good stat to back that up. All right, next headline. This one comes from the Altus Group in their blog. It says, is capital now pushing investors toward older multifamily vintages? And it's interesting. Let me read a little bit. This is that office properties changing hands today mirror the broader US Office inventory and age, with both largely comprising buildings constructed in. I'm sorry, with both largely comprising buildings constructed in the 1980s. However, recently traded multifamily properties are notably older than the overall stock. Meaning that there's a the sample of properties actually trading are older than the average US farm property, and they're often dating to 1960s or earlier. Even in markets with generally newer inventory transactions, skewing to smaller, older multifamily buildings may be a response to the high capital cost environment, given lower initial equity requirements and access to competitively priced agency financing. End quote. All right, so this one's interesting because it bucks the mainstream view that capital favors newer vintage apartments, larger properties, et cetera. And Altus is saying that the data in their data is saying the opposite. But you know, in reality, I think kind of Both are right. I think there's some nuance here. You know, think about the market for these smaller, older apartment buildings. It's obviously, obviously sub institutional capital. You know, these are local private equity groups tapping into friends and friends and family capital for the most part. And for those groups, they may indeed be seeing better buying opportunities in part because there's been more financial distress there, less rescue capital in terms of pref. And that's going to potentially lead to better buying opportunities. So if you're substitutional, you can't really compete for institutional class A and B. But you want to be in multifamily. You like the ultimate story. You can't write the check sizes for these bigger deals and, but you still, you also still like multifamily because, you know, the agency financing, the demographic tailwinds and whatnot, you know, that that maybe makes sense. And so again, smaller check size still get the benefit of agency financing. And maybe this increased, you know, pick up in trade suggests maybe that market is finding its footing a little bit. But again, it's going to be a sub institutional market for the most part. And we can make the case obviously that there's a lot less distress and there's more firmer pricing in the newer vintage institutional multifamily market. So therefore just, you know, fewer bargain deals that could drive up volumes right now. All right, next one comes in the real deal, Donald Bren. Buck Strand presses bet on multifamily. Irvine company shrugs off slowdown in sector puts 9,000 units in works from Orange county to Bay Area California. All right, so you know, you know, this is a 3,000 units in Orange County, 9,000 units in planning phases across Southern California. I'm sorry, 3,000 units under construction Orange county for Irvine companies. Another 9,000 in planning across Orange County, San Diego and Santa Clara County. So, all right, so this is a good reminder first of all, good to see Irvine Company ramping back up again. So of the REITs have done likewise. Some of the bigger developers, maybe not numbers like this, but still. But it's a good reminder that bigger developers like Irvine, which by the way is uniquely benefited from significant land holdings as well, you know, they're able to push forward when most smaller developers can't. We talked about this a lot two episodes ago. But you know, small, smaller developers comprise 75% of starts. And so a move by Irvine probably doesn't move the needle much for that market. But still, you know, kudos to Irvine for getting more going. And our last headline real quickly, this one comes from Bloomberg. It says Austin and Salt Lake City top global list for most affordable cities. New York, Mexico City and Hong Kong rank among the least affordable. So real quick here, you know, I think it's a good reminder that for those of us who live in the Sun Belt, you say, well, everything's gotten so much more expensive. Yes, it has, but it's also still very affordable relative to where people are coming from. So remember, in all of these Sunbelt and Mountain Market cities, the Midwest as well, two things can be true at the same time. Number one, it's a lot more expensive than it used to be. But number two, it's still incredibly more affordable relative to other major cities. With that, let's get back to rental housing trivia. Today's question was property insurance premiums have risen more than any other apartment operating expense category over the last five years. Which category ranks second? And I kind of gave this away earlier in the episode, but it's actually b, it's marketing. And first of all, everything's up a lot over the last five years. But according to RealPage Market analytics, marketing ranks second for expense inflation over the last five years per unit marketing costs up almost 50%. But you know, bear in mind, I know everyone's seen a lot of ILS price increases, but this is not just that. It's also spend on increased marketing prop tech. It's a lot of the marketing concessions like giveaways and then further investment in direct marketing channels. So you know, there's a lot of science that goes into marketing these days. It's, it's, it used to be a very kind of art driven field. Now it's probably even more about science and data than it is about the art of marketing. And next up, it's time for today's interview. It's 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 could help your property centralize operations and automate everyday tasks, visit funnelle leasing.com Today's guest is the CEO of Gables Residential. Gables is one of the nation's largest vertically integrated owner operator developers with more than 25,000 units across the country. It was founded way back in 1982, went public as a REIT in the 1990s, back in the REIT IPO heyday, later taken private and still owned by Clarion Partners. Sue is also the past chair of the National Multifamily Housing Council and still active on NMHC's board of directors. So let's jump in.
