Multifamily Trends with Dr. Ryan Davis of Witten Advisors

Dr. Ryan Davis, COO of Witten Advisors joins Trademark CEO and founder, Terry Montesi, and Chad Colley, Trademark’s multifamily partner, to discuss macro-economic trends for the US multifamily sector, with a specific focus on the Sunbelt. Ryan dives into COVID’s impact on multifamily, and identifies several trends that might impact the next five years. The three discuss multifamily construction and investment, and potential threats that could slow down the booming sector.

Due to the holiday season, this is the last episode of Leaning In for 2021. Be sure to follow the show on your preferred podcast app to hear new and exciting episodes starting in January.



Todd Anderton, VP – Marketing: On today’s episode, Trademark CEO Terry Montesi and multifamily partner Chad Colley are joined by Ryan Davis. Ryan is COO of Witten Advisors, a market advisory firm based in Dallas, Texas, serving apartment developers, investors, and lenders nationwide. Ryan joins the show to discuss several facets of the multifamily industry, from supply and demand issues to current development and investment trends and the impact the pandemic had on the sector. The panel will also talk about the future of multifamily housing and how emerging concepts within this asset class will inform mixed-use developments. Thanks for listening.

Terry Montesi: Hey Ryan, thank you for joining us today. I’d like to start by just asking you to share your background and your journey towards your PhD and becoming the COO of Witten Advisors.

Ryan Davis: Well, I kind of got started in real estate on the finance side and specifically commercial mortgage-backed securities, so CMBS, and rode that wave from the early 2000s, and then when the financial crisis hit, RBC Capital Markets pulled the plug on our entire group. And so, I remember walking in one day to the office and sending out an email and the screen goes black. And I got the order, and a managing director walked in and said, yeah, we’re cutting the remainder.

Montesi: Not a good day.

Davis: Not a good day. And so, I kind of decided to do something a bit different and got a PhD in economics. And as I was going through those studies and reflecting on my time at RBC Capital Markets, it kind of was so focused on the micro level, just trying to get the deals done, worried about what the BPs, buyer was going to say, how to structure deals, etc. And so, as I was going through my studies, I kind of was more drawn to the macro side. So, I think both pieces are important from the nitty-gritty details from an asset specific standpoint, but then also kind of forest before the trees approach. And so got more interested in that in my studies. And when I was finishing that up, I was interviewing and ended up having these wonderful conversations with Ron Witten. And it was just he was doing that macro top-down analysis specifically for apartments. And so, we just had coffee and lunch.

Montesi: When was this?

Davis: This was 2012, the end of 2012. And it was basically, hey, do you want to come work for me? Yes, and a handshake agreement. And I showed up a week later. And so, it was kind of a neat thing. And now, I spend my day-to-day life trying to figure out apartments. And so very much from a top-down approach from national trends in terms of jobs and unemployment rates, demographics, and population trends, but then also what’s happening on the capital markets front, investment flows, etc. And then we cover 43 major markets across the nation, and the goal is to understand the key drivers for each of those markets. So, as you would imagine, the Bay area has different dynamics than San Antonio versus Jacksonville or Boston. And so that’s what we do – try to understand what’s driving these multifamily markets and, more importantly, what that means for fundamentals in terms of occupancy and rent growth two, three, five years down the line.

Montesi: Great. Thanks, Doctor. So, your company, Witten Advisors, has been a leading consulting company for the multifamily sector in the US for a number of years. Tell us a little more about the company and what specifically y’all do to add value and manage risk for your clients.

Davis: Like I mentioned, we cover 43 of the major markets that typically the institutional investors are interested in. I think the smallest market that we cover is Salt Lake or West Palms, depending on how you slice and dice the numbers. And so, each quarter, we’re issuing different forecast reports. So, some of our clients just want the answer, so we have a little executive summary format for those. And then others really want to dive deep, and so there’s an extended format report for that. And then we have a quarterly all client conference call when everyone dials in. I think at the height of COVID when everyone was on their laptops and phones, there were 750 people dialing in at each of those calls. So, we do that. And then also just have lots of ad hoc research requests. So, if a developer is meeting with a potential equity partner and they have a question about a specific market, so they send us an email and we get on the phone and have a conversation, whether it’s five minutes or an hour, about a specific topic. That’s how I spend my day. Our firm is Witten Advisers, and so we publish a lot of data, but it’s more our emphasis on being a dot connector rather than being a dot producer. What does all of this mean? What do the trends mean? And more importantly, what does it mean for my investment in multifamily three, five years down the line?

Chad Colley: Sure. Can you give us a macro view of multifamily supply and demand in the US as we see it today?

