Episode #151: Jay Parsons – Data and the Economy

Today, we are joined by Jay Parsons, who serves as the Senior VP and Chief Economist for RealPage. He's a frequent author and sought-after speaker on topics related to multifamily apartments and single-family rentals and has been cited in the Wall Street Journal, Bloomberg, the Financial Times, and the New York Times. In this episode of the Real Estate Investor Podcast, Jay offers his insights into market trends and consumer behavior as we discuss the US housing market shortage, nationwide rent growth, his predictions regarding interest rates in 2023 and 2024, the differences between true affordable housing and naturally occurring affordable housing, and more. For key metrics to watch and a better understanding of how technology can help you drive down costs, plus so much more, be sure to tune in today!

Key Points From This Episode:

• Jay’s take on the US housing market, which he thinks is short more than five million units. 
• Why he doesn’t like the term overbuilding and what he views as the real challenge with supply.
• Rent growth in Arizona, Texas, Florida, the Midwest, and more.
• Jay’s belief that you can find success in any market with the right strategy.
• His predictions regarding interest rates for the remainder of 2023 going into 2024.
• What it means to be a “homeownership-centric society.”
• Why Jay is a supporter of what he calls targeted rent control.
• True affordable housing versus naturally occurring affordable housing (NOAH).
• Data points that Jay has been focused on and surprised by recently.
• Ways to boost ancillary revenue while also driving down expenses.
• Why Jay doesn’t believe that values will depreciate in the near future.

Links Mentioned in Today’s Episode:

Jay Parsons on LinkedIn

Jay Parsons on Twitter

RealPage

RealPage Analytics

Asset Management Mastery Facebook Group

Break of Day Capital
Break of Day Capital Instagram

Break of Day Capital YouTube

Gary Lipsky on LinkedIn

Joseph Fang on LinkedIn

Transcript

EPISODE 151

[INTRODUCTION]

[00:00:01] GL: Welcome to the Real Estate Investor podcast. I'm your host, Gary Lipsky of Break of Day Capital. I talk to leading experts to discuss a wide range of subjects to educate investors on best-in-class practices to build legacy wealth and positively impact communities. Let's jump in. 

[INTERVIEW]

[00:00:19] GL: Hey, everyone. Welcome to another episode of the Real Estate Investor podcast. I'm your host, Gary Lipsky with Break of Day Capital. Be sure to join our Facebook group, Asset Management Mastery, where we have a great community of thousands of like-minded individuals sharing resources and best practices. 

My guest today is Jay Parsons, who serves as the Senior VP and Chief Economist for RealPage. He's a frequent author and speaker on topics affecting multifamily apartments and single-family rentals and has been cited in the Wall Street Journal, Bloomberg, the Financial Times, and The New York Times. Thanks for joining us, Jay. Can you start by telling the listeners a little bit more about yourself and what you do? 

[00:00:59] JP: Sure. As you said, I have the honor of serving as the Chief Economist for RealPage. Our company is a software provider to the rental housing space and a lot of what I get to do is look at all the data that runs through our systems and aggregates. Kind of like ADP and the payroll information they get, we’re able to do the same thing on the rental housing side. It's a lot of fun. 

[00:01:19] GL: Well, I love that. I really love the content that you put out. Really, really informative. So let's jump in. I know it's funny. Every article you read is a little bit different on what they say out there. I've heard anywhere from four million housing units short in the US, to 5 million, to more than that. I'm curious, what data are you seeing on how many units we’re short in the US? 

[00:01:42] JP: Yeah, that's a big question. There are a lot of different ways to calculate that. We're definitely short. And I think the number is in the millions. But what the exact number is depends on how you define the shortage. I think a lot of times when you see these low estimates, the mistake people make is they're using today's elevated price points, basically pricing out everybody who can't afford those, and saying, "Hey. Well, they can't afford it. Therefore, they don't need it." 