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B
All right, now we enter the interview portion of today's podcast. And I am absolutely honored to welcome in the CEO of Gables Residential, Sue Ansel. So, sue, thank you so much for being with us.
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Jay, thanks for the invitation. I look forward to the discussion.
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B
All right, so it's we're in that budget season. I want to get into all that.
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A
Before we get into the meat and potatoes talk.
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B
A lot of people know you, but there's probably a few out there who don't.
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A
So I'd love to hear a little bit of your story.
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B
How did you get into multifamily?
- [33:38]
C
Well, probably like many stories, it was a bit serendipitous. Jay When I graduated from college, I went to a small liberal arts college in the middle of Indiana University, and I graduated at a time when it was challenging to find jobs. So I studied economics and business in school, but came out with a bachelor of arts degree. So it was. I'm a strong proponent of that liberal arts education, but it doesn't always help in finding that first job. Fortunately for me, I was hired, recruited by an alum who happened to be in the real estate tax shelter business back when that was such a thing. And while I was interviewing with with him and other companies like GM and banks, et cetera, et cetera, I really thought that was probably my path. But I was attracted to the real estate business, not because of the real estate business, but I loved the idea of moving to Connecticut, which where the job was located. I thought it would be fun to move out of the Midwest. So I got there and, you know, fell in love with the business while I was there. I was with that company for five years, three of which I was in Connecticut and the last two when I joined the company. I think I was the 39th employee at the company. When I left five years later, there were 1500 employees. So the company grew exponentially by growing into different parts of the business, one of which was we started a management company that wasn't. We didn't think was going very well. And so they asked me to move to Dallas for two years to. For two years the management company for two years and then moved back. And I have been in Dallas since that time, but I knew where that was going. Yeah, yeah, you knew where that was going. But from there I went and joined Trammel Crow Residential, left there, went to work for Trammel Crow Residential and have been with the many iterations of what is Gables since that time. We started off as a merchant builder and learned that side of the business. And in 1994 the company, several of the Georgia, Tennessee and Texas divisions of Trammel Crow Residential went public. So I had my 11 years of experience as a publicly traded company and then we were taken private in a leveraged buyout led by Clarion.
- [36:08]
B
Well, like a lot of folks, so many it's amazing how he'll go end up going tying back to Trammel Crow in some way or another.
- [36:16]
C
And I certainly, certainly less than six degrees of separation.
- [36:20]
B
Oh yeah, I'm sure probably almost everybody in multifamily, unless it's a small family office or family business touches to at 6 degrees separation to Trammell Crow. So obviously Gables Residential, big name in the business for a long time and Trammel Crow of course. But give us a quick overview of the current Gables geographic footprint in your portfolio.
- [36:42]
A
Sure.
- [36:42]
C
We're about 30,000 units owned and managed. We are in 16 different markets. I think it's nine different states, about 3,940 sub markets within those 16 markets, primarily in the smile states across the United States. So start at Boston and work our way up to Seattle. 75% of the portfolio is really in the Sunbelt markets or the mountain states. We would call those lifestyle markets. Our two newest markets are Seattle, which I mentioned a minute ago, and Salt Lake City. So expanding geographically in ways that we think adds to the diversity of the portfolio that's complementary to our investment thesis. It's a young portfolio. You know, 48% of the assets in the, in the portfolio are have been built within the last 10 years. So when we look at our portfolio, it's, it's young compared to most and I'd say it's a nearly equal mix of high rise, mid rise, garden and low rise. If there's, there's probably a few more mid rise and a few less low rise. But pretty, pretty equal mix across the portfolio.
