Speaker 1: Hello, and welcome to another episode of the Odd LODs podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Halloway. Tracy, you know
Speaker 1: what I'm not looking forward to? Uh, it could be
Speaker 1: any number of things, but what Well, I got a
Speaker 1: pretty I got a decent price on a rental in
Speaker 1: my where I live in Manhattan, moved during the pandemic.
Speaker 1: I did, like, I got a pretty good pandemic deal,
Speaker 1: and I am not looking forward and I think, like,
Speaker 1: you know, yeah, pretty good rent. I'm not. I'm worried
Speaker 1: that at some point, like the cut, my landlord will
Speaker 1: perceive that like there's a gap between what we're paying
Speaker 1: and what the market prices are, and that my rent
Speaker 1: bill is going to shoot up. Well, i got a
Speaker 1: not very good deal on a rental post pandemic last year,
Speaker 1: and I've already gotten my one year, um like rench
Speaker 1: renewal notice and it was an automatic five percent pay increase,
Speaker 1: which kind of sucks. Yeah that's not great. But wait,
Speaker 1: you did you did negotiate with them a little bit?
Speaker 1: I did. I said, I said, is there any way
Speaker 1: we could compromise on the rent, to which their response was, uh,
Speaker 1: they k not seventy five dollars off of their used
Speaker 1: off their proposed hikes. I'm saving myself seventy five dollars
Speaker 1: a month, which relative to the counterfeits I am. I
Speaker 1: am grateful for the gesture. However, relative to um the
Speaker 1: substantial New York rent, um, it's not it's not that much.
Speaker 1: I tried, so we know that, Like, all right, So
Speaker 1: obviously rent is really important for all kinds of reasons.
Speaker 1: It's another one of these highly salient prices that people pay.
Speaker 1: It's a huge component of the inflation measures. What we
Speaker 1: know about the measures of rent seemed to be two things.
Speaker 1: One is various private sector measures seemed to have been
Speaker 1: turning down for a while. That's clear, And it also
Speaker 1: seems like um uh, it's only a matter of time
Speaker 1: before that feeds into the official measures that the Fed
Speaker 1: likes to look at. We had a good episode last
Speaker 1: year with Sharif talking about why there's that gap and
Speaker 1: how to think about reconciled these two measures. But like,
Speaker 1: how far is it going to come down? Will there'll
Speaker 1: be a year in which our rent doesn't go up
Speaker 1: at all? Well, other people and other parts of the
Speaker 1: country seat rent. This is like a huge topic We've
Speaker 1: never actually done like a pure rent episode as far
Speaker 1: as I know, No, we haven't. And there are all
Speaker 1: these interesting little things you can start to pick out
Speaker 1: of the topic. So, for instance, you know, in New York,
Speaker 1: maybe rents are starting to come down now, but not
Speaker 1: nearly as quickly as in other parts of the country.
Speaker 1: New York is a big part of rent c P
Speaker 1: I right, and so if New York prices stay sticky,
Speaker 1: it could have an overall effect on on national rent prices.
Speaker 1: And also I'm I'm interested in talking also about some
Speaker 1: of the big picture developments that we have seen in
Speaker 1: the space. You know, people talk a lot about private
Speaker 1: equity moving into multy family housing, whether or not that's
Speaker 1: pushing up prices, uh, the impact to new technology as
Speaker 1: well on how landlords actually come up with the prices
Speaker 1: that they charge people for their buildings. Lots to talk about. Well,
Speaker 1: you know, and we did talk about this recently with Connerson,
Speaker 1: who I thought made a really fascinating point, which is
Speaker 1: that like the rent apartment rent specifically multi family housing,
Speaker 1: it just has gone from strength to strength over the
Speaker 1: last like fifteen years. You know, It's like after the
Speaker 1: Great Financial Crisis, no one's gonna want to own a
Speaker 1: home anymore. Let's rent um millennials don't want to live
Speaker 1: in the suburbs. Let's move to the city and rent
Speaker 1: millennials are delaying having kids, let's you know, no reason
Speaker 1: to you know more rent. Like at every turn, multi
Speaker 1: family dwellings have won, and there's this boom. And if
Speaker 1: you do a chart showing construction and multi family versu
Speaker 1: construction and single family, single families totally slump, never got
Speaker 1: even backed anywhere near like pre crisis levels, whereas multi
Speaker 1: family just keeps booming. Is that a permanent figure could
Speaker 1: like there be like this sort of like Minsky moment
Speaker 1: for multi family in floor rental options where it's like
Speaker 1: the lux suddenly runt right, and so much of the
Speaker 1: market right now housing in general, so single family plus
Speaker 1: multi family, so much of the outlook is predicated on
Speaker 1: what you think is going to happen to supply and capacity.
Speaker 1: So that is really a key question. Are the multi
Speaker 1: family homes going to keep getting built? Well, let's talk
Speaker 1: about it with someone who can answer all of these
Speaker 1: questions for us. We're going to be speaking with Chris Salviati.
