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Foreign.
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Welcome. It's episode number 6060 of the rent Roll, your podcast on all things rental housing, apartments, single family rentals, and build to rent. In today's episode, we're checking back in on those tertiary markets. And there's good reason for this. We're seeing a lot of growth in these smaller markets. Turns out this was not just some Covid phenomenon. These last couple of years, as more people have come back into the office for work, we've seen people moving back into some of the cities, like San Francisco, for instance. That's also brought some separation between what I would call zoom towns, which are more these, you know, seasonal vacation markets, and the more resilient, less seasonal growing smaller cities with vibrant economies and job bases in their own right. And so certainly places everybody's familiar with, spots like Boise, Wilmington, North Carolina, Savannah, Georgia, Charleston, South Carolina, et cetera. So we'll look at what are these top performing markets, these top performing tertiary markets, and, and which markets might be favored for continued growth in the next decade or so to come. And to be honest, a lot of these spots were already solid, stable, growing markets long prior to Covid. It's just that, again, Covid put that extra accelerant on some of these spots. All right, and then in our interview today, we'll talk to someone who knows a lot about the pros and the cons of investing and operating in tertiary markets. That's the CEO of Center Space, Ann Olson. Center Space has about 13,000 units, many of which are in tertiary markets. And it's the only public REIT with a heavy presence in tertiary markets. They've in recent years expanded into larger markets like Salt Lake and Denver. And so we'll get Ann's take on the strength of those tertiary markets plus the lure of those bigger markets. In many cases, these bigger markets actually haven't performed as well as the smaller markets. Investors still tend to favor the bigger markets. And one thing I want to say out of the gate is our interview with Ann does not touch on the news that just came out about Center Space now exploring strategic alternatives, which could include a potential sale. Of course, we recorded this conversation prior to that announcement, so we'll let that statement speak for itself. But Ann does speak to the broader issue facing all the REITs, which is stock prices discounted to what I call the real world values, what the REITs call NAV NET asset values. In other words, the, in many cases, public REITs today, the. The sum is worth less than its parts, meaning the company stock price versus the Values of what these individual properties would trade for on the private market. And also we're going to get Ann's take on why Wall street historically has not given REITs much credit for owning and high performing, high growth tertiary markets. Even in this cycle where we've seen many of those markets and Annal mentioned North Dakota being one of them for her that has seen stronger revenue growth than most big markets. And by the way, this is not just a challenge for REITs. I think everybody knows that it's harder to get institutional and larger private capital engaged in smaller markets. And the perception is oftentimes that these are smaller markets, more boom bust, they're more volatile, they're less liquid. But you know, there's hundreds of tertiary markets. Right. So it's not universally true. And again, we're going to highlight some of the better and more liquid small markets here today. So let's jump right in. And as always, before we do, a big shout out to our sponsors, first and foremost to jpi. Thank you to jpi. They're a leading apartment developer with a state of purpose to transform building, enhance communities and improve lives and that. And now they are doing that coast to coast. And also big shout out and thank you to Madera Residential, leading apartment owner and operator in Texas. Check them out@maderaresidential.com all right, so as always, kick it off with here's a chart and we are covering some tertiary market highlights today. We did this earlier in the year, so this is kind of a refresh look at some of these trends. Okay, so the first thing I want to look at is supply. Obviously the last few years supply has been the biggest headwind for the apartment market. Talk about a lot of. But in these tertiary markets, we're generally seeing a lot less supply than we do in the bigger markets because of course, capital is more attracted to the more sizable markets, generally speaking. And so we're looking at construction and construction as a share of the total market peaked at 6% among the top 50 markets in the country on average. So for every 100 units that existed, we were building six more at the peak. And that number has come down now to less than 3. So the construction rate is cut in half. We know there's gonna be less supply in the future. But for tertiary markets, the same drop off is happening, but they're coming off a smaller peak. It peaked at less than 5% for tertiary markets as a whole and we're already below 2%. So both for large markets and smaller markets, today's construction rate is well below not only the pre Covid numbers, but they're the lowest numbers that we've seen going back more than a decade, going back to 2012, 2013 timeframe. And that's going to translate the lesser supply that we've seen these last few years has translated to better rent growth. Because again, it's all about supply and demand. It's not complicated. Lesser supply, all else being equal, is going to equal, you're going to lead to higher rent growth. And so here's an interesting chart for everybody. This chart shows you rent growth by region, the four major regions in the country. And we're looking at major markets which I'm defining as the top 50 in size compared to tertiary markets. And so you might just think, okay, well maybe that's true in certain spots, you know, in the south where there's more supply. And not it's actually every single region of the country, the Midwest, the Northeast, the south and the west, tertiary markets have outperformed larger markets by a pretty sizable margin for average annual rent growth. So this is average annual rent growth for new new leases, effective new leases over the last few five years. And that number tops 5% in the Midwest, about 5 1/2% in the Northeast, just under 5% in the south, and a little bit less than that in the West. And again of course most of this would have happened during the earlier part of this decade after Covid. But this is the average numbers and for the most part these markets are still outperforming, even now. Now obviously if you look at the five year period that includes the post pandemic period, we still have numbers around 4%. And most of the major markets in most other regions, with the exception of the west, which has seen less rent growth over the last five years than the Midwest, which is lead the Northeast and the South. But again, every region in the country, tertiary markets have outperformed. So which markets have outperformed the most? Here are the top 20 markets for average annual rent growth in the last five years. Again, obviously these numbers can be skewed upward by the, by the post Covid years, but it'll still give you the kind of a multiple cycle story at this point, going back from COVID to the, to the pandemic post pandemic boom to where we are today in the high supply era. Sixteen of the top 20 markets these last