- [38:02]
B
But fair to say mostly class A, actually a newer vintage and more of the lifestyle renter base.
- [38:10]
C
You know, I think people would be surprised when you look at our portfolio, it's about a third of the assets. A little more than a third of the assets would be considered B assets about, about 2/3 a. And we're measuring that based on rents compared to the to the market. So probably more diverse than most people expect. You know, pretty good because we're a lot of those markets are in less expensive states. If you look at what our the rents are, you know, a good percentage. Almost 77% of our portfolio is affordable by renters at 120% of AMI.
- [38:52]
A
Wow, that's great.
- [38:53]
C
Yeah. So it's a probably more diverse portfolio than most people think.
- [38:57]
B
All right, well, then I think most people listening to us realize this topic is getting more even more relevant than they thought because of that footprint. So, as you know, I want to get into budgeting. Budgeting season. Let's help the good folks out there. And so I want to ask you, from all the budget seasons that you've had in your career, I want you to just reflect on these last five plus years, Covid, the high inflation, the massive wave of apartment supply, the generational high. How difficult has it been before we get to this year, just these last five years, how difficult has it been to put together a budget you can really feel good about and have confidence in?
- [39:33]
C
Yeah, well, you've said a mouthful, Jay. Right. When I think about it, I think about, you know, we'll start with COVID and the stimulus dollars. And they upended everything that was normal. There was no normal as a result of that. And I think about it from the standpoint that early on in Covid, you know, Gables and the industry really tried to lean in to try to help renters who had been potentially impacted by Covid. And we did things by, you know, eliminating fees and capping rents and creating payment programs. And so, you know, that really, how would you budget for that? There was no way to budget for that. And then, you know, the COVID also caused a real pause in leasing activity. And again, how could you, how could you budget for something like that? Then we really begin to see people moving to our markets, moving for lifestyle reasons, you know, work from home. People were moving to be closer to their families or because they wanted to be on the beach or because they wanted to live near the mountains. And so our portfolio was truly the beneficiary of all of that. But to your point, it really created a yo yo effect on the, on the revenue side. And then if you switch and think about, you know, the expense side, the stimulus dollars also created, you know, real inflation on the expense side and gave, you know, that gave the vendors the appropriate opportunity to try to create, to increase their costs. But again, how do you manage for something like that? And then addition the lockdown, you know, so our residents were now at the properties for a significantly greater period of time. And so they were using the amenities more. They were wear and tear on the, the units themselves. So all of that made it really difficult, to your point, to budget.
- [41:32]
B
You just hadn't gone through for Those couple years, right?
- [41:34]
C
No, just hadn't gone through anything like that before. That said, if I look at the period of time, sort of the 10 years prior to that period of time, on average, the portfolio's controllable operating expenses were on average less than 2% a year. And so, you know, again, how do you budget for all that?
- [41:56]
A
Yeah.
- [41:56]
C
That said, since 2021 and 2022, sort of coming out of COVID our team has done a really amazing job of budgeting. We knew that costs were going to be up and I wouldn't say that every line item was exactly where we thought it was going to be, but in total the team had really done a fantastic job of budgeting. So we've got a great team and you know, since 23, 24 and so far in 25, the team's been, you know, right on, on mark with respect to great budgets.
- [42:25]
B
So, yes, challenging, but not everyone can say that. So that is a good accomplishment because it's been a constant challenge these last few years. So well done to your team. Yeah. So as you think about.
- [42:39]
A
I'm sorry, go ahead.
- [42:40]
C
I just said they deserve the kudos. Well done to the team.
- [42:43]
B
Absolutely. So as you talk to your team and you're thinking about 2026, does it feel like a more normal, I hate to say, you know, knock on wood and cross your finger. I'm not really that superstitious actually. But does it feel like we're getting back to a more normal budgeting year, at least in terms of, you know, taxes, insurance, payroll, more expenses in the 2 to 4% range? Is that, is that fair? Do you feel that way?
