← The Rent Roll with Jay Parsons
The Rent Roll with Jay Parsons
EP#83 Alexander Goldfarb | 6 Takeaways From Q1'26 Multifamily REITS' Earnings Calls
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welcome. It's episode number 83 of the Rent Roll, your podcast on all things rental housing, Apartments and Anthony Rentals and Build to Rent. Today we're Talking about apartment REITs. Just wrapped up the Q1 earnings call season. Lots of great color as always and some gossip as well. We're going to get into all that. These calls always give us a good pulse on what's happening in the market today. Specifically, we're talking about how the supply drop off is finally translating to some improvement in occupancy and rent, even if at a slower pace than initially expected. We're going to talk about how REITs are pulling back from acquisitions a bit. Not because they don't want to be buyers. They don't see good pricing. It's just because they're finding even better value and buying back their own stock. And then, of course, talk about the big, juicy, gossipy story of the earnings cycle. The rumored merger discussions between two of the biggest names in the business, Equity Residential and Avalon Bay. And by the way, if you're wondering, hey, what about those Single family rental REITs we got you? We'll be doing our SFR REIT earnings call recaps next week in next week's episode.
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Additionally, if we can't get enough of the earnings call recaps and color, we'll give you more over at the our newsletter@jparsons.com newsletter. So go there and subscribe if you don't already. Okay, so for those who've listened to our REIT recaps before, we do this every quarter after earnings calls wrap up, you know the drill. I'm going to recap for you the key themes and takeaways that I gleaned from these earnings calls, six of them specifically for you today. And then we're going to bring in one of the veteran Wall Street REIT analysts, Alex Goldfarber, Piper Sandler. We're going to get his thoughts as well. And he's got some good hot takes. I'm excited to share with you. So that's going to be good. And so we'll let's just jump right in. We got a lot to do. Let's jump in. Before we do, though, I want to give a big shout out to our sponsors. First and foremost, a big shout out to jpi, a leading apartment developer. The state of purpose of transforming buildings, enhancing communities and improving lives. Check them out@jpi.com JPI is the cutting edge of some really exciting innovations in apartment development and construction. Next big thank you to Madera Residential, leading apartment operator and owner based in Texas, and to Funnel. Check them out@funnel leasing.com the sponsor of our interviews segment. And so let's kick it off with. Here's a chart now. And here's a chart. Today we're going to be talking, not charts, but actually just takeaways. Six takeaways from the apartment REITs earnings calls before we do big disclaimer. I am not a cfa. I'm not an. You're not your investment advisor. I'm not here to tell you whether or not to buy these stocks or sell them. I'm just sharing things I find interesting from these calls. So this is purely for informational purposes. Here's a chart. This is going to be sponsored by my friends at ButterflyMX. Installed in over 20,000 buildings, over 100,000. Five star reviews. They help you boost revenue, reduce costs, and increase resident satisfaction by making property access simple. See how@ButterflyMX. All right, six takeaways from the apartment REITs. Q1 20, 26 earnings calls. And the biggest takeaway didn't even come from a call itself, but came after hours. A clearly strategically timed leak to Bloomberg News. Someone wants to float the idea of potentially merging two of the biggest names in multifamily. So that's our biggest number one takeaway. Equity Residential and Avalon Bay are reportedly considering a merger. And so many questions right now that we don't have answers to. And I imagine, you know, it's for those of us on the sidelines or those of you investing in these that it's interesting itself. You want to know the answers? I imagine working at one of these companies and being like, what is going on? And obviously, you know, one of the challenges of being publicly traded is, is of course, there's only so much that these that the REIT executives are allowed to share with their teams. And so, for example, like, which side is the pursuer? Is this being pushed by some activist investors or both CEOs or one a CEO really driving it? What would a merger look like? And it would attract regulatory review from the federal government. Would it result in real material gains in efficiency and real value creation? Given that the two REITs already share a very similar geographic footprint, primarily focused on big coastal markets, even if they're different on the submarket level, who'd be the CEO who's calling the shots? You know, neither One of these CEOs have been in the role super long. And as far as I know, I mean, neither one seems to be, you know, really close to retirement. Mark Perel, EQR took the role in 2019. Ben Shaw, Evelyn Bay was I believe 2022. So there's a lot we don't know and it's gonna be interesting to see how this plays out. But I do want to say one thing. I think however this plays out is probably not going to be like how some people think. I've seen some really bad takes out there on, on what a combined Avalon Bay EQR would look like with some armchair quarterbacks suggesting this would create some mega behemoth landlord with tremendous pricing power, thereby turning up the heat on affordability challenges. And I'll tell you, that is a truly terribly bad take from people who don't know what they're talking about but are eagerly latching onto some silly narratives. So let's just talk about market scale real quickly here, okay? Number one, both, let's just. This is important context. Many of you know this, but Avalon Bay and eqr, they cater to true renters by choice at the very high end of the market. I mean these are renters making north, they're making six figure incomes, spending around 20% of income on rent. And that's not where affordability challenges lie. Okay? Now second thing I'll point out is obviously these are big names, that's why we're talking about it, right? However, again, this is a very fragmented industry. Both of these companies own less than 0.5% of of U.S. apartments and what can be combined, just under 1% market share. In fact, here's a great stat. At its peak in the early 2000s, Equity Residential owned about 225,000 units. Okay? So remember that 225,000 units. Now if EQR merges with Avalon Bay, they have a combined something like 170, 180,000 units. And that's still a lot less than what Equity Residential had at its peak. Okay? And to be fair, of course, in smaller number of markets today, but also fewer total units. And then if you look at the specific MSAs where these companies are concentrated, the market share is a bit higher obviously, but not dramatically. They're close to 4% combined in Boston, D.C. bay Area and Seattle, around 2% in Southern California, about 1% in New York MSA. So you know, obviously market share is going to vary by submarket neighborhood. It's going to be higher. Of course, if you look at drill down to just class A and high income renters in certain areas, I mean you could obviously define the parameters as narrowly as you want and really craft your own story here. But again, the reality is, no matter how you do it, you would find that this, this industry is as fragmented as any industry, if not more than any industry in the entire country. And Class A renters, they just have a lot of options today. I mean, again, that's not where the affordability and availability pressures are really challenged. Even these coastal markets, they've got more options today. And so I think we need to kind of pull back the, some of the hot air on some of this stuff. All right. Another thing to touch on before I move on. It was kind of funny to see that after the leaks, you know, the analysts, they start probing other REITs about M&A on their calls. And so MAA, UDR, Camden, et cetera. I mean, they're getting asked about questions, clearly probing for perspectives about this proposed merger and whether they think it might have impacts on operational efficiency and also whether these other REITs could be on the same path of mergers and acquisitions or take privates. And so I feel a little bit bad for guys like Brad at MAA and Alex at Camden, especially Alex Jesset, his first earnings call as the CEO, obviously he's done earnings calls previously, but the first as a CEO, as I say that, I take that back. I don't feel bad for these guys. They're both smart, they're pros, they handled it well. Brad said mergers are no slam dunk. Obviously, MAA has done their share of murders over the years with Post, and I believe it was the other one, Colonial, I believe. And he noted that, you know, for maa, if they doubled in size, you know, their cost of capital wouldn't necessarily go down, but certain things, and certain things might not be more efficient, but there could be savings at the operational levels if you pod more properties together in the same geographic micro area, he said. And then Alex at Camden, he said he's not going to discuss rumors, but broadly, he said, quote, whatever decision other companies make, we've got to believe in what is right for. I'm sorry, we've got to believe is right for them. But for us, the way we think about this is that bigger is not better, better is better. And if you look at long term trends, there's absolutely no correlation between size of the company and total shareholder return. That's a great line. You know, bigger is not better, better is better. And whether you agree with this take or not, that's a good line. And I think obviously, I mean, you could apply that to a, a lot of things in life and in business. And Tom, toomey at udr. I mean, he's at this point, he's the, the veteran CEO of the REAP business, especially now that Rick Camden of Campo has moved into the executive chairman role. Tom made a similar comment. He said, we look at it and say excellence is the important thing to all successful companies, and size is sometimes an advantage, sometimes not. And excellence, particularly in operations, in capital allocation and innovation. So well said. All right. And again, we'll get Alex Goldfarb's take on this a little bit later in today's interview. Let's jump to takeaway number two. Low valuations compared to private sector values continue to drive more stock buybacks and fewer acquisitions. All right, so we've touched on this theme previously, so I'm not going to just rehash all the basics here. But obviously REIT investors tend to like buybacks. And they're doing this because Wall street is valuing the REITs for less than the sum of their parts or below net asset value in industry speak. So that means that a REIT can sell all the properties they own and those properties would collectively be worth more than the total value of the company, according to Wall street, the market cap, which is kind of crazy to think about, especially if you're not in the REIT world every day. So it looks like every major apartment REIT has done some buyback stock buybacks on top of other buybacks in 2025, betting