five years in terms of average annual rent growth are tertiary markets and most of them with very little new supply added over these last five years. So by the way, the four non tertiary markets that make this list are all Florida markets. We got the big three South Florida markets, Miami, West Palm Beach, Fort Lauderdale, and then Tampa makes a list at number 16. But the other 16 markets had these 20 that have all seen rent growth of more than 6% on average over these last five years range of 6 to 8%. It's a list that includes markets from all over the country. Number one is Atlantic City, New Jersey at 7.9%. We have Naples, Florida, seven and a half percent. That's followed by Knoxville, Lexington, a couple big college towns. Then we got Savannah, Albuquerque, Salisbury, Maryland, Fayetteville, North Carolina, Grand Rapids, Michigan. You know Grand Rapids, that's a market that's under the radar probably for everybody except those in the upper Midwest who know that market very well. It's a, that's a very strong market, great demographics, attractive job base, etc. Then rounding out the list we have Bakersfield, California, Fresno, California, Charleston, South Carolina, Carolina, Allentown, Pennsylvania, Providence, Rhode Island, Kalamazoo, Michigan and Manchester, New Hampshire. So again, every single region of the country represented in that list. Most of these for the most part pretty low supplied spots. The exception of place like Charleston which is also just had a a ton of demand. All right, so let's now switch to the capital markets and then specifically looking at apartment sales dollars. Okay, so this chart's going to show you the per both the total number of dollars going in to in terms of sales dollars going into these smaller markets and what percent of the total apartment sales they represent. Okay, so when we go back to the early 2000s and the 2010s, we are typically seeing tertiary markets represent 12 to 14% of all total apartment sales in the U.S. now more recently it's been steadily climbing and that number since 2020 has been again picking up a little bit. It was even prior to 2020 is picking up. Second half of 2010's decade picked up. But more recently we've been seeing that that share in the 22 to 23% range, maybe 21, 24 range somewhere around there. So definitely more dollars flowing into these markets and a bigger share of capital flowing in these markets and a lot of reasons for that. One thing I put out in the past really think about is that as we've seen more dollars flowing into the big Sunbelt markets and into some of the big Midwest markets. I think one thing we're seeing, and this isn't universally true, but in some cases you're seeing that the local players in these markets may be now getting Priced out or maybe looking for better yield. And so now they're going to tertiary markets that are still within driving distance of their primary place, but they're going to now kind of sub institutional markets and in some cases, and so that's part of the story here as well as just the, the growth of some of these markets. So that's helped make some of these areas more liquid as well. Increased capital flow into, into some of these in the Sunbelt and the Midwest major markets is then going to push some capital into those smaller markets as well. And then of course you have regulatory issues in places like California and New York. And then that then pushes regional investors into the tertiary markets that may be more politically stable, but still again within driving distance and still banking on some of those same kind of big demand drivers facing those regions of the country. So what are the most targeted tertiary markets for investment? Well, I bet many of you guessed, number one, it's the hometown of the nation's largest department manager and developer, greystar. So that is of course Charleston, South Carolina, not because of greystar, of course, but it's one of many growing number of employers there. And that's a great place, place to, to do business, great place to live, of course, beautiful part of the country. Charleston's out punching its weight class by ranking number 39 for total apartment sales dollars over the past five years. So that's $6.7 billion in total investment over that time period. Total apartment sales, I should say that's a full billion dollars more than the number two tertiary market which was Sarasota, Florida, followed closely behind by Greenville, South Carolina. So two of the three are South Carolina. And then we get to between three to five billion dollars over the past five years in harbor sales in Tucson, Greensboro, Louisville, the Bridgeport, Stamford, Connecticut area, Savannah, Oklahoma City, Colorado Springs, Knoxville, Fort Myers and Birmingham. So those are some of the more liquid tertiary markets today. And again make this point. Again, some people say that smaller markets are not liquid, but that's not always true. In some of these cases, these markets may be more liquid than markets with much bigger populations. So some are going to be more liquid than others. And maybe another measure of liquidity could be ULI's emerging trends in Real Estate Report, which just came out with their 2026 edition. They ask industry participants every year to rank markets. And some of the tertiary markets Cracking the top 50 list include not only Charleston, of course, but also Westchester, Fairfield and the kind of suburban New York area, Tallahassee, Florida, northwest Arkansas, which, you know, we get a Lot talk about that one a lot. Never really shows up on all the apartment data but certainly one that's a fair popular long term bet. Greenville, South Carolina and Portland, Maine. Portland by the way, beautiful city. Maybe not just kind of like its west coast counterpart with the same name. Maybe not the most welcoming to apartment investment and development but certainly a beautiful place place. Now let's look at cap rates. How big is that discount to buy in smaller markets? And certainly there is a discount but it shrunk in this cycle. Prior to Covid it was call it 60 to 80 bips on average. Today it's about 40 bips pretty consistently. And of course again there's a wide gap among individual markets. We tend to see lower cap rates and especially the more favored student housing markets and some of these trendy, trendy or tertiary markets. So those places where liquidity is higher perceived risk might be less places like Charleston, Reno, et cetera where there's a good story around jobs and demand drivers. And then a couple more things touch on. Let's look at Oxford Economics forecasts as we look at the the road ahead. I'm looking at Oxford Economics forecast for population growth and job growth over the next decade. Let's start with population growth. So we're going to look at what is the growth rate in population over the next 2010 years forecasted by Oxford. Now obviously look at growth rate. It's going to favor smaller markets to begin with. So this is a, you know, admittedly a little bit of a, a kind of a stat that skews in the favor of smaller markets. So it's not going to be a surprise see a bunch of them on this list. But the question really is hey, if we want to follow the growth, where might that growth be? And so let's get the big markets out of the way first. Texas and Florida are expected to see a lot of growth in Arizona, North Carolina, South Carolina, et cetera. So we do see those markets on this list. Austin, Dallas, Orlando, Raleigh, all in the top 10 in the Oxford forecast population growth with 14 and a half to 20% forecasted population