Speaker 1: He is the senior Housing economist at Apartment List. He's
Speaker 1: going to answer our questions. Chris, thank you so much
Speaker 1: for coming on odd Lots. Hi thanks so much for
Speaker 1: having me on. So Chris, can I ask my landlord
Speaker 1: for a rent cut when in the next couple of months? Like,
Speaker 1: is it is that reasonable? Well, I guess it depends
Speaker 1: when you sign your least show. It sounds like you
Speaker 1: got kind of one of those pandemic deals that you know,
Speaker 1: particularly in New York City, that was one of the
Speaker 1: markets where friends actually really sharply in that first year
Speaker 1: of the pandemic. So we are really seeing the market
Speaker 1: having turned a corner a little bit over these past
Speaker 1: few Prices have been coming down for four straight months
Speaker 1: now in our our national rent index. But you know,
Speaker 1: if you're still paying that late level, then you might
Speaker 1: not necessarily eligible for a discount that. So when we
Speaker 1: say rents are going down, and I saw on your
Speaker 1: Twitter feed, I think you have the national median rent
Speaker 1: down now three from its August peak, what does that
Speaker 1: actually mean? Like, how are we actually putting together a
Speaker 1: national or you know, even a city rent price. And
Speaker 1: I guess my question really is when when prices start
Speaker 1: to move like that, how much of it is reflected
Speaker 1: in the actual figures that people are paying for their apartments.
Speaker 1: The way that we calculate our price index, it's basically
Speaker 1: a repeat transaction index, and so we can see, you know,
Speaker 1: on our platform, we're able to track individual units over time,
Speaker 1: so we can see for all of the apartments that
Speaker 1: we're listed on apartment List for rent this month and
Speaker 1: that subsequently got rented, we can look back and see
Speaker 1: when was the last time that that exact unit was
Speaker 1: rented previously. Compare those two prices and see how much
Speaker 1: that price changed for that individual unit, which really you know,
Speaker 1: controls for sort of quality across the inventory, and then
Speaker 1: we basically aggregate those up for the individual geography, whether
Speaker 1: that be a city level or national level index. Uh.
Speaker 1: And our national index is basically just an aggregation of
Speaker 1: all the inventory that we see across the country. And
Speaker 1: so that you know, three percent discount that we talked
Speaker 1: about and starting from the August peak to present that
Speaker 1: that should be reflective of what folks are seeing if
Speaker 1: you're going out on the market and signing a new lease.
Speaker 1: So as an economist, I mean, you know, I guess
Speaker 1: like there's like, uh, the index construction as you described it,
Speaker 1: I'm sure it's a you know, I'm sure that's a
Speaker 1: pretty tricky technical challenge. And you know that we had
Speaker 1: that conversation last year at Olmer Sharief. There's these coming
Speaker 1: up with the price index is never trivial, even if
Speaker 1: it's just like a sort of like repeat methodology. But
Speaker 1: I'm curious, like, as an UH, from a modeling perspective, like, okay,
Speaker 1: strength of the consumer, strength of the labor market has
Speaker 1: got to be like one important factor. People are losing jobs,
Speaker 1: people's wages are going down. There's like a got to
Speaker 1: be a limit to how much rent price increase can
Speaker 1: be sustained. What else goes into that supply Like, how
Speaker 1: do you think about sort of like modeling a forecast
Speaker 1: for the price of rent? Yeah, you know, I mean
Speaker 1: I think in the highest level framework, it is, as
Speaker 1: you said, kind of a demand and supply question. I
Speaker 1: think when we talk about housing, you know, obviously the
Speaker 1: supply response UH is a lot more prolonged than it
Speaker 1: is maybe in some other markets. You know, it takes
Speaker 1: a long time to permit and get construct new construction built,
Speaker 1: and so in the shorter term, you know, I think
Speaker 1: the kind of the big up and down swings that
Speaker 1: we see are really driven by demand. And when we're
Speaker 1: talking about demand here, it's really household formation. You know,
Speaker 1: how many new people are striking out on their own
Speaker 1: and forming new households. Uh. And obviously when we're talking
Speaker 1: about the rental market in particular, there's also the dynamics
Speaker 1: of how that household formation kind of interacts between the
Speaker 1: for sale and the rental side of the market. So, uh,
Speaker 1: you know, right now what we're seeing obviously sky high
Speaker 1: mortgage rates, things are really difficult on the for sale
Speaker 1: side as well, and so folks are staying in rental
Speaker 1: units for longer. That creates lightness, but the overall household
Speaker 1: formation numbers, you know, if we go back to that's
Speaker 1: when that was really uh, you know, taking off, and
Speaker 1: when we saw the really astronomical rent hikes over the
Speaker 1: past year and particularly the past few months, that's really
Speaker 1: started to slow down quite a bit. So one thing
Speaker 1: I've always wondered our our rent hikes and rent decreases
Speaker 1: sort of asymmetrical in the sense that rents tend to
Speaker 1: go up a lot faster than they come down. This
Speaker 1: is my you know, at the risk of risk of
Speaker 1: being very biased here, but my personal experience with rent
Speaker 1: is that it tends to go up and doesn't tend
Speaker 1: to come down as much. Is that actually the case? Yeah,
Speaker 1: you know what, when we looked at our rent index
Speaker 1: over time, it's definitely the case that it tends to
Speaker 1: to march upward rather than downward. We do see it
Speaker 1: is typical to see a little bit of a decline
Speaker 1: in the late fall and winter months. There's just a
Speaker 1: pretty clear seasonal pattern to rent friends and fewer folks
Speaker 1: move in the winter, so properties that do have vacancies
Speaker 1: to fill will often offer modest discounts at that time
Speaker 1: of year. But again, at is really just kind of
Speaker 1: a temporary seasonal trend. And uh you know at UM,
Speaker 1: once activity picks back up, rent growth tends to turn
Speaker 1: positive again, and that positive growth almost always outweighs those
Speaker 1: seasonal declines. You know, our our rent index goes back
Speaker 1: to seventeen so we don't have a huge history, but
Speaker 1: at least over those years, we've never seen a year
Speaker 1: in which uh nominal rent growth has been negative. Even
Speaker 1: if you go back to the aftermath of the Great
Speaker 1: Recession and you look at rent cp I over that period,
Speaker 1: you know, it was basically flat or we didn't really
Speaker 1: see much of a nominal decline there either. So just
Speaker 1: on this topic, I imagine that you must speak to
Speaker 1: landlords on on a fairly regular basis. What's the decision
Speaker 1: process for them, like when it comes to setting the rents,
Speaker 1: Like what are they looking at? What are the different
Speaker 1: factors that might go into them actually pulling the trigger
Speaker 1: on either a substantial rent hike or some sort of decline.