on themselves and also because it may be a better use of capital than buying apartment properties today, given that if you buy something that the value of that property is immediately diluted by Wall street once it's part of a REIT portfolio, even if it's accretive for the longer term. So again, because, again, because that discount to net asset value, we bring a new property into the fold, it's by association now associate now worth less than it was previously as at least according to your stock price. So there's a trade off there. Now, REITs, we know they like to recycle capital. They like to sell older properties, buy newer properties. And so they're still selling older properties, but now they're using more of those proceeds to buy back stock instead of buying as many new apartments. And that means investing less in acquisitions they might have otherwise. Dave Bragg, he said this good quote here. He said a key theme lately is the public, private, public versus private markets arbitrage opportunity presented by an unusually wide disconnect in asset an apartment asset pricing. This allows us to sell lower growth assets for 100 cents on a dollar on Main street and buy back our shares, which represent a superior growth portfolio for 75 to 80 cents on the dollar on Wall Street. And then he added, I've had the opportunity to follow the space for many years and have seen this a few times before. And my experience is they prove to be fleeting, these opportunities. He means they prove to be fleeting. And so we are excited about the opportunity to recognize that sell assets and then buy back stock in a manner that is accretive with while also improving the quality of our portfolio. And then at Equity Residential, Robert Gretchen at aqr, he said, I think the stock is obviously a really compelling choice. It's probably oftentimes the most compelling choice. The next decision or the next compelling choice is probably the development side today, your third choice, which is acquisitions are really a tough one relative to what private capital is underwriting. We're seeing private capital underwrite deals still in the 4.75 to 5.25% spot rate and then IRRs are properly in the seven handles, if that. And Kevin O' Shea at Avalon Bay, he said they're still trying to do both development and CYAP stock buybacks and obviously Avalon Bay as well as MAA. I mean those have been the two REITs have done a pretty lean heavily on development of late. Kevin said, quote, buybacks and development are both highly attractive to us today. So it's not a binary choice. At current pricing, our stock implies a cap rate in the low 6% range, which, which makes repurchases attractive and immediately accretive. Now, I should also note there's one REIT that's in a little bit of a different situation and that's Camden because they're selling their Southern California portfolio and apparently they got a buyer lined up rumored to be aggressive pricing for that buyer and that's expected to close according to Camden, in late June or early July. Camden saying they use the proceeds to buy back some stock but also buy some Sun Belt apartments in their core geographic area through 1031 exchanges. And so Camden is an active buyer because they have money to spend and they want to put it to work. Alex Jess said, the new CEO of Camden, he joked, quote, where the Camden's the PR prettiest buyer in the market. Everyone's coming to us, everybody is showing us opportunities because they know that we have the capacity to close and they know that we are for real. And so I'm expecting that we're going to come with some really, really great additional portfolio to enhance what we have today from this process. So there you go. All right, number three, results are slightly better than expected so far in 2026. And REITs expect to start pushing rents more in coming months. All right, so I start with the frame, this one because it's not quite as clear cut. You know, we have these conflicting realities. On the one hand, apart and REITs all meet or beat guidance in Q1. On the other hand, there wasn't a clean, simple story behind it. It's not as simple as, hey, the market's back, all things are good, you know, green light, let's go. Several of the CFOs went out of their way to explain that some of the beat came from one time expense outperformance that was not like likely to be extended through the remainder of the year. But at the same time, they also emphasized they wanted a balance of saying also that hey, but we do expect better things as the year goes on. And we do, we are pleased with the numbers that we're seeing so so far. But they're not ready to raise guidance. They're not ready to say, hey, you know, let's ramp up expectations. They're saying, hey, we already baked some of this into our guidance going into the year expecting to see the the market improve the further went into the year. So they don't want to hype up expectations further. But for leasing and rents year to date, the tone was generally positive. Again, restrained but hopeful. New supply, the biggest headwind of these past few years, it's coming down. So occupancy is improving. Rent momentum is slowly improving too. Resident retail tension remains strong. That's a big theme across the sector. Somehow retention is even stronger now than already was. More renters renewing leases and usually paying a premium to do so and 2 to 5% range depending on the market. So that's continuing. The problem, of course, has been on the new lease pricing side, competing for renter demand to fill vacant units and then giving on rents or concessions to do so. But now REITs are saying they're getting a bit of momentum back on the new lease side too. Nothing crazy, but, you know, some seasonal momentum. And by momentum, again, that could mean that the rents are still falling, but to less degree than they did previously. And I'll point out that with tepid job growth and all the economic headwinds and whatnot, that's certainly notable to still see some real momentum on the new lease side. Again, not a boom, but what they're saying is, hey, we got some momentum, we're seeing better occupancy. Better rent numbers and now we're at this possible inflection point. And so again the REITs are in the middle of this kind of kind of careful dance of talking up the near term outlook. Reduced supply, improving occupancy, early stages of maybe some improved pricing power but they don't want to set the bar too high. Everyone's again very careful not to raise guidance. Especially you know, they could high they would highlight the still heightened macroeconomic uncertainty casting a cloud over the market. All right, so let's get some quotes here. Here's a going from Lori Baker at Camden setting the foundation here. She said, Canada's operating performance year to date is in line with our expectations. While our first quarter results were slightly ahead of budget, the outperformance was mainly driven by timing related items overall and as expected, we saw a slow but steady improvement across the portfolio as we move through the first quarter and into the beginning of the peak leasing season. Our preliminary results for April are on track and indicate modest improvements in both occupancy and blended new lease and blended lease rate growth compared to the first quarter. And we heard similar stories from others and obviously that'll vary by market. We'll get into that momentarily. But REITs across the board are basically saying, hey, you know, we've been focused on heads on beds occupancy protection mode for a long time. Well now supply is down, occupancy rates are good and we think now might be the time to start pushing rents again. Michael Manellis, the EQR said, we're heading into a place of unprecedented times with such low levels of new supply that I think if we maintain this velocity and get over the peak leasing season, the back half of the year with a setup of such limited new competitive supply coming online really does position the portfolio well. Irt Scott Schaefer said, our recent strategy of prioritizing occupancy now positions us to prioritize rental rate growth during the upcoming leasing season. At Essex, Andrew Clement said, heading into the peak leasing season we have shifted our operating strategy to driving rent growth across the across most markets and our portfolio is well positioned. With April financial occupancy at 96.4%. Tim Argo MAA said, with an assumed backdrop of steady demand, we expect gradual seasonal improvement in new lease rates through the second and early third quarters along with consistent renewal growth and retention. And as we get later into the year, improving fundamentals become even more impactful, setting up a stronger 2027. And Alex Jesset at Cannon said we're anticipating sort of a hockey stick and the latter part of 26 as we get through this absorption. And then he said a stronger 20, 27. And then UDR is Michael Lacy. See, he said they're pleased results to date got high occupancy, got good retention. And he hinted that they'll shift more into a rent growth focus as well in coming months. All right, so there you go. A little bit more bullish takes than we've seen previously. We'll see how this plays out. Obviously, if the market shows, you know, some kind of pulls back a little bit, you're going to see the shift focus back to occupanc. If occupancy rates hold, you know, I think we could see that rent growth start to gradually ramp up. All right, takeaway number four. Fundamentals vary dramatically by market, as does momentum. Okay, so this is rather obvious, but this is our time to talk about some details and color of what's happening across the country. But I want to start. Let's take a macro take here from maa. There's some really good color, really interesting stat that MAA shared related to a key theme we've been hearing about, which is obviously there's less hiring of young adults coming out of college, more young adults with mom and dad again. And so maybe that's impacting apartment leasing. You'd think it would. But Tim Argo at maa, he said this, he said we've been looking at some of that, our younger demographic, we all talk about unemployment rates for that group in particular. And so if we look at Q1, for example, our 20, about 20% of our move ins were 25 or under in age. And that's been really consistent over the last several years. That really hasn't ticked up or down. And then we've also tried to gauge some of the pressure. The are there more of our residents needing a guarantor, indicating that perhaps their economic situation isn't great? And that's actually come down a little bit. We're not really seeing any pressure or any changes in that as of yet. So that's super interesting and maybe actually, but surprising in a positive way that they're not seeing a pullback from the under 25 demographic. All right, so now let's tour the country a little bit. Some color on key markets across the country. Let's start in the West Coast. Okay, Bay Area still hot, hot, hot. Big rent growth approaching double digits. Avalon Bay, Essex, udr, eqr, all talk talking up strong performance in the Bay Area. EQR said concessions are basically non existent now in San Francisco. AI jobs driving a lot of demand into the San Francisco and San Jose Silicon Valley area. Even now hearing positive buzz on the East Bay Oakland and that's