growth over the next 10 years. Rounding out the top 20 we have Houston, Charlotte, Fort Worth and Phoenix, all 12 and a half percent plus. But then look at these smaller markets. We have St. George, Utah, the Villages, Florida. These are very small markets today but they've been among the hottest growth markets in the country. A lot of stuff happening there and, and, and, and, and those, those will probably continue to see growth according to Oxford. Lakeland, Florida Provo Utah, Myrtle Beach, Greeley. It's already see a lot of southeast and mountains as kind of some themes here. All, you know, good, good quality of life markets for the most part. And then continuing to the bottom 10 of the top 20 we have Fort Myers, Florida, more Utah, Ogden and Logan, Utah, Boise, Idaho, Port St. Lucie, Florida and then Reno, Nevada. Of course, a lot of interesting things happening in Reno. And then let's look at our next one is going to be looking at job growth, employment growth. And we look at this one, it's going to see some similar names led right on top again by St. George, Utah and the Villages, Florida. By the way, every time I bought the village, you'll think this is just the retirement community. It's not. This is the cbsa, the metropolitan area which includes some of the surrounding towns, not just the retirement community itself. So just let's get that out of the way. And also remember, a growing retirement community does need a lot of support services. That means a lot of jobs. Okay. That's why this one cracks the list. And then also in the top 10 we have Provo, Utah, Austin, Texas. There's a bigger market, but the rest of them will be in the top 10 are going to be smaller markets. We have College Station, Texas, Coeur d', Alene, Idaho, Logan, Utah, Myrtle Beach, South Carolina and Fayetteville, Arkansas, which is of course also known as the Northwest, Arkansas and Bend, Oregon and so some student markets in there as well. And then Boise is number 11. Also in the top 20 we have Auburn, Charleston, Idaho Falls and Gainesville, Georgia. Not Gainesville, Florida, but Gainesville, Georgia, which is outside of Atlanta. Other big markets that make the top 20 beyond Austin are also going to be Raleigh, Orlando, Dallas, Charlotte and San Antonio. So again, this is forecasted job growth. According to Oxford, all these markets expected to see 10 to 20% expansion in jobs over the next 10 years. Again, that's just a forecast from Oxford. So we'll see how that holds out. But certainly those have been strong growing markets and those are the markets that Oxford remains bullish on for the next cycle. All right, next up, rental housing trivia.
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Today's trivia is presented by Foxen, which provides a suite of value add solutions designed to help improve operations compliance and property performance. Rethink renters insurance compliance, rent reporting and pet management with Foxen. Check them out@foxen.com that's fox n.com all right, so today's question is which of these tertiary markets does not rank in the nation's top five for the strongest apartment absorption rates since March of 2020. So I'm giving you six choices. Which one does not belong? If you're back to your standardized test days, I always hated those questions. Which one does not belong? Well, now I'm giving you one of these questions. So there's six of them. Which one is not in the top five for apartment absorption rates over the last since since COVID hit March of 2020? Is it Asheville, North Carolina, Boise, Idaho, Huntsville, Alabama, Lakeland, Florida, Sioux Falls, South Dakota or Wilmington, North Carolina? So all of these have been f have fast growing markets, but only five of these in the top five. In fact, the one that does not belong, it's also not in the top 10 even though it too is a high demand market. So which one is it? And we'll revisit that answer in a moment. But first in the news. And today's in the news section is brought to you. Brought to us by authentiq. If you've got a property that's underperforming and you can't quite figure out why, check out their multi family leasing and marketing audit. They'll dig into your pipeline, your leasing funnel and comps and tell you exactly where things are breaking down. Plus strategy on how to fix it. And listeners of the podcast get 50% off. So head to authenticff.com click on the banner to learn more and claim the offer. All right, so we got a few headlines this week. The first one comes from CoStar. It's a press release says CoStar lowers near term US multif family forecast. All right, so let me read this comment from my friend Grant Montgomery, who formerly headed up research in Elm Communities, which is the outgoing heart and REIT BAS in D.C. and the D.C. area, I should say. And he's now the head of multifamily analytics at CoStar. Grant wrote this. He said the revised forecast reflects a more measured view of near term performance. Still, a turning point is approaching. In the final quarter of 2025, renters are expected to occupy more units than are added to supply, a first since the third quarter of 2021. That shift should allow vacancy to begin receding in 2026, supported by a shrinking construction pipeline and steady renter demand. All right, so I know a lot of groups, a lot of investment shops and investors. You see his headline COSTAR Lowers near term US Multifamily forecast. I'm sure that caused some heartburn in some in some different shops. But the adjustment, the biggest adjustment was actually for 2025, the calendar year, 2025, which of course this year is almost already done and that forecasters have revised down the negative territory at negative 0.1%. Obviously not a huge surprise at that point, at this point in line with current realities now that we're, you know, 11 months into the year. And the context of the commentary by the way, from Grant isn't quite as sour as the headline itself. Okay, so, and, and just for what it's worth, as well, CoStar's forecasts were fairly soft even prior to this year, especially in absorption, at least in my opinion. And so it's a, it's a big headline, but not really a big change here. And, and for what it's worth, we've also seen similar revisions from both Yardi and RealPage. So we'll see how this plays out. We certainly know supply is going to drop off a lot next year. So the apartment outlook really depends heavily on how the economy holds up. No surprise. All right, next headline comes from Bloomberg. It says apartment landlord Center Space confirms it's exploring a sale. Center Space is quote reviewing strategic options including a potential sale or merger. Center Space hasn't set a timetable for the review or made any decisions related to a potential strategic alternatives at this time. The review may not result in a transaction. All right, so could we see yet another publicly traded apart and REIT get taken private? Well, the public market's obviously been in my view at least irrationally punitive of residential REITs relative to real world asset values of late. So we'll see how this plays out. I shared on, on, on, on x and on LinkedIn recently the long list of of multifamily and SFR REITs that have been taken private or on the track to be taken private or to dispose of their assets. And it's a long list unfortunately. I like how public traded companies in our space, I think it's good for everybody and so I hate to see more of that but hopefully something will stem the tide and we'll see this revert in the other direction at some point. And then of course I mentioned earlier, our guest this