Speaker 1: You know, I should say, a lot of the inventory
Speaker 1: that we have an apartment list in particular, and that
Speaker 1: feeds into our r in in index. Uh, it does
Speaker 1: tend to skew towards a particular segment of the market,
Speaker 1: that being you know, the large professionally managed multifamily complexes.
Speaker 1: So thinking here of you know, big apartment buildings that
Speaker 1: that have fifty or more units, and so those professionally
Speaker 1: managed buildings tend to be pretty sophisticated and how they
Speaker 1: set prices. Uh, And actually there are price setting algorithms
Speaker 1: softwares that kind of tend to come bundled along with
Speaker 1: property management softwares, and so a lot of these properties
Speaker 1: are are actually you know, using these kind of algorithmic
Speaker 1: price setting techniques where you know, the software that they're
Speaker 1: using is also uh kind of integrated with various other
Speaker 1: properties throughout the market, and so they have a lot
Speaker 1: of really good real time data, you know, those demand
Speaker 1: changes as I see them in real time. And so
Speaker 1: I think, you know, when we're talking about this professionally
Speaker 1: managed segment, I think it can be pretty sophisticated. Obviously,
Speaker 1: at the other end of the spectrum, you've got you know,
Speaker 1: your your kind of mom and pop landlord's folks who
Speaker 1: maybe only own a couple of rental units, and I
Speaker 1: think that segment of the market maybe the considerations are
Speaker 1: a little bit different, probably a little bit slower to
Speaker 1: respond to those market changes, and also probably a greater
Speaker 1: emphasis on just wanting to avoid vacancies and have intenants
Speaker 1: that will be there for a long time. So it
Speaker 1: definitely varies based on, you know, the part of the
Speaker 1: market that you're talking about actually wanted to bring. I mean,
Speaker 1: it's sort of getting a little bit away from the macro,
Speaker 1: but that's fine, you know, Like it's always seems to
Speaker 1: me when I think about this question, which is that
Speaker 1: if you have a a tenant who is both um
Speaker 1: good at like regularly paying their bills, is not regularly late,
Speaker 1: has never had an issue where they need to be
Speaker 1: did or something. It seems like there must be like
Speaker 1: a pretty big risk in pricing them out because a
Speaker 1: like it doesn't take very long of a vacant apartment.
Speaker 1: It would seem to me it wouldn't take very long
Speaker 1: to lose a lot of the games you would get
Speaker 1: from the rent pricing crease. So if you have like
Speaker 1: a month vacancy, that's a lot of lost money. And
Speaker 1: then there's the wild card of like, okay, then you
Speaker 1: fill it. But what if the person who comes in
Speaker 1: is like not great about paying the rent, They're gonna
Speaker 1: damage the place. And so I'm curious like whether some
Speaker 1: of the software these pricing decisions like take it to
Speaker 1: account about like existing tenant quality and the potential like
Speaker 1: cost of losing them. Yeah, you know, that's a great
Speaker 1: question as far as kind of the the algorithmic portion
Speaker 1: of it. You know, those are sort of proprietary algorithms,
Speaker 1: and you know there's not something that you know, we
Speaker 1: had apartment lists, we don't have kind of version of that.
Speaker 1: So I don't actually have a good sense of whether
Speaker 1: or not you know, this dynamic that we're talking about
Speaker 1: as far as kind of kind of quality, I'm not
Speaker 1: sure exactly how that kind of factors into those algorithmic
Speaker 1: price setting, but as you said, you know, I think
Speaker 1: this is definitely uh unimportant variable. I think in particular,
Speaker 1: like I said, when we're referring to the kind of
Speaker 1: the mom and pop segments of the of the rental space,
Speaker 1: I think that's probably you know, factoring a lot more
Speaker 1: heavily into their decision making if you've got you know,
Speaker 1: if you're if you're a big property owner that has
Speaker 1: hundreds of units and you lose you know, one good
Speaker 1: tenant and have a vacancy that maybe sits for a
Speaker 1: few months, that's not going to really affect the bottom
Speaker 1: line as much as if you have you know, a
Speaker 1: single duplex and and one of your tenants leaves and
Speaker 1: you have a vacancy for months or have a bad
Speaker 1: experience with a tenant. And so I think that's also why,
Speaker 1: you know, maybe prices tend to be a little bit
Speaker 1: stickier for in those kind of smaller rental properties as well.
Speaker 1: You know, if those mom and pop landlords do get
Speaker 1: a good tenant in I think they want to keep
Speaker 1: that person there as long as possible, and so maybe
Speaker 1: they're a little bit more hesitant to um to really
Speaker 1: raise prices. Sing that again we Tracy, I just want
Speaker 1: to point out I really like my landlord. She's very attentive,
Speaker 1: with a very good relationship. So even though I started
Speaker 1: the episode saying I was anxious, if she is listening
Speaker 1: to this, I hope she hears that I really enjoy
Speaker 1: where we live and I really enjoy our the landlord,
Speaker 1: she should factor your consistency into her pricing algorithm. Yes, yes, exactly, excellent, Okay, Chris,
Speaker 1: just on this topic, I mean, I do find this fascinating.