the first in a while. Avalon Bay and Essex both noticed some spillover effect over to the east side. The end the East Bay and now that market is firming up. Seattle more of a mixed bag, getting a little better but still slow with heavy supply and some other challenges. Not quite the same AI job impact as the Bay area, then Southern California Los Angeles. You know that's a different vibe. It's still the market that all the REITs are just having a hard time with. Talk about this a lot in past podcasts as well. Angela Clement at Essex said LA is progressing at a glacial pace. It continuously are most challenging. So for example if we excluded our LA portfolio, our April new lease rates would actually be 100 basis points higher. Sean Breslin, Avalon Bay said, LA has been tough. I would say we haven't yet seen a catalyst yet in LA other than very diminished supply, but we're looking for it on the demand side. Mark Perel, EQR said, really feeling like there's been a paradigm shift away from Southern California and just not feeling those like those employment drivers are what we thought they were when we made those investments initially. Now in fairness though, I will say as I've said before, that the story does appear better outside of LA and other parts of Southern California. Essex and UDR both called out better numbers, particularly in Orange County. Now on the East Coast Equity, Avalon Bay and UDR all highlighted continued strength in New York City and Greater New York City area. And remember, they're really focused on the higher end of the market and not the rent stabilized market where most of those challenges are concentrated and where the new mayor has focused his freeze the rent campaign. D.C. and Boston, meanwhile those remain pretty cold. Those are the high flyers earlier in the cycle, but they've been challenged over these last nine months due to localized demand issues. We talked about previously Federal employment in D.C. and in Boston area. We got research spending pullbacks and reduced international student visas that are having a cooling effect to some degree. The Midwest, not a big REIT presence there aside from IRT and center space, but still a steady EDDY story. IRT said they've seen strong growth in Indianapolis, Columbus and Oklahoma City. Obviously okc, not technically Midwest, but close enough. And let's jump to the Sunbelt and the green shoots themes continue. Still challenges, but slowly improving as supply Drops off. And that's been the key theme. Supply is dropping off, and that's leading to better occupancy, better blended rents. You know, retweet blends. What are blends? Blends are the blended rent growth, new and renewal lease rents combined. And they're saying, hey, we're seeing momentum in that area. It may still be negative or weak in some spots, but it's trending in the right direction. Camden highlighted Atlanta, Dallas, Orlando, Nashville, Raleigh, and Southeast Florida as improving markets. MAA singled out Atlanta, Dallas and Orlando. Equity Residential highlighted Atlanta and Dallas. IRT called out Atlanta, Raleigh, and Nashville. So the most votes there probably Atlanta and Dallas as markets that are showing some improvement. And then, of course, we still have. Markets are lagging behind, and it's the usual suspects, notably Austin and Phoenix and Denver with high supply. Charlotte a bit as well. Just markets are still a good bit of supply to work through. And then a little bit different story in Houston, that ranked number one for population growth last year and doesn't have a ton of supply relative to other Sunbelt markets, but saw a pullback in apartment leasing and rents over the last six to nine months. And Cam, it's not really clear to me exactly what's driving that. You know, Camden, they have a pretty good presence there, and they suggest in their headquarters there as well. And they just suggested maybe it's consumer nervousness sentiment as well as immigration impact in that market. All right, moving on. Number five, rent control. Ballot measures are freezing new investment in Massachusetts and raising concerns for D.C. okay, so quick recap. We have conspiracy theorists in Massachusetts who are spearheading a ballot initiative for the November election that would reinstall rent control across the state, and not just any rent control, but vacancy control, which means rents are capped not only for renters renewing their leases, but for vacancy as well. So rents are capped for new renters coming the door. And this is the flavor of rent control that you've probably heard that famous quote about Swedish economist SR Lindback, who made the comment that something along the lines of the most efficient way of destroying a city short of bombing it, is rent control. And so that's what vacancy control really is. That's what he's referring to. And if you've listened to our recent episode on New York's rent stabilization program, you know how this story plays out. And it's not pretty. Yeah, it's not pretty for renters or investors and really for the cities themselves either. So the Massachusetts ballot measure, when current polls show most voters support it at the moment, it would cap rents at 5% or the rate of inflation, whichever is greater, not 5% plus CPI like we might see elsewhere. The greater of 5% or CPI. So if inflation exceeds 5%, you take your losses. If your property costs exceed the rate of inflation, the sorry, you take your losses. And so the REITs are understandably nervous and worried about this ballot measure. They're spending some cash to support the campaign to get the facts out there and, and really help people understand what the science and all the research shows us from academia, which is that rent control always backs fire, always backfires on the very people it's intended to protect, ultimately just gives them fewer options and worse conditions, less supply and higher cost for what ultimately does end up getting built. And Mark Perel, eqr, he said that, you know, a good example of supply reduction. He said that they've paused construction, planned construction on two projects in Massachusetts and probably wouldn't have built anything there recently if they knew this vote was coming. And it's, and it's not just the new supply impact. It's also for apartment REITs, also the reduced values of existing supply. It's a less Liquid Market. UDR's Michael Lacey pointed this out. He said uncertainty has had an impact. We've seen less transaction volume that makes it harder to decipher exactly where cap rates are. But our experience is directionally this uncertainty at this point in time has an adverse impact on price and we'll see how this plays out. But this could be impactful for the coastal REITs, particularly EQR, Avalon Bay and UDR, which have a presence there. But hopefully facts and science went out at the end of the day,
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the way, also, it's not just Massachusetts. The REITs are also watching Washington D.C. which is also considering a ballot measure. This one would freeze rents for two years, even for wealthy renters and luxury apartments. And then it would automatically freeze rents again in the future anytime inflation tops 5%. So even if operating costs and property taxes keep growing, rents are frozen. And so that's one to watch as well. I want to close this section talking about a quote from UDR CEO Tom Toomey. He said, I think what we want is a thriving America, a thriving housing marketplace, and there are ways to get there without just pandering and stopping development or stopping rent. Growth capital makes better homes, and capital is not going to arrive at the space if it feels threatened. And I think politicians get that. And as we've educated them more and more, we see more of how to, how do we work together and to create thriving communities? And that's more of it.
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So we're not just gonna, we're not
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just in this for a fight. We're in this to make a better place for all of us to prosper. Very well said, Tom. All right, our sixth and final takeaway, and it relates to the last one. Renter financial health continues to improve and affordability is emerging as more of a tailwind than a headwind. All right, so this continues to be one of the most misunderstood topics in rental housing, even among industry pros and investors in the space. I'll tell you. You, when I give presentations, I'll sometimes ask the audience, hey, what do you think the rent income ratios are for market rate renters or for renters making certain incomes? And people always, always, always overestimate what share of income is spent on rent and market rate apartments. And this is an important theme for REITs as well because it's central to their thesis and to their business model in many ways. And so we've been, they've been talking quarter after quarter about improving affordability trends. And that was true again in this last round of calls, ma's Brad Hill, he said, quote, we remain encouraged by underlying demand across our markets, declining new deliveries and the strength of a resident base with continued strong collections and affordable rents at 20% rent to income ratio. Ryland Burns Essex said their current median rent rent to income median ratios in Northern California stand at 21.5%. That's in one of the most expensive markets in the country outside of New York, 21.5%. And obviously higher income renters there, of course, but that just reflects who lives in market rate apartments. And he said the 20 year average for them was 26%. So again, wage growth is outpaced rent growth. That brings down rent to income ratios. Camden's Alex Jesset, he said they're at 19%. He also said that bad debt, which is unpaid rent, is the lowest level since pre Covid. Equity Residential said they're also at 19% rent to income ratio. Michael Manellis at EQR said they saw improvements in bad debt and the financial health of their resident base remains attractive. And now this, this is good news, of course, but doesn't always jive with the narratives. And there's a great quote that Rick Campo, now the chairman at Camden, he made about this disconnect. He said, the consumer, at least from our great apartments, the consumer is actually doing really well. The feeling they have is bad, but the underlying consumer Strength is good, and that's very true now. The perception, though, could become reality. Now if you're uncertain and you feel like you're nervous, and even if you could afford an apartment, you may live with mom and Dale a bit longer in this environment than you would otherwise. But those who do make that move, they're spending 20 to 22% of income on rent, well below the affordability ceilings of 30 or 33%. Now that has implications on the renewal outlook as well. For people coming in spending 20% income on rent, that gives them more capacity for renewal increases if they come. Michael Lacey UDR said rent income levels of our new residents are stronger than the long term average, which suggests an encouraging outlook for renewal growth going forward. And so he's really saying is that supply pressures ease and rent growth starts to return. The vast majority of renters can afford a moderate rent increase and that's especially true if we continue to see pretty solid wage growth, which is what we've seen of late despite the slow and slowdown in hiring. And by the way, real quickly, if