- [43:07]
C
Yeah. Look at our insurance renews in, in the middle of the year. So we've just gone through our insurance renewal. So we've got visibility on what that looks like for next year. And interestingly enough, this year our property insurance costs came down dramatically. Last year, the property insurance costs came down dramatically as well. So we had, you know, a big a run up the year before. But so we're, we feel good about where we are there and so that'll be. Keep us well in that target range. Property taxes, the capital markets have had a big impact on that. You know, the fact that there's valuations are down, you know, cap rates have moved up quite a bit and they're. The volume of transactions is down significantly have given the appraisal districts less information to try to increase the property tax valuations. So we've had pretty good success over the last couple of years. Most of our Markets are not. I guess the other thing that we don't control on that regard or we don't control on valuations, but we at least can talk about it. We don't control what the millage rate is. And most of the markets in which we operate are actually in pretty good financial condition. So we haven't seen, in some cases we've seen a decline in millage rates. So I think in answer to your question, it feels like 26 that those costs will be, you know, pretty good shape. Don't expect, you know, some of the increases that we have seen in the past. Other controllable expenses we've seen beginning to trend down and I think we'll continue to see that trend continue. The one controllable expense that we, we have less control over is utility costs. And so we're spending a lot of time trying to think about, trying to understand what those might be for next year. But big picture question to your answer, it feels like we're headed back towards sort of more normal operating costs.
- [45:11]
B
And by the way, I like for those who aren't watching the videos, when sue was talking about utility expenses, a controllable expense, you put that in air quotes, which I like because that's somewhat of a. Is it controllable or not? So what about, I want to talk to you about technology a little bit centralization, AI, automation. Obviously a lot of hype around these. Are we at a point, Are you seeing that it's actually helping reduce costs or at least tame OPEX inflation for you guys?
- [45:37]
C
Yeah. Look at technology continues to change. It's going to continue to evolve. We've done a number of different things. We have centralized really our on site back office operations. In 2022, we partnered with Avalon Bay and are using their CCC, which is based in Virginia, to help us really control our costs as well as turn our on site team into a sales and leasing focused team which is, you know, service to our residents has really been one of the things that we think is a key differentiator for us so that, you know, that consolidation has certainly helped. We are using technology where we have, we've been using a lot of technology over time, but frankly, sometimes you don't, you become more efficient but you don't really see the cost savings. Where we have begun to really see the cost savings side is on the marketing side. Look at the information that we are getting from some of these tools today allows us to much better understand where our prospects or where our new renters are coming from, where we can spend our ad dollars most efficiently and effectively. And frankly, in spite of the cost of the services continuing to climb, we've seen over the last couple of years about an 8% decrease in marketing costs. We are continuing to look for ways to consolidate different operations and specialization. I think if you can really specialize tasks and have experts work on those tasks, it allows ways for you to be more efficient and effective. So I think that that's the new norm. We're going to continue to see those efforts and the hardest part of it frankly is managing change. How do you, as you see these new technologies, how do you implement them appropriately and effectively?
- [47:32]
B
Sure. And I think what's interesting too is even as the market rebounds, like you get these efficiencies, you're not going to go backwards, right. Maybe that spurs more. I mean you guys are tend to be on the front end of some of these things, but more of the industry looking for efficiency and even as market conditions improve, you don't want to go backwards. So let's switch to the revenue side and correct me if I'm wrong, but my sense from talking to people across the industry is that the bigger question, we're feeling a little better about expenses, but there's still some big, big question marks around the revenue, specifically rent side of this. As you know, going into this year 2025, we just haven't seen in most markets the rent bump that a lot of operators and investors expected to see this year. But you know, we do finally have the supply really dropping off supplies in the big head. When it drops off dramatically next year.
- [48:22]
A
We'Ll be able to work through a.