Speaker 1: So let me ask about this in a slightly different way,
Speaker 1: which is, over the past few years, given the rise
Speaker 1: of some of these algorithmic pricing services, given also the
Speaker 1: rise of the number of big landlords who seem to
Speaker 1: be moving into the multifamily space or becoming a bigger
Speaker 1: part of that space, do you see an impact on prices? So,
Speaker 1: for instance, are they more volatile, more reactive than they
Speaker 1: used to be when we maybe had a run a
Speaker 1: landscape that was more about small, mom and pop landlords.
Speaker 1: That definitely could be the case that we're seeing a
Speaker 1: little bit more of volatility, kind of bigger swings in
Speaker 1: either direction in rent prices. I think one one kind
Speaker 1: of piece of evidence that's maybe kind of interesting and
Speaker 1: relevant here. Um, the Cleveland Fed actually put out a
Speaker 1: really interesting working paper recently where they dugged into you know,
Speaker 1: you mentioned kind of briefly that this difference between the
Speaker 1: trends that you would see in our rent indexperts what's
Speaker 1: happening in the official CPI measures, uh, and so this
Speaker 1: paper was really meant to kind of like disentangle those differences.
Speaker 1: And so what they did was essentially take the underlying
Speaker 1: micro data that feeds into the official CPI estimates and
Speaker 1: reconstructed an alternate index. That's you're using a methodology similar
Speaker 1: to how apartment List and other kind of private sector
Speaker 1: sources calculate our rent indexes, so essentially looking at you know,
Speaker 1: rather than all households, looking at only new tenants, and
Speaker 1: using kind of a repeat rent methodology similar to ours.
Speaker 1: And so what that found was basically that this kind
Speaker 1: of new index that they constructed, uh follows a very
Speaker 1: similar trend to what we see in our index, but
Speaker 1: the swings are a little bit less extreme, And I
Speaker 1: do think that probably this comes down to the difference
Speaker 1: in sample. As I said, you know, the apartmentless index
Speaker 1: is heavily skewed towards this large, professionally managed segment of
Speaker 1: the market, whereas the l S data is designed to
Speaker 1: be representative of the market as a whole. And so
Speaker 1: that kind of suggests to me that we are seeing,
Speaker 1: you know, a bit of kind of what you described,
Speaker 1: that these uh, that a large professionally managed buildings are
Speaker 1: going to be a little bit more reactive in their pricing,
Speaker 1: and that those uh, those swings, as I said, you know,
Speaker 1: when when rents are going up, they might go up
Speaker 1: a little bit quicker when they're going down with that
Speaker 1: seasonal trend, those those winter tips might be a little
Speaker 1: bit more pronounced as well. Um, you know it is
Speaker 1: it could also be the case that there is maybe
Speaker 1: just different demand dynamics happening at different segments of the market.
Speaker 1: So this might not all come down to just that
Speaker 1: kind of algorithmic pricing alone, but I do think it's
Speaker 1: certainly a factor there. Well, let's talk a little bit
Speaker 1: more about the picture right now and what's happening, because
Speaker 1: so we've had we had this huge rent boom. Everyone
Speaker 1: knows the price of rent surge, especially basically all the measures,
Speaker 1: private measures, public measures, etcetera. Everything went up a lot.
Speaker 1: But it seems like there are a number of factors
Speaker 1: now that and we've touched on some of them that
Speaker 1: are reversing. So the labor market is slowing, wage growth
Speaker 1: is slowing, new job creation is not what it was
Speaker 1: a year ago. Household formation, as you mentioned that ship
Speaker 1: that boomed, and now there's already some talk about like, okay,
Speaker 1: well maybe like people are getting roommates again, which as
Speaker 1: we talked about I think it was with them James
Speaker 1: E in the dats A factor and shrinking household formation.
Speaker 1: I didn't understand all these terms until just a few
Speaker 1: months ago when we talked about that. But so that's
Speaker 1: shrinking household formation and then you know, and talked about
Speaker 1: it in the intro the the part the multi family
Speaker 1: industry just like booming, and those those construction numbers haven't
Speaker 1: really don't seem to have slowed down at all yet.
Speaker 1: And so like, how much of like a sort of
Speaker 1: like confluence of factors could there be or how unusual
Speaker 1: the situation could be where there's a number of potential
Speaker 1: drivers of reduced demand, and at the same time the
Speaker 1: supply creation has been off the charts, Like, what do
Speaker 1: you see happening with this combo of drivers. Yeah, you know,
Speaker 1: as I said, we've been seeing already that our national
Speaker 1: rent index has been declining for the past four months.
Speaker 1: You know, as I said, that all in and of
Speaker 1: itself isn't necessarily a typical but the decline that we've
Speaker 1: been seeing recently has been notably sharper than than the
Speaker 1: usual seasonal trend. And so it seem like like some
Speaker 1: of these factors are finally kind of colliding and coming
Speaker 1: to fruition in a way that's really resulting in a
Speaker 1: big shift in the market. And I do think, you know,
Speaker 1: it's really kind of the things that you just laid
Speaker 1: out there. On the demand side, things really are cooling
Speaker 1: down quite a bit obviously, you know, after a year
Speaker 1: plus of extreme skyrocketing grunt growth as well as just
Speaker 1: broad based inflation eating way at non housing budgets, folks
Speaker 1: are finding that their budgets just aren't going as far,
Speaker 1: and so fewer folks are able to afford to strike
Speaker 1: out on their own. Also with you know, kind of
Speaker 1: as you said, kind of a cooling labor market where
Speaker 1: session fears even people that maybe could currently afford to
Speaker 1: strike out there on their own are possibly delaying those moves,
Speaker 1: And so demand has really cooled down significantly. And on
Speaker 1: the supply side, we are seeing really, as you said,
Speaker 1: a historic boom there. We've got right now more multifamily
Speaker 1: units under construction that than at any point since nineteen seven.