week is Center Space CEO Ann Olson. And while she's not speaking directly to this news, we will get her take on on on where how Wall street thinks about REITs right now. All right, next headline comes from the laist laist headline is LA reforms rent control for first time in 40 years lowering rent hikes for most tenants. All right, so this term, you know, I always be careful your word choices here. Reforms, I think the better word is changes the Rent control criteria, the new rules cap annual rent increases for rent stabilized apartments at 4% or 90% of the local CPI, whichever is lower. And so just think about that like the headlines a lot of times say maxed out at 4%. Well, it's, it's, it, the Max is not also 90% of CPI. And so right now, and in really most years you'd likely see caps well below 4%. And there's also 1% minimum increase for what that's worth. And, and so in LA, this impacts buildings built prior to October of 1978, which is mostly sub institutional mom and pop space. So after that vote, I posed this question on X recently and it's not rhetorical, it's really, well maybe it is rhetorical. It's a real honest question, which is. So it's rhetorical or not. You can make the decision on this. But here's the question. What is the investment case for investing in rent controlled apartments in LA or rent stabilized in New York instead of investing in T bills or a high yield stock savings account? And again, I posed this question, got some different takes. Some people think that there's a real reason to do it and make that bet. Others would much rather invest in something that doesn't have the operational risk and the capital risk associated with rent controlled apartments. But it's a tough bet. And I think I always tell people this. It's like from a policy perspective, you want to have not only development but also you want to encourage reinvestment into maintaining and renovating buildings to maintain them at a good level of quality and safety and desirability for renters. You know, there has to be some type of return on investment that beats the risk free rate. You know, if it's safer and easier just to, just to invest in a, in the ten year treasury or in a, or something like that or in bonds, then why not do that? Why take on the headache of all the things associated with managing apartments? So I think you've got to find that balance there to ensure that capital is incentivized to not only develop but also, well, maintain these buildings. All right, speaking of also rent stabilization in New York, we've also got a really interesting story. This one's from the Wall Street Journal opinion section and it says rent control as a constitutional taking. New York landlords argue in a lawsuit that the limits of on what they can charge tenants force them to take losses. All right, so we have yet another lawsuit trying once again to convince the courts that rent control is unconstitutional. And these cases have failed numerous times. But this one's the backers say is a little bit different because it has a very narrow focus on New York's vacancy control law that passed in 2019. So that means rent increases are capped not only for renewal but also upon turnover for the next renter coming in. And the lawsuit says that amounts to an unconstitutional takings in their view, because the rent levels aren't sufficient to bring these older units up to code and to release them. So they sit vacant. So let me read a quick blurb from this about this, from this article about two brothers at the center of this lawsuit. It says after decades with long term tenants, the brothers calculated that getting the apartments back up to code would cost thousands of dollars that couldn't be recouped at the artificially low rent cap. So the apartments sit vacant and off the rental market. According to the Census Bureau, in 2024 there were some 26,000 regulated apartments in the same situations. All right, so this probably this case won't be resolved quickly, but certainly one to watch going forward. All right, let's get back to our trivia question of the week presented by Foxen. The question was which of these tertiary markets does not rank in the nation's top five for strongest department absorption rates since March of 2020? Again, absorption rate, we're defining here as just essentially the expansion, the number of occupied apartment units or just net new occupied apartment units and divided by the starting point. So we give you six choices. Which one did not belong? Asheville, North Carolina Boise, Idaho Huntsville, Alabama, Lakeland, Florida, Sioux Falls, South Dakota, Arlington, North Carolina. The correct answer is or really the incorrect one. The one that does not belong is Asheville, North Carolina. And many people know Asheville is indeed growing fast, but it's not actually in the top five or the top 10. It ranks number 13 with a still very impressive 29% absorption expansion rate since COVID hit the top 10. By the way, Huntsville leads the nation at 59%. A lot of supply there, but also a ton of demand. Wilmington, North Carolina, same thing, up 56%. Lakeland up 43%. And then Boise, Sioux Falls, Savannah, Charleston, Austin, Charlotte, Provo, all more than 30%. And by the way, pretty remarkable that Austin and Charlotte cracked the top 10. I mean, this is a stat kind of like population growth and job growth that favors smaller markets that can grow at a faster rate because they have a smaller denominator, smaller base. But those two did crack the top 10. And then Nashville and Raleigh both came just outside the top 10. So a lot of demand coming in to those markets. We always talk about the supply side, but there's a lot of demand as well. All right, next up, it's time for today's interview, sponsored by funnel, the AI and CRM software trusted by four of the six major REITs and many more leading operators like BH and Cortland. To learn how Funnel can help your property centralize operations and automate everyday tasks, visit funnelleleasing.com okay, our guest today is the CEO of one of the one publicly traded apartment REIT that still has a large presence in tertiary markets, Ann Olson of Center Space, based in Minneapolis and operating about 13,000 units across Colorado, Minnesota, Montana, Nebraska, North Dakota, South Dakota and Utah. Now, again, I want to repeat this big programming note here. I mentioned this at the very top. This interview was recorded prior to Center Space's announcement that it would explore strategic alternatives, which again could mean, but does not necessarily guarantee a potential sale. So we'll see what happens. We did not cover that topic with Ann, and furthermore, we're not going to talk about it here. It's, well, let's see how that plays out. But we did talk about how Wall street is valuing the REITs at a discount relative to the private market and also talked about how investors have historically not given Center Space full credit for its presence in some particularly strong tertiary markets. So they're perceived as less liquid, but have in many cases consistently outperform some bigger markets, as I shared earlier and as as we'll talk about with Ann here in a minute. So you'll get Anne's take on all that and also about how Center Space has balanced the strength of tertiary markets with this expansion into larger markets that have a lot more supply, like Denver and Salt Lake City. So here's my conversation with Ann. All right, welcome to the interview portion of today's podcast. And I am honored to welcome in the CEO of Center Space, Reet Ann Olson. Anne, thank you so much for being here.