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you're confused by this, hey, why do
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we keep hearing about rental affordability Crisis if the REITs are all saying this, this thing and you're saying this thing well, again, I want to remind you that the real challenges for rental affordability at the low end of the market, those making less than $30,000 a year, those challenges are really real. But it's not a demographic that lives in REIT quality apartments or in really market rate apartments in general. So affordability is a very bifurcated issue that I think really reflects this K shaped economy we hear about of haves and have nots. That's true in the rental market as well. And one last point on affordability, a good stat from MAA about renovated apartments. And it really highlights again, the affordability is a tailwind and a flight to quality over a flight to affordability. MAA said that they've been doing a big renovation program. They said that newly renovated units least nine days faster than non renovated units and for a rent premium of $104 per month. So again, that's a flight to quality, not a flight to affordability. And IRT made similar comments about good returns on renovations as well. All right, and that'll wrap up our recap of the big takeaways from the apartment REITs Q1 earnings calls. We'll get again more on this with Alexander Goldfarb in our conversation today. But next up, it's time for rental housing trivia, Foreign. Today's tribute is presented by Authentic. If you're an owner, asset manager or developer running multifamily, here is the truth about leasing in 2026. A couple of ILS accounts and cross fingers won't get you to stabilization. The properties that are winning are running a tight ship across paid search and social retargeting, email and SMS nurture. All coordinated and with one accountable team. Authentic built that system. They call it demand to door and it's one platform, one partner, one monthly number that scales to your velocity targets. Pod Lister only get 50% off setup fees for a limited time. Head to auth ff.comd2d to see how this works. Right? So make sure you do this. It's a U t h f f.com d2d okay? All right, so the question is for Today, of the seven major apartment REITs, a former or current CEO chairs the board for all but one of them. Which is it? So which one is not chaired by a former or current CEO of the same reit? So give that some thought. We'll answer that one in a bit. Next up, it's time for a Good question. Good Question is sponsored by Inside the Deal, a CRE podcast by Barcadia that takes you beyond the headline and into the heart of the transaction. Hosted by Barcadia's EVP and head of production, Ernie Catey, each episode pulls back the curtain on a real deal, unpacking the situation, the challenges, the creative solutions, and the outcomes achieved. You'll hear directly from Berkadia producers as they share exactly what happened behind the scenes, the roadblocks they hit, how they navigate the market, and the strategies that ultimately got them across the finish line. So if you work in crew or just want to understand how complex deals get work get worked, this is where you'll hear those stories, the lessons and perspectives that you're not going to see in a press release. And so follow Inside the Deal at Siri Podcast Hypercadia, wherever you get your podcasts. All right, so today's a good question. Usually I'll answer a question that people are asking me. Today I'm turning the tables. I'm going to pick a question from the REIT earnings calls and a good question asked of them and share the answer as well. And this one comes from Nick Uluko. Apologize, Nick. I probably butcher your name there at Scotiabank. And he found a creative way to ask a question loosely related to the rumored merger with Avalon Bay. But knowing the equity wouldn't answer that question directly, Nick worked the edges a little bit. So here's what he asked. He said if we look at the multifamily sector, there's a clustering evaluation for the stocks that are in your peer group. What I'm wondering is, are you thinking about, and I know you are, there is a different differentiated strategy here that many people don't sort of pay attention to. But what are you and the board, are there conversations to sort of go even more in terms of differentiation and strategy, whether it's investments, platform, how you're managing the balance sheet that you guys are focused on to differentiate yourselves? And so this is a good question, even absent the rumored merger. And here's what CEO Mark Perel said in response. It was a good answer. I'm a truncated a little bit, but here's what he said in part. I think real estate expert investors, of which there used to be more than there are now, understood the differences between the big six or seven apartment companies. I mean, we do have a different strategy. We're more urban focused. We're less development focused. We're more operationally focused on excellence and investment and operations. So I think people that are experts in the area know the differences between us and others. I think the generalist investors and of course, the index funds, they don't. And I think it's a little bit hard to know how you can sort of break through, except I don't know, by some really more dramatic step. But I do think some dedicated investors know the difference between us and our peers. I think the generalist investors probably don't. So that's a really interesting question and answer. Obviously, we're all left wondering what Mark meant by dramatic step. What kind of dramatic step can solve that problem? Could it be a merger with Avalon Bay? And we don't know. I mean, I'm totally speculating that could I mean, he might not even thinking about that when he made the comment, but it's an interesting topic nonetheless. And about this whole idea about generalist investors versus specialized investors who understand the difference between different REITs. All right, next up, it's time for in the News. In the news, presented by my friends at Foxen, which provides a suite of value add solutions designed to improve operations compliance and property performance, rethink renters insurance compliance, rent reporting and pet management with Foxen. Check them out at foxen.com that's F-O-X-E-N.com all right, two headlines for you this week. The first one comes from Politico. It says, Trump privately raises objection to Senate Housing bill. The Senate's sorry. The president's concerns could complicate passage of the largest housing measure taken up by Congress in years. And it goes on to say that President Trump does not support language in the bill that would require mega landlords to sell single family homes built as long term rentals after seven years, as the Senate's Road to Housing act would do. All right, so this is huge news. If it's true. If the White House pulls support for the Road to Housing act or the Road to Less Housing act as we call it, I assume that would just effectively scuttle the bill and it would resuscitate the build to rent construction market which has more or less been frozen since the Senate overwhelmingly passed this sloppy list legislation back in March. So big kudos to all the voices of sanity on both sides of the aisle for getting the facts out there to combat what has been arguably the most reckless housing misinformation campaign of all time, and ultimately a supply reduction campaign as well. So hopefully coming together around now, just common sense solutions that focus on the one true solution to housing affordability and that's just build more housing. And on that, here's an update from the House. Again, the House has pushed back on the Senate's version of the Road to Housing act and they prefer their own, not just because of the SFR and BTR provisions, but some other elements around banking reform as well and some other things. And so the article goes on to say the House GOP leadership has an amended bipartisan housing bill in hand, is considering putting up for vote in the coming weeks, potentially as soon as lawmakers return from recess the week of May 12, three people familiar with the talks said. All right, so my guess is the BTR ban will probably be excluded from this House version of the bill. The big question though is sfr, and I think even the House leadership is less eager to embrace the SFR ban than the Senate was.
- [39:39]
C
But I don't know what kind of
- [39:40]
B
compromise and horse train is going to happen here. So that's going to be really what to watch for is probably less about build, build to rent and more about scattered site, singularly rental acquisitions and providing houses people for families who are unable or unwilling to buy a house. All right, one more piece of news for you if this comes from the Associated Press. It says landlords seek compensation for pandemic eviction moratorium. And it says after initially losing in the court of Federal claims in 2022, the plaintiffs won on appeal and are now in settlement discussions with the Justice Department landlords, hoping to recoup as much as $1.5 billion, a fraction of what the industry. And the plaintiffs here said they lost $57 billion in unpaid rent due to the federal CDC eviction ban, which went from September 2020 to July 2021 and later was ended by the Supreme Court, which ruled that the CDC lacked authority to impose an eviction ban without congressional authorization. So we'll see where this goes. It's interesting. It's being backed by a lot of smaller local groups, not the big brands in rental housing. So that's, that's, that's an interesting twist to this story and we'll see how that plays out.
- [40:50]
C
All right, let's get back to rental
- [40:51]
B
housing trivia of the week. The question sponsored by Authentic. The question was, of the seven major apartment REITs, a former or current CEO chairs the board for all but one of them, which is it? The answer is Essex. Now, some of you may think Essex, that's not right. Well, it is a trick question.
- [41:11]
C
Okay.
- [41:12]
B
If you know your REIT history, Essex is the answer. But it's a little bit of an asterisk mark here.
- [41:18]
C
Okay.
- [41:18]
B
The chairman of Essex is also its founder, George Marcus, who founded the predecessor company back in 1971 and then went public as Essex in 1994. But George never actually served as the CEO of the Essex REIT. He's a legend of the multi handling industry for sure, but never a REIT CEO. So there you go. That was a fun trivia question, right? 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 all right, our guest today is one of the veterans of Wall Street REIT analysis and tracking, Alexander Goldfarb. We're going to get Alex's take on the rumored merger, his thoughts on Q1 earnings calls overall, the direction of the market going forward, Sunbelt and Coastal, etc, much, much more.
- [42:15]
C
It's going to be good.
- [42:16]
B
So let's jump in.
- [42:33]
C
All right, welcome to the interview portion of today's podcast.
- [42:35]
B
And I am absolutely honored to welcome
- [42:36]
C
in Alex Goldfarb of Piper Sandler. So, Alex, thank you so much for being here today.
- [42:41]
A
Jay, thank you for having me.