Speaker 1: A lot of that supply is expected to hit the market,
Speaker 1: and so I do think that, you know, we we
Speaker 1: aren't necessarily expecting to see a prolonged slide in rents,
Speaker 1: but I think these days of you know, extreme brain
Speaker 1: froth are definitely behind us. Why is that construction boom
Speaker 1: happening because for the past few years you would have expected,
Speaker 1: I mean, we talk a lot about on the show
Speaker 1: about supply chain issues how that impacted housing. You saw
Speaker 1: the big gap between single family housing starts and completions
Speaker 1: supposedly because of a lot of supply chain issues. At
Speaker 1: a minimum, you would have expected some big multi family
Speaker 1: builders or investors to have a more uncertain outlook for
Speaker 1: the past two or three years. But that doesn't seem
Speaker 1: to have translated into any sort of construction slowdown. So
Speaker 1: why is that? You know, I think despite kind of
Speaker 1: the factors that you mentioned, the the outlook for multi
Speaker 1: family has continued to remain pretty strong. And I think
Speaker 1: even as we talk about the market slowing down a
Speaker 1: little bit over these past few months, that's still a
Speaker 1: very minor decline when we think about it relative to
Speaker 1: what's happened over the past couple of years. So prices
Speaker 1: down three from the August peak, but still up compared
Speaker 1: to their marks level. And so you know, we have
Speaker 1: really seen that, uh that brand prices are continuing to
Speaker 1: go up, and over the long run, we are seeing
Speaker 1: strong demand and and so I think, uh that is
Speaker 1: creating kind of you know, maintaining sort of a positive
Speaker 1: outlook for the multi family industry. And uh, can I
Speaker 1: and you know, can I ask this question in a
Speaker 1: slightly different way, like what is the bowl case for
Speaker 1: a multi family here? Like why like what gives these
Speaker 1: big investors the confidence to keep building um at the
Speaker 1: rate that we've seen recently? Yeah? So, I mean, I
Speaker 1: think when we just look kind of holistically, it's definitely
Speaker 1: the case that the US housing market is still undersupplied.
Speaker 1: You know that there are kind of various estimates out
Speaker 1: there on on how big that gap is. But Freddie Mack,
Speaker 1: for example, estimates that were have a shortage about four
Speaker 1: million housing units right now, and uh, you know, we
Speaker 1: we are still seeing kind of more and more of
Speaker 1: you know, obviously millennials are the largest generation, but Gen
Speaker 1: Z is also a large generation that's continuing to come
Speaker 1: of age and to form their own households, and there
Speaker 1: is still a lot of pent up demand there I
Speaker 1: think in terms of uh, you know, new household formation
Speaker 1: that we could see going forward. And so I think
Speaker 1: that's really uh kind of them I say, macro level.
Speaker 1: I guess that would be kind of the broad picture.
Speaker 1: I think a lot of this also varies geographically as well.
Speaker 1: A lot of this contruction is happening in Sun Belt markets,
Speaker 1: and in those markets in particular have been continuing to
Speaker 1: draw release really strong demand. Yeah. I was just gonna
Speaker 1: ask actually that question, because you can like point on
Speaker 1: a chart to production of new apartments going up. But
Speaker 1: of course isn't not really a commodity because you know,
Speaker 1: new apartments being built in Nashville or Dallas don't help
Speaker 1: me as a renter in New York City. Can you
Speaker 1: talk a little bit more about the geographical distribution of
Speaker 1: where this new supply is coming out. As I said,
Speaker 1: a lot of this is coming in in the sundult markets.