- [48:23]
B
Lot of these lease ups assuming the economy's in decent shape. So do you think we'll see. I know the question probably everybody's looking for is should we expect to see new lease effective rent growth return to that normal ish 3,4,5% range in most markets?
- [48:39]
C
Yeah, look at, it's really. You said a mouthful. It's really dependent I think on what markets that you're talking about. We in 2025, I think the industry was, was a little bit surprised by the pricing power in what is normally the peak leasing season. And I think most operators really turned to an occupancy based strategy even though there's been plenty of demand. You know, there's this is the last year, I think of a lot of supply. That said, with the decline in supply that's coming, you know, we can go out and we can go out and count the apartments that are being built. If the Economy continues to be solid. I think we will begin to return to more normal revenue growth again back to sort of the 2 to 4 range. It will be very much market dependent and very much dependent upon where that, you know, the amount of supply that's still coming and the submarkets, not just the market. But we do feel with the, I think there are some real tailwinds in our industry. There's still a, you know, a real housing shortage and there continues to be, there has continued to be good job growth. If that continues, it feels like we're overall, I think we're headed back towards that number that you've, you know, between the 2 to 4%. Will we see that in every market? Probably not, but I think we're on the right path.
- [50:07]
B
Yeah. I want to get more of the markets in a moment but first I want to ask you about in the lease up space and the newer construction. Obviously we've seen a lot of concessions in this cycle. Some of the most generous concessions in terms of just value that we've seen since the early 2000 and tens in.
- [50:23]
A
Certain markets that are more high supplied.
- [50:25]
B
So I want to ask you this. If it just hypothetically or it's not, I mean just this is obviously a real life scenario but not specific to your portfolio. Broadly speaking, if someone has a two plus month and we've seen even three month concessions, will the property manager, are they going to be able to just burn that off at renewal and then get that effective rent growth of 16 plus percent? Because the reason I ask is my sense is that while the class A renter could probably afford that in most cases they're probably still not excited about paying that. They may shop around. So what do you think?
- [51:01]
C
Yeah, look at. I think a consumer will shop around for sure. So I don't think you, we can just wave your magic wand and say that it goes away. One gable strategy for years has been to not use concessions to mark rents to market. We have demonstrated within our portfolio it's a better way to maximize revenue at the time. And the challenge with concessions in my opinion is really they come in chunks. You think about concessions from a 1 week, 2 week, 4 week month, 2 month process and that's not. I think there's better ways to price. So I think it is absolutely challenging if you have become quite dependent on using a concession strategy to burn that off in chunks. I think you have to think about it from a whole dollar standpoint and it's more challenging to do. That said depending on supply in the Market. We've seen plenty of times in the market where you can make meaningful changes to rents over time. So the answer is, is that going to happen? Are we going to be able to get 16% increase across the market in all markets? No. Do I think you will begin to see as supply declines, I do think operators will begin to move away from the occupancy strategy that maybe has been deployed more aggressively in 2025 than it was in the past. But I think renters look at all of the options that are available to them and so they will see what the market price is and that will determine what they're willing to pay. And I also recognize that I think it's expensive to move. And so, you know, this year we have seen retentions, retention rates across the portfolio go, go up quite a bit. And I expect that we'll see retention rates, you know, stay above where they have been historically because the alternative to move out to buy a home is just, you know, financially much more challenging than it has been in the past. So I think we have all of those tailwinds that are helping us. But it's renters know what's. There is good transparency in the market of what rents are across, across the submarkets.
- [53:25]
B
Yeah, I mean click at fingertips, you know what your alternatives are. And by the way, I agree with you on those points, but I'll continue to make the case too. I think that the renters have much better, especially at the class A and B market, like where they live, like these are much nicer places than we had 10, 15, 20 years ago. And they're stickier living experiences and groups like yours are. You've only gotten better at management, I think. I know I've said this before to different groups on this podcast as well, but I think that's a part of this high retention equation as well.
- [53:54]
C
Well, and back to the point I made earlier, why service is so important and why we think the fact that you can have your on site team really focused on, on sales and service is a differentiator for the res for those residents.