Well, that's not exactly how it works. If you can't afford to buy food, that doesn't mean you don't need food. The same thing is true with housing. I think it's north of five million units. With that being said, we need housing of all types, single-family for sale. We need single-family for rent. We need multifamily for rent. Maybe even some alternative for sale. It's a little trickier in most spots and at all price points. But the biggest deficit is undoubtedly on the low-income side. 

[00:02:31] GL: Okay. Yeah, absolutely. That's where we typically buy value-add. Multifamily, they don't make anything new. So, we look to improve communities and fix it up and make it great for someone else that can't afford the luxury apartments that they're building elsewhere, you know? 

[00:02:48] JP: Yeah. Yeah. And I mentioned, to your point, it's also the middle incomes. Most new construction today is catering to households that have six-figure incomes. Usually with roommates. The challenge though is that we don't build for the middle class. Or for that matter, we have the LIHTC tax credits. But that's a pretty limited program at the low end of the market. It's a real need. 

[00:03:10] GL: Yeah. They're certainly building a ton in Nashville, Dallas, Austin, Phoenix. Are you concerned about any of the markets that are overbuilding? 

[00:03:20] JP: Yeah. No. There is a lot. We're building new units right now and I'm smiling here because I think it's a good thing in the long run. Now that being said, there are going to be some short-term challenges. I don't like the words overbuilding or oversupply because I think that's kind of misstating the issue, which is that there's going to be demand for these units. Long term, we need them. 

The challenge is always can we absorb this much supply in the short period of time in which they're being delivered? Honestly, I don't think we can. I think there'll be a couple of years here, '23 and the first half of '24, where there's going to be a lot of demand. But there'll be even more supply. Especially, I think it's going to be the case in, you mentioned Nashville. And not even necessarily all of Nashville but especially in the core part of Nashville. We're going to see this all over the country. 

And so, I really describe the supply issues as, number one, short-term. But number two, I think that – and when I say short-term I mean one to two years. And then number two, I think it's going to be more pockets as opposed to a macro story. There's going to be challenges in many parts of the country, but it's generally going to be limited to certain sub-markets. 

[00:04:26] GL: Yeah, that's a really good point. Phoenix is so huge, they're building on every outskirt of the city. It's insane. And rent can be the same from one end of the MSA to the other end of the MSA. And that's a 40-mile difference. 

[00:04:42] JP: Yeah. You're not competing for the same renters, right? From one side to the next. Now, to your point though, it's like if I'm operating apartments right now in the far west side of Phoenix, it's going to get absolutely inundated with supply. It'll be a short-term challenge. But again, that's not necessarily competing for the same folks on the far east side of the metro area.

[00:05:01] GL: Yeah. Absolutely. What are you seeing as far as rent growth? Now, obviously, Phoenix has actually – I mean, they've had tremendous, tremendous rent growth. But now you're seeing a little bit of negative rent growth short-term. But do you have some favorite cities second half of 2023 or 2024 that you really like as far as rent growth? 

[00:05:23] JP: Yeah, Phoenix has been challenged. We see that one slightly negative. It's not falling off the cliff. It doesn't look like 2009 timeframe. But it's rented down about 3%. Also seeing slight rent cuts in places like Las Vegas and Sacramento and even Austin. 

But places that we – nationally, I think what we're really seeing is the story is shifted from a rising tide boosts all ships. Everybody's doing great regardless of your investing strategy, regardless of your operating strategy. Now it's a higher variability story. There are pockets where it's really challenged and there are pockets where it's still really hot. 

I mentioned that Austin's cooled off. But Dallas is still really strong. In Florida, we've seen Tampa's cooled off. But South Florida, Southeast Florida, especially Miami, is still a very, very strong market. The other area I mentioned is we're seeing a lot of strength right now in the Midwest. The Midwests are kind of slow and steady markets. We're in that point in the cycle where it's like the tortoise beats the hare. The hare is a little tired. Now the tortoise is up front. 

We're seeing places like Columbus and Indianapolis, Cincinnati, and even parts of Chicago, in Cleveland and Milwaukee. Go on a list. A lot of these markets are doing much better in the national rankings than they typically would. 