- [42:44]
C
So, Alex, I always like to start things off just letting the audience get to know you a little bit. So tell us how you ended up in this wonderful world of tracking apartment rates, among other things,
- [42:56]
A
it goes back a long way. When I joined Lehman Brothers, I came in associate class and it was pretty clear that this is right after the dot com, there were more of us than there were seats. So quickly set about to find something and I ended up on this research sales team which was sort of the pet project of the DoR at the time. And I was assigned to the financials group, which included REITs. All I knew of real estate was Robert Moses and urban planning. And I thought that's what real estate was, that's where REITs were. And so when an opportunity came to join the REIT team as an associate, I had Robert Moses in my head and lo and Behold learned that REITs are not about urban planning, but are operating companies and run different types of assets. And from that, you know, the first of the first six companies I was assigned majority were residential. I had amle, Gables sun and what was called manufactured, was it manufactured home communities or whatever, which since became els. So of the six names that I originally started with, four were somehow residential related. So I guess apartments always have a soft spot for me.
- [44:13]
C
Yeah, obviously some of those names still around, but no longer in the publicly traded REIT world, which is kind of foreshadowing for some of our conversation. So let's start with that. Obviously the big news broke after hours last week. After you go through all these earnings calls and it's like, oh, Bloomberg's reporting a potential merger between two of the biggest names in the space Equity Residential, Avalon Bay. And before I ask your thoughts on the merits of it, I just want to get your take how serious you think this is. Because my first thought, which could be completely wrong was I was like, are there some activists, investors or some board members who are pushing this behind the
- [44:51]
B
scenes and leaking it to the media?
- [44:52]
C
Try to get some pressure or is
- [44:55]
B
there more to it?
- [44:55]
C
So how do you think about it?
- [44:58]
A
I definitely believe it's true. I probably would err more on the side of someone floating a trial balloon to see the market reaction and be able to gauge both companies are well run. I think Ben Gahl deserves a lot of credit for being an outsider coming into Avalon. And yeah, that's been tough because the company has tended to hire from and promote from within. So to come in as an outsider at the top, that's big. And also I think a shakeup of the culture. But certainly it's a well run company. I think they are getting their development program more manageable for today's economics. The cost, I mean people forget that development has doubled, the per project cost has doubled, the delivery times have extended. And that's not because of something the company is doing per se, but the approval process, getting the cos, getting the trades lined up, everything else out there, especially since COVID has just taken longer. And when you think about it, it's a four year endeavor from the time, not even counting pre planning, from the time you break ground, deliver and fully stabilize. So you look at eqr, they're more of the acquisition type entity. They do a little development but more acquisition. But both companies overlap with their traditional bicoastal footprint. Some a little bit more suburban, some more urban, but essentially the same. And they're both trying to sell down some of their coastal exposure reallocate to the Sun Belt and Denver. And if you look at the investment discipline in both companies and the cultures, you see it in real life because they both joined together when they took down ARCHSTONE probably what, 13 years ago, 12 years ago, something like that, so they can work well together. They have similar discipline cultures. And really it just comes down to a matter of do you know, does Mark Perel and Ben Shaw, do they think that the companies would be better together? And presumably is one of them willing to give up a seat? So the beauty is neither company has to do a deal that's always a positive and the other is that they both have similar balance sheets, similar cost of capital. There are a lot of similarities here. So it really comes down to does it make sense? And I think ultimately for a deal to pencil for investors it needs to be something more than just oh, you eliminate corporate gna because I'm shot. That doesn't drive long term growth. Certainly there's a look at like assignment of prologis other, you know, large caps that people could say oh, it gains more mindshare in the public. But you know, look, EOP was the biggest office read around and it languished for years. Right? Then you get, you know, in our space, you know, East Group, which is a small, I won't say small cap anymore, it's bigger now but you know, a small industrial play. They've been phenomenally well despite the fact that they've never become this megalith. So ultimately it's about driving profitability and for apartments, critically it's customer experience. So you know, just cutting a bunch of people and having everyone go on their phone to do a lease signing or, or, or a service request if there's no Human element. And nothing that attaches that resident to that property, that's not going to be successful longer term. And that's why, as I say, it's got to be more than just corporate cost cutting. It's got to be something that truly enhances the customer experience, but also allows these companies, given the regulatory environment, it makes them more competitive because legal costs, advocacy, all this stuff is getting more expensive. And just to have a bigger base, plus your alma mater, the real page, having more proprietary information, that's an advantage.
- [48:52]
C
Yeah. So that's, by the way, funny folk going full circle. You mentioned your time at Lehman Brothers, obviously eqr, AVB acquiring Archstone, as you mentioned, out of Lehman Brothers. So yeah, small world. That is probably taking you full circle a little bit. By the way, as an aside, you mentioned Ben Shaw at Avalon Bay. Do you sense that they're the pursuer in this partner, this potential merger?
- [49:16]
A
No, the reason I say that is if you look at Avalon, apart from Avalon and Bay, which I think was in the late 90s, Avalon has not been an acquirer. EQR on the other hand, is an acquirer. Although recently not so much. But in the 90s and early 2000s it was a roll up model.
- [49:35]
B
Sure.
- [49:36]
A
But I have a feeling this was more of mutual acquaintance. Whether this was on the side at nareit, whether this was at some industry conference, you know, who, who knows? But I have a feeling this was more of a mutual casual conversation versus, you know, one side aggressively approaching the other. But if a deal happens, obviously we'll all read the background and see how it, how it came about.
- [49:58]
C
Yeah, and obviously all of us nerds are all fascinated by this because neither is, neither one is like, I mean, I'm just speculating here, like neither one of the CEO seems like they're ready to sort of ride into the sunset. But, but who, but who knows?
- [50:10]
A
I mean, Mark is a lifer at eqr. He's worked hard and he's awesome. Then you know, I mean, in REIT terms, he's only just gotten there, right?
- [50:19]
B
Yeah.
- [50:19]
A
Let's face it, you know, we all like to joke that being a REIT CEO is like, you know, the golden ticket. But in fairness, you know, he only just got there. Certainly Avalon is a great company. There's a lot of good stuff to happen. And know if you think about where the industry is going, the supply wave, you know, is certainly trailed off. There's a housing shortage, there's a lot of stuff to be upbeat about. And the question is for both CEOs. Do they want to participate then in that as CEOs or do they want to combine entities, in which case one of them, you know, will have to give up their seat.
- [50:58]
B
Yeah.
- [50:59]
C
So one more question this before we move on the I'm curious, your perception on you sort of alluded to this. I know you wrote about it to your clients as well. But I will tell you I've heard
- [51:10]
B
differing views in the chatterboxes of late
- [51:12]
C
about how much additional synergy and operational expense containment can they really get from
- [51:19]
B
a merger given they're in similar geographic footprint.
- [51:22]
C
And obviously, as you know, one of the themes these past few years has
- [51:25]
B
been expense management and centralization automation to try to reduce costs.
- [51:31]
C
And so they're already doing a lot of those things, I guess high level. How much additional room do you think
- [51:37]
B
there is for further synergy?
- [51:40]
A
So I think we need to be careful about the word synergy. Cost cutting for cost cutting sake is never a way to drive growth. Right. Because whatever short term benefit, eventually customer service is going to fail. And I think the best example is anyone who has an AMEX card, especially like an upscale AMEX card, always impressed by the customer service. And then you get a regular credit card and you're like, oh my God, like I issue like you're on hold forever. It never gets resolved. You're like, the heck with it, I'll just pay the overcharge and move on. AMEX is like amazing. So if you think about where EQR and Avalon target as far as renter profile, someone who wants service. So that's one, two is the operations. If the people at the property or the service techs feel like they are just a number and you know, it's just piling on more work for them and not much benefit, they're going to leave. And the demand as we all know at the property level is intense, especially for maintenance folks. So the properties depend on good people, both front of house and backup and back office. And it's critical now at the same time when you look and say and this was proven out by the way, and we wrote about this in our note, when Essex bought BRE or the Avalon EQR divvy up of Archstone and suddenly you brought more properties together. The synergies were exponential because suddenly you could have one regional manager or one main property manager or maintenance manager overseed more properties and it was incredible how much more efficient you could run them. But ultimately it is a people business. Everyone likes to talk about online leasing or online service requests. But you know, you're still talking about human beings living in a community. And community is community because of the people. And right now where everyone's targeting tension because one, it's the cheapest form of leasing and two, you can raise rents more with a renewal versus new again, you go back to customer service. If someone feels like, hey, they're not really being treated well or their responses go on or their questions or requests go unanswered, they're more apt to leave. And then as a landlord, it's just now that unit is down, you got to turn it, paint it, shampoo the carpet and compete with whatever the rents are in the marketplace versus the natural friction that comes about when you renew someone.