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Yeah, thanks for having me, Jay.
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All right, so for those of you don't know, for those who are listening who don't know, you give us a little your background because you have, I think, a really unique story going from real estate lawyer to, to now the chief executive officer for a publicly traded apartment reit. So how'd you get there?
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Yeah, it's probably a longer story than you'd like to hear. And I like to remind people I'm not the only one. Mark Perel at EQR is also a recovering lawyer, but I grew up on a farm. And when. Well, we had cows and pigs when I was young, it was really a real estate operation. My parents were always renting or buying more land and dealing with all the issues that came along with owning, you know, a growing land. And I remember my parents attorney being around a lot as they grew their holdings and witnessed how his advice helped them, how they listened to him, how they trusted him, and that's probably what made me choose law school. But I always liked the business side. I joke frequently that if you cut my wrist open, dirt would fall out. And once I was practicing law, I really quickly realized I wanted to get to the business side. And early in my career, I had an opportunity to work at a company that went through an IPO in the industrial space. That was my first taste of capital markets, particularly public capital markets, and I was hooked then. I just feel like I worked my way up. You know, I came to the company Center Space as a general counsel, sat in the CEO role, and then about three years ago became the CEO.
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Yeah, well, that's. That's quite a journey. And Nami will have, you know, you and Mark will share the lawyer background, having the farming background as well. It gives it a unique flavor. So, Ann, as you know, we've had your predecessor, Mark, on this program. And one of the things that I admire about what y' all are doing at Center Space, it's such a unique. Y' all are very different from the other REITs. I say in a good way. You have a unique geographic footprint. I believe the only REIT with a real presence in Minnesota, the Dakotas, Montana, Nebraska, and y' all have reported some good strength in these markets in terms of occupancy and rent revenue. But you made a comment in your earnings call 2/4 ago in Q2, and I'm going to paraphrase here, which basically said, you know, we're putting up good numbers, but Center Space isn't getting credit for it from investors and your stock price. And that really caught my attention. So why is that? Because fundamentally, you know, you look at these markets as, I mean, you know, this, but everybody listening, it's like these markets have been steadier than, you know, the boom bust on the coast through Covid, the supply cycles and the Sunbelt. We've seen a lot of volatility where everybody else is, you know, you're in these steady markets, so why aren't you getting credit for it?
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Yeah, I think really the not getting credit for it is about, you know, we are going on year three of putting up what I would consider sector leading of revenue growth, same store, noi growth in particular. And, and yet we trade at one of the lowest multiples in the space, multiples of earnings. I think there are a couple drivers to that with respect to how it relates to markets. First, these markets have less transaction volume across North Dakota, Rapid City billings. And that's a real perception of illiquidity. And also that lack of transaction volume leads to fewer data points for investors who are trying to figure out what is that portfolio worth. So when you're underwriting our company to make an investment and decide should you buy it at a consensus nav, which is $77, should you buy it today, is it worth the $60 we're trading at? You know, you really want to look at the underlying assets and get a feel for the markets. That's very difficult to do in markets like North Dakota or Grand Forks. It's very easy to do in some of the bigger, the bigger markets. So I think that is a big thing. Just the market data, being able to access the data and then what that means for a perception of liquidity. And then second, these markets in regional midw, they lack a compelling growth narrative. So while they're very stable, investors are looking for growth. And I can tell You Minneapolis has 18 public companies in the Fortune 500. We have one of the largest health care companies in the world. Target is based here. But these are, that's a long term story. Those companies don't necessarily have outpaced growth or innovative growth associated with them. And I think, I think we get a little, a little dinged for that. And one of the markets I think about a lot with respect to the growth narrative that people are looking for. And a place that I know you've, you've spent some time looking at is Huntsville, Alabama.
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Right.
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I mean, this is not a, this is not a huge city population of just half a million. That population is growing quickly and they have a reputation. People can tell you what happens in Huntsville, Alabama. I don't know that you could tell me what's going on in Grand Forks, North Dakota. So these are great places to live. They, they're healthy economies and we have gotten great results there. But from just the perception of liquidity and access to data, to get a bead on valuation is tough for investors.