[00:06:36] GL: Yeah, it's definitely cyclical. And people always ask me, what are the best markets to invest in? I'm like, "Well, I'm in LA. I don't invest here. But I have friends that invest here and do really, really well." It's not a landlord-friendly state. You've got a lot of you know politics and whatnot. But there's a thesis for every area depending on how you underwrite. 

[00:06:59] JP: Yeah. Yeah. No. Absolutely. And I fully agree. Part of me doesn't even like answering the question about markets we don’t like because, truthfully, you could be successful anywhere with the right strategy. I think certain places, especially Southern California, are just a lot harder to be successful. 

[00:07:16] GL: Yeah. But, yeah, tremendous appreciation. And the occupancy, there's just such a lack of units here in Southern California that things get – 

[00:07:26] JP: Yeah. It's never been a demand issue for housing in California. There's other things that are worrying about. But like you said, people have been successful there. And especially, I think that we'll see more and more opportunities for small and regional players to be more and more successful as larger investors start to diversify outside of coastal markets like California. 

[00:07:47] GL: At the time of this recording, the Fed raised rates, 25 bips last week. Do you have any – obviously, you don't have a crystal ball. But are you thinking another 25 bips? And before we start cutting rates, maybe in 2023 – what are you thinking?

[00:08:05] JP: Well, like you said. I mean, I don't have a crystal ball. I think we found that economists have a pretty horrible track record at predicting the prices of oil and also interest rates. I try to avoid those two things. 

Now that being said, if I'm pushed into a corner, I'm in the camp that thinks that I think the Fed will likely hold off for a while and see what's going on. There's already a lot of distress obviously. I say a lot. There are signs of distress that are starting to show up in the banking sector given what's going on with deposits and whatnot. There are signs with commercial real estate. Especially, obviously, in multifamily, you have short-term debt that's maturing and it's going to get refinanced at much higher rates and that's going to have a serious impact on the market. There are some concerns about obviously the job market, although the numbers continue to weigh out before everyone's expectations for the gazillionth year in a row.

My guess is that the Fed's probably going to hold off for a while. Then, maybe by next year, we start to see rates coming down again. 

[00:09:04] GL: Yeah. I read a lot of data, a lot of articles out there. It can range from zero rate decreases next year to 200 bip decreases next year. It's crazy here. It certainly runs a gamut. But I definitely feel that rates will be coming down quite significantly next year and over time, you know? So it'll be interesting.

[00:09:28] JP: Yeah. I think they'll be cautious about not doing it too quickly. But I do – and I think they're going to see. Especially, there's so much political pressure right now on mortgage rates, which obviously have been tied to what the Fed's doing with the base rate. 

And so, my guess is eventually that starts to put some pressure on the Fed to push down rates a little bit. I mean, our view of the – kind of the national view of how we think about the economy is so often tied to mortgage rates. We're a homeownership-centric society. So, I think that could end up being a driver in where rates go. 

[00:10:01] GL: Yeah. What they're doing in California – and, I mean, I don't know the exact law. But there's a tax [inaudible 00:10:08]. And it just recently put in for – if you buy a home $5 million or more. And then I think there's another level. 

They're trying to balance it out as much as they can. But, yeah, it'll be – they're going to have to come up with some other long-term real solutions, which they've never really been successful at. But if they're trying to increase home ownership in the future, they're going to have to come up with some other programs. 

[00:10:35] JP: Well, and that transfer tax is a big deal for multifamily owners well of course. And I think that's one reason why you're going to have less interest in places like Los Angeles, and Chicago is now considering a big increase in its transfer tax because, immediately, those assets become less liquid, which the policy ends up being less productive because there's fewer sales, transactions that are occurring. So we'll see. 

[00:10:57] GL: Rent control. That's really had a negative effect on what they're trying to create. And you'll see a lot of people stay in apartments that can afford a lot more staying at 10, 15, 20 years because they don't want to move and not have to pay two or three times the rents. 