Davis: Sure. And as you probably know and everyone listening right now, we’re seeing record setting numbers in multifamily, just never seen a market this hot in terms of the number of new leases being signed right now. So, in the second quarter, 200,000 new renters entered the market; in the third quarter, over 250,000 new leases were signed. To put that in perspective, the 200,000 is the annual run rate that we saw from 2014, ’15, and ’16.

Montesi: Annual?

Davis: Annual, right. So, in those three months alone, it is comparable to what we saw earlier on in the cycle on a 12-month basis. And so, over the past year, leased over 600,000 units, and this is national data. So, across the nation, leased over 600,000 new multifamily units. Kind of looking at prior peak earlier on in 2018, 2019, it was about 350,000, almost 400,000 units. So, leasing levels that far surpassed anything that we’ve seen in the modern era for multifamily. And then, we can get into specific markets here in just a bit, but on the supply side, we had a pandemic pause back in March and April; everyone’s trying to figure out what’s going to happen to multifamily, are renters going to pay their rent, and are investors going to be interested in investing in multifamily? And so, there was that pause in March, April, and May when everyone, all the developers said, hey, we may continue construction, but we aren’t going to break ground on anything right now. We are just going to see how all this plays out. But then beginning in May of that year, everyone realized the sky was not falling in terms of apartments.

Colley: And where did we end up on collections? From a national average?

Davis: Oh, depending on the data source, I think low 90% range. And I think it went down. I think that the lowest point of collections was April or so, and then it began to improve therein and then improved all throughout 2020, and then through this year as well. So, we didn’t see the fallout that everyone was expecting, and a lot of that has to do with the stimulus efforts. But kind of getting back to supply, everyone realized, and especially in the Sunbelt markets when we saw this exodus from the major gateway markets at the height of the pandemic, that there was going to be demand for multifamily. And so, we saw new leasing activity really accelerate in the summer of last year. Part of that was many young adults had moved back into the basement of their parents. Because just thinking about the nature of this recession, lower wage positions were most impacted, so restaurants, bars, tourism, a lot of those are filled by the 20- to 34-year-olds, which is the key demographic for apartments. And so many of those people moved back into their parents’ homes and then moved back out as the economy started opening back up, they got jobs, and also stimulus. And so, we saw new construction activity really began to pick back up in the second half of last year. And then it’s just accelerated notably so far this year. So, over the past year, about 430,000 units have begun construction. That’s above the prior peak that we saw at the end of 2019, early part of this year.

Colley: So, to make sure I heard correctly, you said from a supply standpoint, we’re looking at about 300,000 apartment units per year?

Davis: That was prior to the pandemic. Now, we kind of saw a pullback into this year. And then so far, it’s just over the past five months, for instance, we’ve started 40,000 units each month. So, annualize that, it’s almost 500,000 units. But over the past year, as we sit today, 430,000 units.

Montesi: But the absorption of 600?

Davis: Yes, the absorption of 600.

Colley: So, we’re not even keeping up?

Davis: Correct. That’s also true on a broader residential sector basis as well. So, it’s not just multifamily, it’s across all asset classes for residential – single family, multifamily, for sale, rental. We’ve seen household formation just spike in the second and third quarters. And so, this is just a broader phenomenon and not specific to multifamily.

Colley: So, taking a little deeper dive from a supply demand standpoint, in the major cities in Texas, what are you seeing?

Montesi: Yeah, the general health of those markets?

Davis: Yeah, so general health, I think let’s start with their economies. That’s kind of the basic standpoint. Looking at employment levels compared to where we were in the early part of 2020, so before the pandemic hit, February of last year, if we compare employment levels now to where we were then, Austin is above those levels, Dallas is above, San Antonio is almost there, but then Fort Worth is a bit lagging, more exposure to oil and gas, and then Houston is the laggard of the five major Texas markets. It’s all due to energy. So yeah, I remember being down in Galveston in April of 2020 at height of the pandemic, my nine-year-old daughter counted 36 ships out there at sea, all full with oil. And so, we had oil go down. So, we had energy jobs really just get hammered. Rig counts went down. Since then, today, we’re at $80 a barrel – a big snapback. What’s different this cycle is that we haven’t seen energy jobs come back like we have in prior cycles. And so maybe there’s something different this time around.

Montesi: A little bit of talk about the end of the carbon-based energy business. I’m sure that’s some of it.