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Yeah, that makes sense. But since you mentioned North Dakota, let's talk about that. Because everyone in the public world's like, San Francisco's the best market in the country, New York's second best but wait a minute. North Dakota is putting up some really good numbers. I believe y' all just said for your last earnings call, blended rate growth of 5.2%. And that's other than maybe San Francisco, I don't think anywhere else is doing that. So what is driving the boom there?
- [35:30]
A
Yeah, I mean, 5.2% plus our occupancy is above 97 there. Our retention rate is 60%. So, you know, that's not just new lease rates growth. We're really seeing strong renewal growth there. It's, it's really a lack of supply. That Grand Forks, Bismarck, these are cities that haven't seen much, if any supply at all since kind of early 21. So that's all been absorbed. We've also seen some new job activity, particularly in Grand Forks, where there's a military base. And there's been a really strong investment in government drone programming there and engineering jobs. So that's driving it. And it's not just a lack of multifamily supply. There's also a lack of single family supply because single family homes in these markets are still affordable relative to the, you know, the cities you mentioned like San Francisco or even Denver or Minneapolis. But they're, they're just really not getting any, any new supply, which is helping us drive. Drive rates there.
- [36:31]
B
Yeah, no, that's impressive and certainly think that that would attract some, some local regional developers into that market with those type of numbers at some point. So let's shift to kind of the new strategy. You've expanded into Colorado and Utah, in and around the MSAs of Denver and Salt Lake City, obviously more institutional markets, high growth markets, but also high supplied markets, the opposite of North Dakota in terms of supply. So talk to us about what went into the decision to expand into these mountain states, as opposed to, say, a major Midwest market gets less supply like Chicago, Columbus and Indianapolis, or even a Sunbelt or coastal market. Why the Mountain West?
- [37:13]
A
Yeah, I think this is a question we talk to our investors about all the time, particularly since we acquired our first community in Salt Lake City over the summer. We really thought about not only do we look at all the markets across the country and think, where, where is the growth story? Where do we think we could have a good opportunity? But we also partner that with what is our, what is center space? Right. What, what is we like that we're different. You noted that at the top of the call, we have a very differentiated footprint. And if I had chosen someplace like Charlotte, you would say, well, there's a lot of reits there. So now, you know, not only am I competing against them for capital, but also for residents, but you can, you can already play that market. So number one, we wanted to stay different. We wanted to choose a market that didn't have a lot of REIT coverage. And then Salt Lake City was a really a natural extension for us of our Denver portfolio. And they share a lot of similar characteristics. I'd say, you know, when you're on the ground in Salt Lake City, a lot of people say, well, this is Denver 20 years ago, this is Denver 10 years ago. And then we can also leverage our regional oversight and the similar operating platform dynamics across that mountain west as we look from Fort Collins, you know, down, down the range into Salt Lake City. So I think when we, we did think hard and are, you know, open to other Midwest markets, but we still have that challenge, Jay, that we just talked about where the Midwest markets have been performing really well. I think markets like Columbus and Indianapolis are very attractive for investors right now, but they're seeing a lot of capital and they still have some lack of that growth narrative that we talked about. So I think if we were open to those other Midwest markets, we like the differentiated footprint, we really like the stability that those markets can provide when paired with the Denver's of the world and the Salt Lake cities, which has a little more volatility. But I think you'd see us enter that in a portfolio transaction where we could get immediate scale rather than Salt Lake. We're looking to build over time like we did Denver.
- [39:19]
B
Yeah, that makes sense. So some diversification a little bit in terms of the steady markets versus the, the, the, the growth markets. So let's build on this a little bit. You know, the more institutional markets, once you're getting into the, you obviously been in Denver for a little bit, now you're getting into Salt Lake. As we talked about, these are higher supplied markets and they've not performed as well of late as your tertiary markets. And of course they're pricier to get into as well. And so as you think about diversification and how do you balance the competing realities of your current markets being fundamentally stronger versus the pull into these institutional markets that are more liquid and more favored by investors.
- [40:03]
A
Yeah, I mean this is, this is a tough one for us where, you know, I mentioned we went into Salt Lake City this summer, we sold our portfolio in St. Cloud, Minnesota, which is a town of about 60,000 people north of the Twin Cities. In order to do that, obviously there's a cap rate differential there and so as we, as we think about that, we really look at not just the competing realities of what the current return is, but we're looking at future growth and where we think it's going to go over the next year, you know, five to 10 years. And the other thing we're looking at is the age of the portfolio and the, the CapEx associated with it. So you know, we're not only looking at what is, what is the potential dilution because we're maybe selling at a 6 and buying at a 5 that is dilutive to your earnings, but we're also looking to say what does it do to the cash flow? Right. Our, our tertiary market portfolios in the Midwest are older, vintage, there's not a lot of new supply in these markets as we discussed. So you know, we own a lot of 80s built in those markets. It's still top of market products, you know, really great products and great homes for people. But the capex does, does get at you and it does impede your cash flow. So you know, we really think about that and think about the longer term growth story paired with the potential for buying newer assets that have less, less need for capex. And that's how we're approaching what we might sell versus what we might buy.
- [41:29]
B
Yeah, that makes sense. And this thing about buying and selling that takes me naturally to the topic of valuations. This is something I know it's frustrating to every single REIT right now. REITs of all sizes, of all qualities are trading at a sizable discount to nav to net asset value. And center space is among a bunch of the REITs that were repurchasing shares lately. And it looks like, well, tell me if I'm wrong about this, but it looks like there could be an implication where there may be less acquisition activity across the board given that acquisitions are instantly dilutive right now. Is that, is that a fair assumption? Do you think we'll see that in the public markets overall?