[00:11:14] JP: Right. No. It's a big challenge. I mean, un-targeted rent controls ultimately have tremendous benefits for a lot of households who don't need the benefit. And that's been one of the biggest challenges. I'm a big supporter of very what I would call targeted rent control, which is essentially true affordable housing. The LIHTC program, Section 8 vouchers, and things like this that get, A, directed to those who need them, and B, without the negative side effects of traditional rent controls. 

[00:11:42] GL: Yeah. And you're starting to see – you're talking about some lenders that, Fannie and Freddie, really pushing more and more programs down that route to have more affordable housing for people. 

[00:11:52] JP: Yeah. Yeah. No. Fannie and Freddie have obviously been – they're more and more structured around trying to incentivize more affordable housing. And affordable is a big – it can mean a lot of different things. You have true affordable housing associated with some sort of subsidy program but you also have the NOAH stuff, the naturally occurring affordable housing. 

If you can keep you know market rate units at lower rents and you could subsidize that like – I'll give you one example. There's a proposal in Congress right now that Senator Wyden out of Oregon put out called the Middle-Income Housing Tax Credit. And it would help, number one, do construction in the middle tier rents. But the other thing it would really help out with is maybe doing renovations and value adds, where instead of having to raise the rent 20%, 30% to pay for all the CapEx you're putting in. Maybe having a subsidy associated with it that would keep the rent lower but still be able to do the renovations that otherwise you can't afford to do [inaudible 00:12:43] need. It could be a win-win. 

[00:12:45] GL: Yeah. And can you explain NOAH for our listeners that have never heard of that before? 

[00:12:50] JP: Yeah, NOAH is naturally occurring affordable housing. Basically, if you imagine like all the stuff they're building today, we talked about it being Class A, luxury apartments catering to six-figure income households. Well, today's new supply ends up being the naturally occurring affordable housing of decades in the future. And so, if you think about properties built in the 70s, for example, or even the early 80s, these properties are more affordable today, right? And so, when we're talking about NOAH, it's just kind of aging in and becoming – the rents are naturally cheaper because of the age and the condition of the property.

[00:13:27] GL: Excellent. Has there been any data points that have come out recently that you're really surprised or really focused on? 

[00:13:34] JP: Oh, that's a good question. I'll start with the focused on. I think the big thing we're looking at this year are our turnover or retention rates of residents. We've seen – even in non-rent controlled markets, there's been very little resident turnover these last couple of years. First, you had COVID, so people couldn't move or didn't want to move given the pandemic. Then, you had record-low vacancy rates occur. With the places that did have openings were getting more expensive in a way than just staying put and renewing their lease. 

And so, now we're into one of those more supply and there's more vacancy. And I think that's going to lead toward more turnover again this year. I think property managers are very focused on this and trying to protect the back door the best they can. I think that's going to be a key metric to watch this year. 

In terms of surprises, for the most part, I think the market is performing kind of as we expected. Except the biggest surprises are really on the expense side. You have – insurance costs have gone through the roof, especially in Florida and Texas, Southern California. But really, all across the country. In some cases, insurance premiums could be double what they were two years ago. I think that's been a surprise. 

I'm also surprised that payrolls continue to go up as much as they have you. Payroll was an issue when COVID hit. I would not have predicted that three years after COVID we'd still be wrestling with staffing shortages especially on-site for policing and maintenance teams and other things around the expense side as well, [inaudible 00:14:57] utility, et cetera. 

And then of course you have the cost of debt. Of course, debt service coverage is going up. The mortgage that you pay if you're on a floating rate. Expenses I think are really the big surprise this year. 

[00:15:10] GL: Yeah. Yeah. You mentioned turnover earlier. And so, before we were having to deal with that as much over. Now you've got turnover. You've got turnover as far as units but also turnover in staff. And then when you add insurance and all these other costs associated with running an apartment building, it's been insane. Got to really make sure your asset management is super tight and maybe introduce a couple of other streams of income, whether it's package lockers, or preferred parking, or whatever to try to keep up with those expenses. 