- [54:25]
C
Yeah, those are all good points. So let me ask you kind of a broader question that's obviously been top
- [54:32]
B
of mind a big theme for all
- [54:34]
C
these recalls last couple of quarters and that is and probably contributing to this conversation with equity and Avalon Bay as well, and that is frustration with public valuations of REITs, obviously well below replacement value. So I guess if we just zoom out a little bit, what's it going to take to get a real bounce?
- [54:52]
B
Is it, is it rent growth or something else that's going to get that moving again?
- [54:57]
A
So it's interesting because like Camden on their call last week spoke about how they can still buy private assets at a discount to replacement cost. So, you know, REITs being at a discount to replacement costs isn't unique to REITs. It's you also see in the private market. But more to the point, the issue for REITs, and this is something we've been writing about for a while, is people have got away from cash flow growth and dividend growth and there's a lot of focus on same store, right? When you look at the apartments, same store for almost all the companies, I think all, but I'll say almost all is only their wholly owned properties, does not include joint ventures. So same store is not, does not correspond to actual earnings growth because it's a subset. It's also management defined. So when you have folks asking more about a management defined subset of a portfolio's operations versus, hey, what's overall cash flow growth doing? It's no wonder that REITs start to lose their way with generalists. The other thing, which is something else I've been harping about is moving away from nareit earnings and using core earnings or company defined. And I get it in technology and other parts of the equities market, a lot of companies use adjusted earnings and things of that sort. But it doesn't mean that REITs have to. And the issue becomes, and we've written about this a number of years ago, that a lot of the items that these companies are choosing to ignore or add back to their core are recurring parts. One is legal costs. Right. Two is weather damage. People like to say, oh, well, it was a hailstorm, it was a mudslide, it was whatever. But you chose to own properties in that part of the market. So you kind of like if you have California exposure. Right. And then you get hit by a mudslide or wildfires, you chose California because lack of supply. Right. And outrageous housing cost loads to drive apartment. Right. The downside is their mudslides, you know, higher insurance. Right. Or you chose Texas because it's a pro growth economy and inward migration is awesome. Well, guess what's in Texas? Hailstorms, Tornadoes. It's just hurricanes. It's part of being there. So that part is frustrating to me. But overall, I think the more that REITs can focus and drive on dividends is good. And look, I gave a shout out to Tom Toomey and his team at UDR in going to a monthly dividend. I don't know that it's the panacea and that it will work, but I do think it's interesting that he is saying, look, dividends are important. We paid almost 9 billion since IPO, and we want to focus on investors who want growing dividends. And if that statement and philosophy translates to UDR acting accordingly and seeing improving cash flows, increasing dividends at a faster pace, that's a benefit. So REITs have been blessed this year, outperforming the broader market. Hopefully that continues. But, you know, it goes back to a theme that I've been talking about, which is lack of supply. We first identified it right out of COVID It took a while for it to manifest, but this year we're really seeing it. Whether it's apartments, you know, for like an EQR in New York and San Francisco, whether it's shopping centers or premium office, you're seeing this lack of supply drive the economics to the landlord. And when you look at the REITs versus the broader market, it's not as surprising, you know, as you mentioned, that private money is coming in to take a look at the space. And we've seen privatizations be a growing trend.
- [58:41]
C
Yeah, I tell people all the time, as somebody who just tracks the stuff on the side and likes to file the earnings calls, whatnot, I hate it because there's Fewer and fewer companies that we get color from because you don't get the same color from the private side, of course. But obviously all these things could be cyclical, maybe in a few years. Talking about a bunch of IPOs again. But let's talk a little more about the public market for a moment. So obviously after the earnings calls last week, we did see a little bit of pop in some of the stocks. So when you look at that, how much of that was related to the
- [59:15]
B
earnings themselves versus the rumored merger versus something else happening out there?
- [59:22]
A
I think it was a lot because the earnings. There was a lot of caution going into results. Not because anyone thought that results would be bad, but just the commentary earlier this year. Certainly you have some of the research we've done and we hosted Brian Dinnerstein because if you don't know, I'm one of the great guy, one of the leading private developers. And a lot of his comments echoed and fit well with what we had been understanding, which is that leasing was rents were still soft housing hangover or supply hangover in the Sun Belt, but that things were better in San Francisco, New York and as a result no one thought that, you know, the REITs would have any inkling of raising numbers. Fast forward, you had results, you had a few companies beat and some companies, which is part of the reason we upgraded Essex, you know, sort of, you're like they would have normally increased guidance if it weren't for the macro. And yeah, so I think the apartments were net a bit better than, you know, expectation now versus REITs overall, I think there's still a laggard. Right. If you look at the shopping centers which are really tightening. If you look at premium office, especially like a BXP or an SL Green that has exposure to San Francisco and New York or New York for SL Green, there's like the tangible growth qualities there. You look at industrials, industrials have really come back and you can see those tailwinds. Apartments are probably more a 27 story, right? Apart from an EQR Essex because of the exposure to New York and San Francisco, the other companies probably this year is going to be tough to get that rent capture into this year's peak leasing to really affect this year's earnings. But 27 increasingly looks better. Certainly you heard that from Camden in mid America that by later in the year this supply wave should be largely eaten through putting them in a better position versus the overall REIT environment that we look at. I still think there's better opportunity for this year in some of the other sectors.
- [61:31]
C
So let me ask you about the coast REIT second, because it's interesting because obviously the Bay Area, New York City, that's been the theme. Hey, these are carrying the portfolio. Great numbers. But it's not a coastal wide. Used to be coast for Sunbelt. It's a much more nuanced story now because Bay and New York are hot. Southern LA in particular still seems to be everybody's least favorite market, at least
- [61:53]
B
in the short term.
- [61:54]
C
It's just challenging for a lot of reasons. Obviously, Seattle's iffy Boston and D.C. have slowed down. So when you talk to investors, how are they sort of balancing the strength in the Bay in New York versus some of the challenges in these other coastal markets?
- [62:12]
A
Real estate investing has really become a submarket endeavor. And we're seeing that in office. And I know this is an apartment call, but I think there are a lot of parallels with office. You're an office, right. There's a lot of ton of availability out there. But you try to like rent something and, you know, Park Avenue or view space in San Francisco. Good luck. Right?
- [62:34]
B
Yeah.
- [62:35]
A
So let's look at apartments. California proverbial. It's falling into the ocean. It's got issues. Everyone's left, right? Okay, that's true. There's no one left in California except in the Bay Area where AI is driving. And despite the fact that all the billionaire owners have left and moved to Florida, there's still a lot of job in the Bay Area.
- [62:55]
C
And they weren't renting apartments anyway.
- [62:57]
A
Exactly. Mark Zuckerberg and all those guys, Elon Musk. But my point is that that's where the bulk of the VC funding is going. That's where the tech, DNA and the innovation sphere is. And because no one pulled a permit after Covid, there's no new construction, like very little supply in Northern California. So the rapid pace of that recovery over the past year is astounding. When you go to Seattle, again, very interesting. Seattle, cbd, not so good. It's got political issues. Progressive tax the rich. Okay. You go across the bridge to Bellevue and Redmond one. It's the closest thing that they have to Texas. Out there, if you are a criminal, you will get arrested. And due time, if you do something in Bellevue or Redmond in Seattle, they'll celebrate. You get a parade, it takes place. But my point is the difference is noticeable in the operating results. And that's why for Essex, they have 17% of their NOI from Seattle. But 10% is the Bellevue, Redmond side. 4 sorry. 3% is Seattle suburbs and only 4%. Think of this numbers, right? Only 4% is Seattle CBD. And that's where the issue is. So the east side is really strong. A lot of jobs and good performance. Go to Southern California. Louisiana. Has issues. Now, if you're west of the 405, your life's pretty good, right? Yeah. DEI has, you know, Douglas Emmett has noted that, that their apartment portfolio performance has been very strong. Where are their apartments? Brentwood, Santa Monica. Like all those areas that are on the west side.
- [64:44]
C
Sure.
- [64:45]
A
But go up to the Valley, you're good. Orange county and San Diego. Not a surprise that Camden is getting some really good bids, good pricing. They have a, you know, a better, it looks like, for the entire portfolio at numbers that meet where they want to be. So Orange county and San Diego are amazing. Right? So again, it's nuanced. LA has issues, right? The Hollywood strikes, political issues, crime and all that fun stuff. But that's not all of Southern California. So what? Real estate investing. And look, look in the Sunbelt. Sunbelt still supplies, but people say, hey, Atlanta's gotten much better, Dallas has gotten much better. Southeast Florida, what are the problem trials? You know, Charlotte and Austin, and by the way, Denver, which isn't Sunbelt, but it gets looped into that Sunbelt thing. Why?