- [42:13]
A
Well, I think you may particularly for companies like us. Right. We're small and so it's difficult for us with this cost of capital to find external growth opportunities. Meaning growth by issuing equity. Right. And, or debt. That makes sense given the cap rates. But you know, a lot of the public companies are still going to be acquisitive and still going to fund their development pipelines with their free cash flow. So you know that that money is, they don't have to issue at their current stock price. This is, you know, free cash flow that they can be reinvesting into Acquisitions. So. And I also think that you're starting to see even in the first half of 2025. So some of the REITs take a real look at being a first mover, right where you're seeing them go back into markets like Austin or EQR has done a lot of transactions. Avalon Bay did a large acquisition. So I do think they're thinking about where they want to be positioned when the cost of capital might come down so that they're ready to really hit the gas. That's how we're thinking about it, is how do we prepare the portfolio, prepare our balance sheet to be ready to take advantage when the cost of capital makes it feasible for us to have some external growth opportunities. I've never met a public company CEO that didn't think his stock was worth more than where it's trading.
- [43:32]
B
So even when the price is trading above nav, I'm sure it's not good enough for.
- [43:36]
A
Oh, yeah, always. I mean, we wouldn't be doing our jobs if we were, if we didn't really believe in the value of our company and the proposition we have for shareholders to create value for them.
- [43:48]
B
Well, and your strategy makes sense. I'm just curious. Some of the other REITs, just looking at the last rounds of earnings calls, you can tell the analysts really want them to be putting cash into repurchases, stock buybacks, and may not be happy to see and how much they do or do not speak for the actual investors. I guess time will tell. But I'm curious where that goes. But though some of the REITs, Avalon Bay and MA obviously are heavy on development and continuing down that path as well. So let's shift gears back to fundamentals. What's your read on the overall market right now? And I think you and I are both at ULI recently, and so this isn't just a REIT issue across the industry. I think there's just a lot of questions and conversation around, like what's going on? The economy's obviously slowed down. We have a government shutdown. We don't have good data right now on jobs and wages. There's some mixed signals in the apartment data. Some of your REIT peers said they thought that the leasing season ended early, earlier than usual. They've seen weaker than expected leasing activity and yet still strong, strong renewals, strong renter health. You know, no sign of just move outs, turn back the keys, things like that, but just slower new leasing activity. And a couple others actually said it was more normal in their view. But what's your take on the market kind of high level right now, broadly speaking?
- [45:08]
A
Yeah, I'd say our data is pretty consistent with the overall themes that you just mentioned last year and this year we saw a slowdown earlier. So I do agree. I think leasing season has moved up a month, maybe a month and a half from start to finish. And what we really saw was a slowdown midway through Q3 in terms of overall prospects. So the very top of the funnel really started to deteriorate, you know, a little bit in July, but really in August. And we saw a bigger year over year decline in August through October when we look at it from compared to last year. Now that's the top of the funnel. When we look at throughout the funnel, our tour volume is not declining at the same rate as the prospect volume. And in fact our tour volume is pretty healthy year over year. So suggesting that we might have fewer people looking but higher intent prospects than we had last year. So maybe there was more shopping last year and more action this year. So there are other things that contribute to those changes like occupancy, how much advertising spend you're throwing out there. But seasonality really does appear to be a factor and I think the trend really is true that we're seeing the season come earlier and end earlier.
- [46:30]
B
Yeah, and I agree with you. I think that several of the REITs made the comment that it started earlier as well. And so I don't know how much to kind of look into kind of end of second half of Q3, which is never a great period anyway. And it does seem like you said to move up. So do you think my assumption is that we won't really get a good pulse on the market because obviously little lease expirations, there's little that relatively few leases that expire or get signed in the winter months. My sense we're not really getting pull splits the direction of the market until maybe March timeframe. Is that fair? What's your take?
- [47:05]
A
No, I think that's right and that's how we think about it almost every year. But we used to think, well, we're not really going to know until May. I agree with you. In May, last year and this year, that's really when we're seeing the peak. So I do think you're right that it's March before we're really going to have a view on, on a lot of things. And I do think that there's some uncertainty in the economy. You know, that's driving, not only is it driving that larger unemployment rate in that demographic of kind of, you know, 20 to 29. But that is, there are also a lot of reporting about how there's more people in that age category living at home. So if there's some certainty, if there's some pickup in jobs there, that's also could create a lot of demand in the apartment sector though. That's the core of you know, first time, first time household formation into, into apartments is, is those college graduates and we're seeing more and more of them staying at home. I think we're, we'll, we'll probably start seeing the, hopefully some green shoots in March.
- [48:09]
B
Yeah. And obviously that's pent up demand too. So once the market does start to warm up a little bit, you know that that's a group that's probably going to be a good funnel for, for new apartment demand once, once the job market improves a little bit.
- [48:21]
A
Right.
- [48:23]
B
Do you think there was another thing I wanted to, just as we were talking about this, starting to think about it has been there's obviously a lot more renewal growth than new lease growth. Obviously in your tertiary markets that's been stronger across the board. But there are some conversations more about gain to lease coming back and maybe that'll be an issue. And no one seems too worried yet because of seasonality. But you think more of your peers. We're talking about gain to lease or renewals or potentially going out above your new lease asking runs on a website. Do you think more conversations about that in the next round of earnings calls?
- [48:55]
A
I would expect so. I mean the data just would tell you that people should be in the gain to lease situation, particularly in the Sun Belt markets or the high supplied markets like Denver. We still have a slight loss to lease that's, that's really being driven by the health of the tertiary markets. And then also Minneapolis where we've seen some decent rent growth and are projecting, you know, really strong rent growth into, into next year as we're well past the supply. We've seen great absorption here. But yeah, I, I, I definitely think if you have a, if you have a majority Sunbelt market, you, you're very likely to be in a gain to lease situation.