[00:15:42] JP: Yeah. And also, there's a big focus in the industry right now around just operating more efficiently and centralization. Using technology allows for more automation of services for renters. I mean, it started off with things like paying your rent online. But now a lot of like resident service, and resident care, and even leasing can occur kind of sight unseen. That reduces costs. There's a big focus on not only ancillary revenue but also trying to drive down expenses too. 

[00:16:08] GL: Yeah. Really hard for property management companies to do that. Typically, the ones that we've dealt with are so archaic. But, yeah, getting them to really embrace technology has been a struggle. But it could pay – 

[00:16:21] JP: Well, you start with – I'm amazed how many companies still don't allow online rent payments. I mean, stuff like that is a no-brainer. Because number one, the residents like it. And number two, you're not processing rent checks. Number three, you're going to deal with a lot of check fraud and things like this that would occur and reduce a lot of your risk. 

And so, I mean, I tell – I mean, to me – and I'm not trying to pitch anything here. But I just think of all things you can do, that's the easiest to kind of recover some lost revenue and also reduce some expense and make your residents happier.

[00:16:53] GL: Yep. A lot of time-saving, cost savings to be had. But there are slow adopters. Low margin. Thankless job. I get it. 

[00:17:03] JP: Yeah. Yeah. No. I hear the same things. And ultimately, I think you can't just spend money to make money in every single way. But there are certainly things that just are sensible ways to operate more efficiently that should be no-brainers.

[00:17:19] GL: Yeah. Anything else that you see on the horizon that's going to – people talk about. We're still waiting for another drop in value on home values and for multifamily. I don't see it coming. Maybe some markets will take a little bit more dip. But you know I see things starting to pick up soon in the second half of 2023 and certainly in 2024. What are you seeing? 

[00:17:45] JP: Yeah. I think the big question right now is really tied to how much distress is going to be in the market. And when I say distress, as you know, it's really tied to those who bought at peak values and didn't have the run-up in revenue the past pretty couple of years and then just inherited the expenses that are now above what they pro forma-ed. Then, they have floating rate debt that's going to mature late this year, in the next year. And invest at higher rate. 

And so, how much that gets worked out behind the scenes with preferred equity and Mez? How much that ends up on the market? I think there's [inaudible 00:18:20]. Ultimately, there's still quite a bit of dry powder. A lot of funds that have been raised need to be deployed. People still like multifamily as well as industrial relative other options. 

I don't think values will – I think they have to adjust somewhat because the cost of debt is so much higher obviously. But it's hard to see a scenario barring a big shock that's not yet occurred or immediately visible where values can significantly depreciate. 

[00:18:50] GL: Yeah. They talk about the wave of loans that are coming due. And certainly, people under siege because of the debt. But sellers haven't been as desperate when they're looking to sell as of now. We'll see how it plays out. But they've been holding out for a buyer to pay more than we've been willing to pay. It's certainly interesting times. 

Jay, I appreciate you coming on the show and sharing your knowledge. Where can listeners find out more about you and RealPage? 

[00:19:25] JP: Well, sure. And again, thanks for having me on. We put out a lot of content at realpage.com/analytics. There's a blog there with a lot of details. And also, I post, as you alluded to, on LinkedIn quite frequently. So you could see a lot of our content there as well under my name. 

[00:19:40] GL: Yeah. Listeners, definitely check it out. A lot of great information. Highly recommend it. Thanks so much again, Jay, for coming on. I'll be back next week with another informative episode on the Real Estate Investor podcast. 

[OUTRO]

[00:19:52] GL: To all of our listeners, thanks for joining us. If you like this episode, please head over to iTunes or Stitcher and like, subscribe, and leave a review as it will help us reach more people. And if you'd like to learn more about what we do at Break of Day Capital, head over to our website at breakofdaycapital.com and sign up for our newsletter and fill out our investor application. We'll talk to you next week. 

[END]