- [65:35]
C
Yeah, it's honorary Sunbelt member for sure. Even though different. Different regulatory environment, though, that's for sure. Yeah. Alex, those are all great points. I'd be surprised if the average REIT investor is aware of those nuances at a submarket level, but certainly you're nailing it now. Let me ask you kind of the other side of the question. If you go to the Sun Belt, the big topic has been, hey, when does the market recover from all the supply? I think everybody would tell you it's taking longer than expected, but still expect it to happen at some point. But my question for you is, I know a lot of REIT investors, you know, they want to know, hey, I get this in question a lot, which is, is the market bottomed and is now the time to jump in? If you get asked that question, are you saying, hey, now's the time, it's bottom, it's coming back up, or do you think it's still kind of wait and see mode?
- [66:23]
A
It's not a wait and see mode, but I don't know that you need to jump in today. We wrote that in our note out last night when we upgraded Essex. The Sunbelt has, you know, and Camden did a great job. Articulating this on their call last week. There's a lot of good job growth. There's a lot of inbound migration. There's just a ton of supply. And you're seeing you have to eat through that supply. If you, you know, I like food. So I'll give you a Thanksgiving analogy. It's sort of like, you know, you have Thanksgiving. I know about your family. We overcook. So there's a ton of. And then pretty quickly the favorites get eaten down, right? And then you're left with, you know, we made way too much of x, Y, or Z side dish or, you know, whatever it is, right. And you end up looking and you're like, wow, we really don't have any more. You know, we're almost done with the turkey. You know, the. The mashed potatoes are pretty much gone, but, wow, we made way too many. The sweet. The sweet potato casserole was too much. And we have endless amounts of stuff like, we have too much of that. But you know what? The cranberry sauce is almost done. So you're looking at it. And at Thanksgiving table, you had this huge abundance. Two days later, a lot of it is gone, but some of it is still there. And it's just like, oh, this is too much. I got to get rid of it. That's being an apartment. So certain markets I just identified, the Atlantas, Dallas's, South Florida's, they've eaten away a lot of the excess, and now they're in a better position to start to get some strength. There are other markets that still have too much, but overall, by the time we get to the tail end of this year, assuming that there's no change in the economy, almost all these markets are going to be on the leading side. They're going to be, Patrick. They'll be on the way to growth, which then sets up 27 to be a very good one for the landlords. All else equal.
- [68:30]
C
Yeah, I think that's a good take. I agree with you. And by the way, for our family, no matter how much Mac and cheese we get for the kids, they're plowing through that. And there's going to be plenty of stuffing and sweet potatoes and all that leftover, but that's a good analogy. Alex, I'm curious. You've covered the space for a while, obviously, and so I'm sure that by the time the calls actually roll around, 95% of what's being said is stuff that you knew, expected, not too surprised at, no matter how it's being spun. But I'm curious if you just, you know, look at the, the calls for the apartment rates that we went through, were there any actual surprises or maybe just particularly good, colorful moments from this round of calls that stuck with you?
- [69:11]
A
I just say I was really impressed with udr. I, you know, you have especially juxtaposed to the M and A theme that was out last week. I have to give them credit, you know, whether it'll be successful or not, who knows. But they're trying something new and if it means that it improves their cash flow growth, then that's a positive. If it's just a marketing gimmick, then it is what it is. Right. And certainly our initial reaction was like monthly dividend, come on, what's this? But I think Tom articulated it well. They certainly, when we asked them questions about going up against FAS and especially the high commissions, a lot of the private products target, and the fact that a lot of private high net worth or retail investors want higher yielding than what apartments do, I think they had some good responses. The market color was probably the most interesting aspect and we just talked about that, the difference in the different submarkets, the different markets. I think that's something that makes investing very interesting because to your point earlier, it's not just buy the coast, sell the Sunbelt, it's no, no, no, that doesn't work. And by the way, Boston softness should not be a surprise. Right. Lives had an issue. The universities have been under pressure, Barnes students have been under pressure, and Boston's political scene, you know, when you pass a millionaire's tax and you encourage the job creators to leave the state, that has consequences. Right.
- [70:40]
C
And now the rent control ballot measure is a big topic as well.
- [70:43]
A
Yes. So, you know, there's, and D.C. is, you know, D.C. i, you know, it, listen, it's our nation's capital. But I don't think anyone sheds a tear for it, no matter which side of the aisle you're on. You know, they, you know, listen, it's a market that's insulated because it has, it receives our tax dollars. So but at the same token, it's, it's just a market that has always had a lot of supply. And so on one hand you say there's a lot of good growth because it's government dollars, you have more increase in defense. But I don't think there's anyone out there who doesn't think that as soon as that market starts to improve, the developers won't come back. Which then begs the question for the REITs. Apart from the political aspect, do you really want to be so exposed to a market that's proven time and time again to be a developer's dream? You know what I mean?
- [71:43]
C
Yeah. I think there's another variable too. And one of the things that's changed since I think since you and I started in this space versus now is like it used to be, hey, we want to be in these high barrier to markets like the District of Columbia or downtown Seattle and downtown Boston. But now the regulatory risk factors, the
- [72:00]
B
rent control and other things around it
- [72:03]
C
we're seeing in places like Denver as well, that really changes the calculus of not just oh, hey, high barrier entry. We could be in here and kind of be, it's tough to get in, but once we're in, we're good to, hey, like can we actually execute a
- [72:14]
B
business plan in this market?
- [72:16]
C
And that, that, that seems to really be a theme that sort of hangs over, doesn't, doesn't rule out these, these, these coastal markets, but it seems to change this. You, as you mentioned, it's a submarket game, like what submarkets do you actually want to be in those MSAs?
- [72:30]
A
Mark Perel said it perfectly when someone asked him on the call about, you know, New York and why not invest more and what have you. And his response is fairly like, look, we're 14% exposure to Manhattan, Brooklyn and the Jersey waterfront. We like it, but it's enough. So I think moderation, we'll go back to the Thanksgiving feast idea. Moderation in all aspects of life and certainly in real estate are a good thing. And for the companies that overinvested, let's say in downtown Seattle or over invested in New York or California, overall, too much of a good thing is tough. And by the way, Camden had it when they were too exposed to Houston. So diversity is good. But more importantly, when you think about where you are in the product, what I think people have learned is if you're at the real high end, it's a very small renter base. We haven't talked about affordability or renter catchment yet. I'm sure we will. But when you're at the very high end, one, you compete directly with new supply unequivocally and two, you've really limited the number of renters. If you're at the low end, you're people who are much more economically sensitive and apt to have credit issues. So the ideal sweet spot, I think most would agree, is that sort of B plus A minus where your value proposition, you're a Nice amenity package, but you're not so high that the new supply is going to hurt you, but you're not so low that your residents are struggling. And at the same time you benefit from people moving up or moving down. And that's it. Next you have, where are you located? And that's what I think. Covid has done a wonderful job of rethinking how people live their lives. And obviously there are a lot of people who lost. I'm not talking about that. What I'm talking about is people are more thoughtful about how they live their life. And instead of I'm going to pay a lot to live in the smallest apartment to be in the coolest part of town, it's now, where do I want to live and how do I want to live? So for the REITs, then it becomes, do we own the right product in the right neighborhoods, in the right markets that combines livability with space. So if someone is working from home, there's plenty of space. Community in a market where I don't have to worry about the politicians letting people know they don't have to pay their rent, where police are funded and economies that encourage growth. And that's where you have the dichotomies. Where you go to a San Francisco. Where you go. There are a lot of things that it doesn't check, but what it does check is one, you had political moderation. Two, you have a real deep technological innovation base that remains there despite the fact that the billionaires have seemingly left.
- [75:25]
C
Yeah, yeah, and I guess I was going to go there, but I do want to quickly call us out. I mean, the affordability one I think is one that I think most of the outside world, whether it's media or even investors at large, I don't think they fully appreciate how this has become
- [75:38]
B
more of a tailwind, not only for
- [75:40]
C
the REITs, but for what I would
- [75:41]
B
say is the A and B market overall.
- [75:43]
C
But it came across a lot in these last round of earnings calls, which was, hey, not only are these affront income ratios down back below 20%, 20%
- [75:50]
B
in many cases, which is very affordable
- [75:52]
C
for the people who are renting them. But also there was a comment, I think it was from maa, where they said, hey, we're actually still seeing good demand from under 25 year old renters and with fewer guarantors despite all the AI fears and fewer people getting jobs out of college, all that kind of stuff. So I think that's been an interesting subplot that really shows, hey, supply has certainly Been a big headwind, but affordability
- [76:14]
B
is not the headwind that it gets portrayed to be sometimes in the headlines.