Speaker 1: So when we look at you know, new permitting activity
Speaker 1: per capita, so how many new housing units are being
Speaker 1: permitted as a proportion of the existing number of housing
Speaker 1: units in a given market, Austin is far and away
Speaker 1: the leader there, but they really, you know, the ones
Speaker 1: that are seeing kind of the most permitting activity are
Speaker 1: really a lot of those Texas markets, Florida Market, Phoenix,
Speaker 1: in the big coastal you know, superstar cities, and contrast
Speaker 1: places like New York, San Francisco, Boston. We're we're really
Speaker 1: not seeing that same level of activity. And so the
Speaker 1: markets that you know are kind of the nation's most
Speaker 1: expensive ones, the ones that have been under supplied for
Speaker 1: so long, we are continuing to see that be a
Speaker 1: problem where uh they are still under building. Um just
Speaker 1: in in terms of I guess the factors and motivations
Speaker 1: that drive apartment construction. Can you talk to us a
Speaker 1: little bit about financing, Like what is a typical financing
Speaker 1: structure if I want to build a big, you know,
Speaker 1: apartment building of some sort do I take out, you know,
Speaker 1: a floating rate loan or am I so big that
Speaker 1: maybe I'm issuing my own bonds? Like how does that
Speaker 1: actually work? You know, that's a great question that isn't
Speaker 1: necessarily my particular area of expertise. I don't have kind
Speaker 1: of the concrete details there, but you know, I will
Speaker 1: say that when we talk about kind of single family
Speaker 1: of our multi family constructed and obviously single family has
Speaker 1: slowed down quite a bit recently, and that is in
Speaker 1: response to sort of rising interest rates obviously hit mortgages
Speaker 1: as well, and so the rising interest rates really hit
Speaker 1: demand on the single family side in a way that
Speaker 1: they don't on the multi family side. Family project, yeah, yeah, yeah,
Speaker 1: and multi family projects, I would also say, are just
Speaker 1: kind of bigger and more complex, and our endeavors unfold
Speaker 1: over a longer period of time, and so maybe a
Speaker 1: little bit less reacted to those kind of short term
Speaker 1: fluctuations in the market. I want to go back to,
Speaker 1: you know, we talked about household formation or maybe I
Speaker 1: don't know, household deformation lately, and maybe people get roommates again,
Speaker 1: they're feeling a little less confident another like sort of
Speaker 1: maybe it's like medium term trend, and it seems like
Speaker 1: during the pandemic we did start to see a bit
Speaker 1: of a millennial baby boom. And my understanding and so
Speaker 1: I guess when people have kids, they're like, well, maybe
Speaker 1: we'll move out of the city, move out of a
Speaker 1: multi family there's actually already have a second question. But
Speaker 1: the first question is like how does that factor into it?
Speaker 1: And again, you know, we're talking about SAT in the beginning,
Speaker 1: like all these things have been going in good for
Speaker 1: multi family developers. Could this be like a meaningful, like
Speaker 1: medium term setback if there's some sort of structural shift
Speaker 1: among millennials, pretty huge generation right now, and which actually,
Speaker 1: you know what, we thought we were cool, but in
Speaker 1: the end we ended up boring like everyone else and
Speaker 1: we moved out to the suburbs. Yeah, definitely, you know,
Speaker 1: I think that is actually something that we've already been
Speaker 1: seeing play out in our data. Is that kind of
Speaker 1: shift a a from the downtown areas and and towards
Speaker 1: the suburbs to a certain extent, when we look at
Speaker 1: our rent data and and break that out by you know,
Speaker 1: the core cities of major metros first they're surrounding stuburbs
Speaker 1: We've actually found that since the start of the pandemic,
Speaker 1: rent growth has been notably faster in uh in the
Speaker 1: suburbs of big metros as compared to the core cities.
Speaker 1: Uh So, I think some of this, you know, is
Speaker 1: maybe due to just changing preferences because of the pandemic itself, folks,
Speaker 1: you know, maybe not feeling as safe in the early
Speaker 1: phases of the pandemic being in a dense urban environment,
Speaker 1: wanting to to space out a little bit more remote
Speaker 1: work is also a factor here. But as you said,
Speaker 1: I think, you know, the millennial generation is now aging
Speaker 1: into this phase of of wanting to settle down and
Speaker 1: start families and uh and so you know, I think
Speaker 1: we can we definitely are starting to see some of
Speaker 1: those shifts already start to play out. I have another question,
Speaker 1: which is, like, so, I have two kids, but unlike
Speaker 1: other people, I actually am cool and I don't want
Speaker 1: to move to the suburbs. Like this episode is just
Speaker 1: Joe taking like advice on handling his rent. No, this
Speaker 1: is this is a this is gonna be a gripe.
Speaker 1: This is this is a grape. Like I don't want
Speaker 1: to move to the suburbs. I like living in Manhattan.
Speaker 1: They've being said, you know, every once in a while,
Speaker 1: and we look like new developments and they're like, oh,
Speaker 1: really cool, and they have like a pool room and
Speaker 1: they have like a doorman, which is all stuff I've
Speaker 1: never had before. They're like terrible for families, and they
Speaker 1: don't none of these buildings have like you know, like
Speaker 1: they'll like call the two bedroom and the second bedroom
Speaker 1: will like be a closet, like really and then like
Speaker 1: god forbid, like a third bedroom or something like never
Speaker 1: you never find it. Why is it that like all
Speaker 1: of this new development that they see, like none of
Speaker 1: it seems like suitable for people with kids. That's a
Speaker 1: good question too. I think, you know, it has been
Speaker 1: the case that historically we do see these kind of
Speaker 1: shifts that you know, as folks kind of age into
Speaker 1: that phase of life of settling down and having kids.