- [54:07]
B
Absolutely, yeah. I mean the renters have options today, so if they're not happy, they're going to move. Right, let's get back. You mentioned the markets are different and obviously, you know, you're in a bunch of markets coast to coast. What markets do you all think will lead the pack this next year? Which ones you think are going to need more time to bounce back and I guess more broadly, do you think we'll have another year where the coast, particularly the east coast and the Midwest maybe outperform the Sunbelt in the mountain.
- [54:37]
A
States for another year.
- [54:38]
C
Yeah, look at, I think it's, I think it's going to be a little mixture. I think it's hard to go with a broad brush. I think you, I would look at when I, when I bucket them into what I think are going to be the better performers in 20 what sort of what they have in 25 will continue in 26 perhaps is some of the recovery markets. So San Francisco, the Valley is a great example today of what they are having a very strong rental rate growth. I expect that that will continue to happen. I view that as a recovery market. They were down for some time and sort of getting back catch up market. So we saw that coming out of COVID with other places as well. A market that we think is going to continue to be strong, quite strong next year is West Palm beach. So, so parts of parts of Florida we think are going to continue to have good growth and I think parts of the Midwest, you know, Chicago has had good run and probably will have a, continue to have a good run for the next year. I think when you look at it over a longer period of time, I think you, you're going to go back to where there's job growth, where there's demand and I think some of those ones that are high flyers today will cycle out. We saw really strong growth in 2025 in our Washington D.C. area market. It'll be interesting to see how that continues to evolve as you know, the macroeconomic conditions might change. So again I think it's market by market. I think some of the markets that have had the most significant impact from supply. So I'll pick on Austin for a minute. You know, poster child of plenty of supply. In my view. Austin is going to be just fine. It continues to attract jobs. It continues to have, you know, a strong economy needs to work through the supply issues. But long term Austin is going to be just a terrific market in, in my opinion.
- [56:39]
A
Oh yeah, I agree.
- [56:40]
B
I mean it's, it's, it's probably going to take longer to bounce back than you know, Dallas and you know, other markets in the Southwest but with exception maybe Phoenix might be a little later one too. But yeah, it's Austin. I, I, I, I joked about this before. I think you know, we've probably at the same page where it's, you know, you see these headlines sometimes about oh, oh you know, Tech Bros. Move to Austin, realize Austin's hot, move back to California. It's like, well, that I'm sure that happens, but people are still moving to Austin. Like, Austin's fine.
- [57:07]
C
Austin's going to be just fine. Yeah.
- [57:10]
B
All right, so big picture question as we close this out, sue, what is the, you mentioned your team does a great job budgeting, so everyone's hopefully learning from you, but none of us have a crystal ball. So what's the biggest question mark you have for 2026? The one thing you wish you had.
- [57:27]
C
Better clarity on, Jay, it's really macroeconomic conditions. I think what has changed most dramatically since the first half of the year when I read the prognosticators forecast is really what's going to happen with job growth. You know, there's, when I think of the word of the year for 2025, I don't get to make that decision. But if it's not uncertainty, I would be surprised because, you know, there's just, there's uncertainty and everything. And we've seen that have its impact in, in all things capital markets. So for me, the uncertainty for 2026 is what do we, what will happen with job growth? What's going to happen with a macroeconomic conditions? I think there are tremendous tailwinds behind housing generally subject to what happens with the overall economy. And if, if the economy slows down, that will certainly have its impact on us. If the economy stays steady. It's I like, I like the future. Future. Right.
- [58:33]
B
Couldn't have said better. I agree. I think, I think you're right. Well, sue, thank you so much for your time and best of luck. And they're doing budget season for next year.
- [58:43]
C
Appreciate it. Jay, thanks for the time.
- [58:45]
A
Thank you, Sue.
- [58:46]
C
Take care.
- [59:07]
A
And that's wrapping Episode number 56 of the Rent roll. Big thanks to sue for being our guest today. Thank you to funnel to JPI and Madera Residential for sponsoring today's episode. Thank you to all of you for spending part of your day with us. We'll see you next time.