- [76:18]
A
Well, I think there's. And you and I had a good discussion with this at the Mid America event at Nareit this past fall. But my concern on that is pre pandemic and pre. We haven't had good inflation and I put good in quotes since the 70s, right. Almost for 50 years people didn't have this crazy inflation where costs just went up so quickly with such ferocity today. And at the same time, look, we all have these phones, right, that are. You don't get given it for free for signing a two year contract. Right. They're expensive. But you look at every. I mean, if you're a FIFA fan trying to go to the World cup from New York, you're paying 150 bucks for a train ticket just to get there to empty your wallet further. So my point is the cost for people's lives, especially if you're a renter, there are a lot more other parts of your life that have gotten more expensive. So this is a question I've had for a while. I've asked a number of the management teams. Traditionally it's the 20% rent to income. I think Essex, on their call, I think it was Essex said they've gone up as high as towards 30. They think that there's more room to.
- [77:33]
C
Years ago.
- [77:34]
A
Yeah, years ago. But when you look overall, whether it's an EQR on the coast, whether it's a Mid America in the Sun Belt, and you say, hold on a second. If someone's cost of living in everything else of their life has gone up, plus after the pandemic, they realize that there's a lot more to life than just living in an apartment and hanging out in your neighborhood. You want to travel the world, do whatever, and all these things have gotten more expensive. Do landlords really have an ability to drive rent outsized just because on the paper it says, hey, wage growth has outpaced rents. And there's an adage I like to say, which is never trust advice from somebody who doesn't pump their own gas. Yeah. When you think about the demands on renters, they're going to choose how they want to spend their money. Now it goes back to something we talked about earlier, customer service. If you are a REIT and you offer a great product, great service and people really love being there, then that's the golden ticket, right. Where then you can charge more and move that up because you're Making the residents feel very good about where they are. But I do think that, you know, I'm going to take the under. I think that we may not be able to get the same rent to income power that we've had in previous cycles simply because everything else in their lives has gotten more expensive. But as I say, I've asked a lot of the REITs I cover and so far none of them has agreed with me.
- [79:02]
C
Yeah, no, it's totally a fair point. I mean, I'm actually working on some research on that separate paper, but I'm going to be trying to make the point that I think you're right, but I think it's going to be in the kind of the sub institutional part of the market where we see those pressures play out, which haven't really played out yet. But I think if you're paying 19%
- [79:20]
B
of income on rent,
- [79:23]
C
that's such a low share even as other costs have gone up.
- [79:25]
B
But we'll see.
- [79:28]
A
Think about the people right now move out to homes are like 10%. For some it's even less, but call it 10%. Yeah, you want to buy a home today, you need to save up a lot of money quickly. So where you have renters who do want to be homeowners, they're not going to be wanting to pay more rent out of their income because they need to save for a home. So I think that that's, you know, that's an element that people need to think about. The other is political. We wrote a note about this. I think I sent it to you a few weeks ago. I think it's going to be harder for the public landlords to be able to tout rent growth on earnings calls when you have, especially if we have not if, when we have a Democrat in the White House, Elizabeth Warren, you know, dials into all these earnings calls. I think she probably hits star one. But, you know, for a CEO to be talking about boosting rents, even though REITs, you know, are not the problem, you know, their, their renter set and they're a small part of the market and you know, they actually build and add to housing. But still, you know, the political pressure is, you know, and look what happened with RealPage, right? All these companies are settling because they're like, it's just easier to settle, move on, even though we didn't do anything wrong. You know what I mean?
- [80:35]
C
Yeah, yeah, no, that's totally a fair point, I think. But, but I think that what these REITs are probably looking for is more, hey, can we get back to the, you know, 3 to 5% range on, you know, blended or new lease rents alone. And I think that gets you kind of that sweet spot. I mean, no one's expecting to get Back to the 21, 22 days of double digit rent growth and nor would anybody want to say that out loud.
- [80:58]
B
And I mean, nobody expects that anyway. I shouldn't even say that out loud.
- [81:01]
C
It's just that that's just not reality. That's a once in a generation event that was, was quickly we felt the other side of that as the supply responded to it and wiped out all those increases.
- [81:10]
A
But by the way, you say that, but look at the policies in New York, when 421A became 485X, we wrote about the time that 99 units would be the magic number. Lo and behold, that happened. That happened. Look, in California it's really difficult to put deals in place. Thankfully, Sacramento and Credit to Gavin Newsom are trying to address some of the roadblocks that people have been using via regulation. But if you don't allow people to build and you put policies that make it tough for existing landlords to invest in their properties, by definition you're creating a scenario like you just described where rent growth could be 5, 6 plus percent because there's not enough housing relative to the demand.
- [81:59]
C
And Obviously San Francisco StartNet is the case. So Alex, we only have one last question to close out and I think a fun one here for you. You know, you've been covering this market
- [82:09]
B
a long time, so I'm sure you
- [82:10]
C
got your share of hot takes on the sector. But what's your biggest hot take on the apartment REIT outlook or whether it's performance related? Future take, privates and mergers, et cetera. Give me a good hot take.
- [82:25]
A
I'm going to give a shout out to Ann Olson at Center Space. Okay, if you look, you know, years ago people were only the coasts then they became the Sun Belt. No one ever looked at the upper Midwest. True, we'll put Denver aside, we'll even put Minneapolis aside. But when you look at the markets of like Omaha or Rochester, Minnesota or Fargo, these smaller upper Midwest markets that would never appear on the annual report for any major institutional investor are actually really good. And they tend to drive outperformance in rents. They tend to outperform a lot of the bigger markets. And yes, they will never have the same overall economic growth, but they have very little supply. They're pretty stable. They have good law and order. There are a lot of good Qualities. I'm not saying they're perfect, but I do think I give credit to Ann for exploring strategic options. I think that the hunt for yield, the hunt for real estate, the hunt for assets that can grow rents and take advantage of this disconnect between in place and where market is, I think is making people come to realize that, you know what, everyone loved Austin, but you build too much of it and people don't want to touch it because very few people were going to, you know, Rochester, Minnesota or Omaha to build. Guess what? You still have very good rent growth. And that, to me, is really cool. When I started in REITs, you know, Sunbelt apartments were low multiples. Everyone, you know, it was this whole race. EQR and Archdome were going to the coast. And then over the past decade, and certainly post pandemic, the Sunbelt became all the rage. And I just think it's really cool now that people are starting to see, you know what, maybe the upper Midwest isn't such a bad place after all. Maybe it is an investable place. And again, no one's saying it's going to compete with the depths of the market of the major MSAs, but I think more people are realizing there's some good qualities there. And I got to give Ann credit for that.
- [84:29]
C
Well, I've had Ann on the podcast earlier, and I will tell you that I think she wishes more people thought like you did and actually gave them credit for being in those markets, because Wall street certainly doesn't give them a lot of credit for being in Fargo and tertiary Minnesota and et cetera.
- [84:45]
A
Exactly. But there, you know, those are. And, you know, and look, they're great markets, though. They are. And look, they paid up to go to Salt Lake. You know, we'll see how that goes. They obviously, they paid some big numbers, but, you know, I think they have to think out of the box. They have an existing hand that they were dealt, and I think they're trying to navigate it to the best. But overall, what's amazing about apartments is one, how the companies have all collectively gotten to be, you know, much tighter than, you know, years ago when it was a more eclectic group. And two, they're all, you know, again, I'll give a shout out to eqr, to Mark and Ben, EQR and Avalon. For a long time, they were coastal, coastal, coastal, even though they had some Sunbelt in their roots or they had other areas, and they finally realized, you know what, post pandemic, we can't be here. These are great markets, but we can't deal with unrest or politicians telling our renters they don't have to pay rent. And I give them credit for both mentally overhauling and saying, you know what, eqr, they left the Sun Belt, now they're going back. Avalon never there but for a long time they were coastal and now they're realizing and from a corporate culture that's really when you have that amount of self reflection and the ability to say, you know what, this is something that we need to do. Because where we are these conditions, it's not in our fiduciary to be 100% allocated there. That's that shows a lot of the maturation that this sector has gone through overall. And you know, it's pretty cool to as you mentioned, to have covered apartments for, you know, for 25 years. It's a lot. I've seen a lot. But you know, certainly there's a lot more to go.
- [86:33]
C
Yeah. Yeah. It's funny to see things come back around though and well, Alex, this has been awesome. Really enjoy picking your brain. Thank you for your time and hopefully get some get a break here after earnings call season wraps up.
- [86:44]
A
Thanks Jay. It's awesome. Again, credit to you. You've done a great job. Great to see all your podcasts and LinkedIn newsletters out there. So kudos to you and the franchise you built.
- [86:55]
C
Well, thank you so.
- [87:09]
A
Much.
- [87:16]
B
And that's a wrap on episode number 83 of the rent Roll. Thank you to Alex for being our guest today. Thank you to our sponsors. Thanks to the JPI Madera ButterflyMX. Thank you to also Authentic and Foxen Bercadia and also big shout out to my friends at Apartment Life and Funnel as well. And thank you to all of you for spending part of your week with us. We'll see you next time.