Speaker 1: You know, that has been a pretty predictable pattern that
Speaker 1: you know, the majority of folks move out of the
Speaker 1: city and towards the suburbs. And so I think historically
Speaker 1: maybe that that that demand just hasn't necessarily been there
Speaker 1: as much. But I do think that you know, we
Speaker 1: are also seeing that, as I said, we've been seeing
Speaker 1: some of these kind of shifts out of the city,
Speaker 1: but I do think that we are have also seen
Speaker 1: that millennials have kind of different preferences as well, and
Speaker 1: probably have a little bit more of a desire for
Speaker 1: those urban amenities than potentially prior generations, and so I
Speaker 1: think hopefully that will be something where, uh, the supply
Speaker 1: side starts to to come around and maybe cater to
Speaker 1: that segment of the market a little bit more. But
Speaker 1: historically I think maybe that that just hasn't necessarily been
Speaker 1: the case as much, and so potentially property is kind
Speaker 1: of working on a little bit of an outdated model
Speaker 1: potentially on on what folks are desiring. Let me ask
Speaker 1: a really basic, simple question that we probably should have
Speaker 1: asked at the are the beginning, but how low could
Speaker 1: rents go from here? What's the outlook? So I think,
Speaker 1: you know, our our base case for this year is
Speaker 1: that we're not really expecting to see a decline for
Speaker 1: full year three, We're probably expecting to see very modest
Speaker 1: positive rent growth, maybe a couple of percentage points. But
Speaker 1: I think there is the possibility that rents could continue
Speaker 1: to slide, particularly if we do enter a recession. This year,
Speaker 1: if the labor market continues to weaken, and uh, you know,
Speaker 1: we do enter a phase where there's possibly a contraction
Speaker 1: in household that that may be reversed as some of
Speaker 1: this household formation that's happened in recent years. There's certainly, uh,
Speaker 1: there is certainly the possibility that rents could continue to
Speaker 1: trend downward. Uh. As I said, that's not really the
Speaker 1: base case that I'm working with right now. And even
Speaker 1: if rents were to continue sliding in you know, that
Speaker 1: downside scenario where potentially we enter session, I don't think
Speaker 1: we're talking about declines anywhere near the magnitude that would
Speaker 1: reverse the increases that we saw in Say what's the
Speaker 1: biggest wild card or the most important factor in that outlook? Like,
Speaker 1: what would give you reason to pause and say, actually,
Speaker 1: maybe maybe things could go in a different direction. Is
Speaker 1: it something like, you know, if there's a recession, an
Speaker 1: unemployment picks up, or something like if if capacity suddenly
Speaker 1: booms even more Like, what is what is that that
Speaker 1: pressure point for that look? I would say it really
Speaker 1: is probably just what's happening in the in the broader
Speaker 1: macro environment and the labor market in particular, as I said,
Speaker 1: you know, we we've got kind of record number of
Speaker 1: new units in the construction pipeline. So the supply side
Speaker 1: of it seems pretty clear that we are going to
Speaker 1: get a lot of new supply coming online this year,
Speaker 1: and I think the demand side is going to be
Speaker 1: a little bit more of an X factor, uh as
Speaker 1: you know, as as we've looked at these past few
Speaker 1: months of economic data, obviously inflation has already started to
Speaker 1: come down. There's maybe uh some some frightening signs that
Speaker 1: potentially the FED can achieve, you know, this soft landing
Speaker 1: that they've been talking about. But at the same time,
Speaker 1: you know, there is still this sort of recession risk
Speaker 1: and consumer sentiment you can have it if it's rebounded
Speaker 1: a little bit, is still uh not great. And so
Speaker 1: I think that really is uh you know, probably probably
Speaker 1: the biggest thing that I'll be keeping an eye on.
Speaker 1: If if the labor market continues to weaken and we
Speaker 1: see tightened unemployment, then that's definitely something that we would
Speaker 1: expect to impact the demand side of the equation, uh,
Speaker 1: and that that would maybe be the case where rents
Speaker 1: continue to slide. You know, I just want to actually
Speaker 1: go back to the recent decline and uh in historical context,
Speaker 1: because you said, right, you know, it's not that weird
Speaker 1: to get a few of these soft months. The most
Speaker 1: recent prints do seem to be a little bit more
Speaker 1: on the unusual, unseasoned side. What are some past comparisons, Like,
Speaker 1: what are we talking about in terms of like what
Speaker 1: prior downturns looked like if at the end of you're like, wow,
Speaker 1: this really did turn out to be a very different year.
Speaker 1: Is a bad year? Like what are we talking about
Speaker 1: in terms of like magnitude and how far do you
Speaker 1: have to like go back before in time to like
Speaker 1: see uh, to understand this context. As I said, you know,
Speaker 1: when we when we talk about the recent declines August three,
Speaker 1: December down three percent, Uh, the past three months of
Speaker 1: rent declines are actually you know, in the history of
Speaker 1: our index, which like I said, we're going back to
Speaker 1: seventeen here. Uh, those these past three months October, November, December,
Speaker 1: those are the three sharpest declines in the history of
Speaker 1: our National rent Index for comparison. You know, that three
Speaker 1: percent to client that we've seen over these past few
Speaker 1: months is in comparison to say a more you know,
Speaker 1: normal year of nineteen we were seeing a decline of
Speaker 1: maybe one and a half percent over over that same
Speaker 1: stretch of months, And so definitely you know, sharper right
Speaker 1: now than what we've typically seen as far as you
Speaker 1: know what happens in kind of times of of of
Speaker 1: sort of broader economic down terms. Uh, you know, we
Speaker 1: don't really have the the longer history in our index
Speaker 1: to be able to to give the direct comparison there.
Speaker 1: But as I said, you know, if you look at
Speaker 1: just rent cp I, obviously that's a little bit of
Speaker 1: a different measure than than our index. But even in
Speaker 1: the aftermath of the two eight recession, there wasn't really
Speaker 1: a significant decline there. It was basically just flat for
Speaker 1: a couple of years. So you know, at least in
Speaker 1: nominal terms, we weren't seeing prices come down by a
Speaker 1: significant amount. Again, because of the differences in how it's
Speaker 1: tracked and cp I versus our index, we we probably
Speaker 1: were talking about a little bit of a decline in
Speaker 1: in in new lease prices, um, but I think you know,
Speaker 1: to to answer questions in terms of magnitudes of you know,
Speaker 1: how much could things come down? I think even in
Speaker 1: that that downside scenario, if you know if we were
Speaker 1: to enter a recession on the national level, you know,
Speaker 1: maybe five percent, I would say ten percent would be
Speaker 1: would feel pretty extraordinary to me. Um. Obviously, again, this
Speaker 1: is something that varies market by market, so some markets
Speaker 1: could could definitely see sharper declines. It's really the fact
Speaker 1: that great the Great Financial Crisis, that rents didn't actually
Speaker 1: they just stalled, but they didn't even plunge. That kind
Speaker 1: of makes me believe that they sort of like, you know,
Speaker 1: every episode we've done for years, like lessons from the Crisis,
Speaker 1: right in some way in the lesson for multi family
Speaker 1: from the Crisis, that it never goes down, which kind
Speaker 1: of makes me believe that that's sort of like one
Speaker 1: day that Minskew moment hard landing could come from for
Speaker 1: the industry anyway. Chris Salviati, economist at Department List, thank
Speaker 1: you so much for coming on Odd Lots, helping us
Speaker 1: to finally address the topic that we should have probably
Speaker 1: touched on a long time. Thanks so much for having me.