- [49:35]
B
Yeah. And for, for what it's worth, even a couple of the coast rates where the supply is a little more heavier in certain markets talked about that as well. So I'm curious how that plays out. Another kind of aside, when you look at your Denver and Salt Lake markets, is the seasonal patterns there different from the Midwest? Is the leasing season, is it any different?
- [49:54]
A
You Know, not materially, not materially different. You know, we try to look at each when we think about revenue management and what we want our lease expiration profile to look like, you know, we think about the region, but we really look at what the pattern of the immediate submarket is and the immediate comp set is. But not huge, huge breaks between what we see in Denver versus what we see in Minneapolis or what we see in Omaha. The shift forward of the leasing season has been consistent across all of our markets.
- [50:26]
B
Interesting. So even the markets where it's colder, longer, you're still seeing the leasing season warm up a little faster.
- [50:31]
A
That's right.
- [50:32]
B
Interesting. Another thing I want to ask you about is the financial health of renters. And I know you're asked about this in your last call. I'd like to talk to you about it again here because it feels like every time there's any sign of, of caution in the industry or just not the industry, like in the economy, like there's this rush to think renters have to be down their luck right now. But across the board, you know, all the REITs and everybody talked to the private side as well, we're still hearing that apartment renters are in good shape in terms of incomes, rent, incomes, delinquency. So can you share what you're seeing at center space?
- [51:06]
A
Yeah, sure. I mean, I think we definitely are seeing our rental health be very, very strong. Our rent to income ratio is down about 60 basis points this year to, you know, kind of that. We're, we're in that very low 20s, 21, 22%, but that's down from 2024. I heard that consistently at ULI this past week with sitting with a lot of operators that they have the best rent to income ratios that they've had in a long time. And then the other thing that we watch closely is the average income of applicants. And that's, that's up pretty significantly portfolio wide. It's up 6.3% year over year. In markets like Denver, it's, it's up 7. So, you know, I do think the renter health is, is strong and some of what we're seeing on the demand side and absorption, what this leads me to believe and why I really dig through these statistics is we're trying to pinpoint in places like Denver or high supply markets, is it supply driving it or is there also uncertainty about jobs? Is there any deterioration of incomes? Is there doubling up of are we seeing more people per unit and how is that driving it? And I think after Reviewing all of that and talking about with our team about incomes, decline rates, those are right in line with the national average in our portfolio. So, you know, when I look at all that and I think about Denver, I really do think it's a supply issue and not any deterioration of the underlying, you know, economic fundamentals of the market.
- [52:40]
B
No, that's good. Yeah, it seems to be the story and I think it's a good story for the industry and particularly since we've seen wage growth more than rent growth these last few years, hopefully that's built up some cushion. And one last question for you too, and you're, who is your typical renter? Like, what's the, what's the renter base of center space in terms of just general demographics and jobs and whatnot?
- [53:00]
A
Yeah, I'd say, you know, given our market presence, it's maybe a little bit different. You're not going to hear me say, oh, 30% of our renters are in, you know, high tech jobs, but a lot of, you know, service industry, healthcare related jobs, jobs tied to education, you know, just given our regional kind of economic focus and then, But I'd say, you know, the average renter, the age has ticked up a little bit. So we've, we've seen the resident age go up. We're now at just under 34 years years old and that's been increasing over time. So I think our average renter is, and generally about 30% of them are staying with us for longer than two years. And the most frequent reason people cite for moving out, which is just based on what they tell us is job relocation. So when we really think about our renter, we're kind of looking at that this is maybe their first home. We generally are under 2, 2 people per unit on average. So yeah, about 34 years old. Average incomes, you know, over a hundred thousand dollars for the household. Strong, strong credit scores and we're happy to have them.
- [54:20]
B
Yeah, that's especially some of the job sectors you mentioned. Those are pretty resilient. And, and, and to your point on the aging, I mean the population is, is aging up, but also the, we're having people in their 30s who are renting longer. So that doesn't seem to be impacting the apartment sector at least in the current cycle.
- [54:36]
A
Right. And average average home, home ownership, the new, the new new age for first time home buyers for this year was 40.
- [54:45]
B
Yeah, I think that's, yeah, there was a lot of conversation about that. Ula. 40 years old for the first time for average first time homebuyer. That's, that's pretty crazy to think about.
- [54:54]
A
Yeah. And particularly because that same data reported in 2021 was 33 years old. Yeah, it's a hu, huge jump in just a, just a few years.
- [55:04]
B
Yeah, I, I, I, I think it'll probably come back down at some point, but certainly the broader trend is going to be, you know, continue to tick up regardless of mortgage rates. People are just getting married later, having kids later, all the drivers. Plus I tell people times everyone's building nicer apartments, they're, they're more desirable living experiences than they were in the past. And I think that's somewhat of a factor, too.
- [55:24]
A
Yeah, that's.
- [55:26]
B
Well, Anne, thank you so much for letting me pick your brain. Thanks for being part of the rent roll today and best of luck in the rest of the year and moving into the next leasing season.
- [55:34]
A
Yeah, thank you so much for having me. I enjoy your podcast. I'm happy to be a part of it. Foreign.
- [55:59]
B
That's wrapping Episode number 60 of the Rent roll. Big thank you to Ann Olson for being our guest today. Thank you to Funnel, to Foxen and to Authentic, and to Madera and JPI for sponsoring today's episode. And thank you to all of you for spending part of your day with us. See you next time.