Speaker 1: It was a lot of fun. Tracy, I just want
Speaker 1: to start off by reiterating that I have a very
Speaker 1: good landlord. She is very responsive in their issues in
Speaker 1: the apartment with appliances, etcetera, and that I hope she's listening,
Speaker 1: and how much we appreciate her responsiveness, and yeah, anyway,
Speaker 1: I just want to get that out of the way again.
Speaker 1: The fact that you keep addressing your landlord, who may
Speaker 1: or may not listen to this episode makes me think
Speaker 1: that actually, maybe the landlord has a decent amount of
Speaker 1: pricing power here. And the more you say it, the
Speaker 1: more she's going to realize that You're right. I'm like
Speaker 1: totally backing myself into a corner by I'm showing my
Speaker 1: hand how much we want to stay in the unit.
Speaker 1: You should be like, I don't care. I like moving whatever,
Speaker 1: I likeaucracy, all of these all of these new buildings
Speaker 1: have great amenities that I can use. No, but I
Speaker 1: do think, I mean the My major take from that
Speaker 1: discussion is that it's good to be a landlord, and
Speaker 1: it seems good to be a multi family landlord. There
Speaker 1: is a big question mark that you kept alluding to
Speaker 1: about whether or not at some point the boom and
Speaker 1: the expansion um, the supply side expansion, whether or not
Speaker 1: that will come home to roost. But it seems I
Speaker 1: don't know, like given the structural lack of housing in
Speaker 1: the US, it seems like we're a long way off
Speaker 1: from that. I'll tweet out the chart when this episode
Speaker 1: comes out so people know. But like we have this
Speaker 1: index US US multi family unit started for rent, and
Speaker 1: it's just so far above pre Great Financial Crisis. I mean,
Speaker 1: it's way above pre COVID levels, pre Financial crisis. The
Speaker 1: last time it was this high, at least on this index,
Speaker 1: looks like it was like six. So I mean, this
Speaker 1: is just like an industry that just wins, wins, wins, winds.
Speaker 1: But I do think, you know, like again, I do
Speaker 1: remember we probably read, maybe even wrote, like some stories
Speaker 1: like well millennials be scar on owning homes forever and
Speaker 1: two thousand ten and that was a popular thing. And now,
Speaker 1: like you know, everyone got boring and they had kids
Speaker 1: and they moved out to the suburbs and they bought
Speaker 1: a house if they could. And so I do wonder,
Speaker 1: I do like buy this idea, like maybe like maybe
Speaker 1: some some big shift is going to happen. You know
Speaker 1: what's interesting if you chart that line multi family units
Speaker 1: started for rent versus multi family units started for sale,
Speaker 1: it's two very different directions. So for sale ones just
Speaker 1: plunges and the for rent one just keeps going up.
Speaker 1: Oh that's a great shore, you know. Yeah, yes, we
Speaker 1: should definitely write that, not just tweet about it. Yeah, no,
Speaker 1: you're right. Wow, I never looked at this, and okay,
Speaker 1: there's plenty of um. The other thing that's surpribably, can
Speaker 1: I just say, actually before you know, it's interesting and
Speaker 1: I don't know if this chart exists, but I think
Speaker 1: the flip side is that there has been an increase
Speaker 1: in single family units for rent, which is not a
Speaker 1: category of housing that gets a lot of discussion, but
Speaker 1: it is a growing sector of like single family household units,
Speaker 1: but for the rental market anyway, I think that actually
Speaker 1: is a that's some interesting stuff here to explore further,
Speaker 1: for sure. And you know the other thing that surprises
Speaker 1: me about that whole episode, Yes, we managed to get
Speaker 1: through it without once saying that the rent is too
Speaker 1: damn high, which I thought one of us was for sure,
Speaker 1: for sure gonna bring you just took care of that
Speaker 1: for us. Yeah, okay, I did it. Shall we leave
Speaker 1: it there, Let's leave it there. Okay. This has been
Speaker 1: another episode of the Odd Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Why Isn't All? You can follow me on
Speaker 1: Twitter at The Stalwart. Follow our guest Chris Salviati. He's
Speaker 1: at Chris Underscore Salviati. Follow our producers Kerman Rodriguez at
Speaker 1: Kerman Arman and Dash Bennett at Dashbot. And check out
Speaker 1: all of our podcasts at Bloomberg under the handle at podcasts.
Speaker 1: And for more odd Lots content, go to Bloomberg dot
Speaker 1: com slash odd Lots, where we post transcripts Tracy and
Speaker 1: Tracy and I blog. We have a weekly newsletter that
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Speaker 1: sign up for it. Thanks for listening.