Davis: Exactly. Yeah, absolutely. So, do they want to make that investment? So, that’s part of the story behind Houston. But kind of digging in a little bit more in terms of high wage employment, and so this differs across markets. So, in Austin, high wage begins at $85,000. In San Antonio, it’s probably closer to $70,000 in annual salary. If we look at high wage jobs there compared to where we were pre pandemic, Houston is still lagging, no surprise. Oil and gas are high paying positions. But Austin by far leads the nation. Employment in those positions are up by almost 10%, just crazy. So, it just speaks to the tech sector, but also, it’s broader than just tech – it’s finance, it’s insurance, etc., etc. And so just a tremendous story there for Austin, Dallas also, San Antonio slightly, and San Antonio is about even. So just a very good story for the Texas markets, and especially when you compare them to the Bay Area or Metro New York City where employment is still about 60% of what we saw in the early part of 2020. So, a very favorable standpoint for the Texas markets in terms of the labor situation. And then you combine that with the stimulus efforts and kind of scoping back out, and this applies nationally, if you look at the stimulus efforts, $4.7 trillion in stimulus, when you add up the super unemployment benefits, the PPP program, rental assistance, etc., etc. So, $4.7 trillion in stimulus that’s been injected into the economy. And so, we have about $2.7 trillion in excess savings. So, there’s households and consumers are flush with cash, and it’s all due to stimulus. And so that’s supporting the economy as well. And so, then kind of getting back to our focus today, which is multifamily, that’s translated into record demand across multifamily, the major Texas markets in terms of the absorption levels that we’ve seen that are far outstripping supply. So, we’ve seen occupancy rise by almost 300 basis points in DFW, 250, Austin, San Antonio. Houston’s again been a bit of a lagger, but we are seeing improvement in Houston as well. And that’s the imbalance of more demand than supply is showing up in rent increases. And if we had to boil the health of a market down to one specific metric, it’s rent growth and pricing power. And so, thinking back to late last year, Austin and Houston were recording year over year rent declines. And then as we got into this year, it began to stabilize. And then as we got that last stimulus payment, or the last big one in March and April of this year, then we saw the leasing activity just skyrocket. And so, with that comes the ability to push rents. And so, Austin, for instance, went from year-over-year declines since the early part of this year, and now increased rents by over 20% in the past year. And some of our clients are reporting on a trade out basis 30 to 40% rent increases. So, we’ve never seen the demand and the ability to push rents like we have over the past year, just tremendous activity. And then looking at the other markets typically below Austin on a market-wide basis. So, you think DFW, Dallas and Fort Worth, plus or minus 15%; San Antonio is a little bit lower, 11%. But even Houston, which has been a laggard, is almost to double digits at 9%. But this isn’t just specific to Texas, it’s a broader phenomenon. So really thinking about performance since the pandemic and gateway versus non-gateway markets. So, gateway markets beginning in the second quarter of last year, tremendous outflows from all of those. You think of who wanted to be in New York and San Francisco and LA and Chicago when city life is just shut down and cities aren’t activated, so you are going to move outside of those, especially if you you’re on a work from anywhere.

Montesi: They don’t feel as safe when they’re not as full.

Davis: Completely agree. Yeah, exactly. So, there’s a lot of movement outside of those gateway markets to non-gateway metros. But then we saw at the beginning of this year, it began to stabilize. And then in the second and third quarters, renters have moved back into gateway markets in part because at some points, rents are 30% cheaper than they were in the early part of 2020. So yeah, you may deal with the city not being as vibrant, but you’re getting a third discount compared to what you were paying previously. So, we’re beginning to see some of that reverse a bit. But looking at the non-gateway performance, never saw the heavy move-outs. And then in the second and third quarter of this year, just tremendous activity as well. And so, especially, those non-gateway markets are inland California, the inner west markets of Salt Lake, Denver, Phoenix, and into Texas, into the Southeast, into Florida as well.

Montesi: Sunbelt.

Davis: So, Sunbelt, exactly. The Midwestern markets, they don’t get talked about as much. They didn’t have as much downside, but they don’t have as much upside either. What we’re seeing in Texas markets is really more reflective of the Sunbelt trends and the demand there.

Montesi: And so, what do you hear from your institutional clients as they think about investing in the Texas markets and other Sunbelt markets based on what all you’ve just said? What are you hearing from them? And what does that tell you about the future?

Davis: So, several thoughts on that topic, and to really kind of go back even before COVID-19 hit, let’s go back to 2011 or so, and coming out of the financial crisis, there was a mindset of institutional investors wanted to be in a live, work, play investment. And so, capital went to those types of projects. And so, you had a concentration of supply in the urban cores with the walkable story, that was a great play for many years. But then with that concentration in supply being so focused on that type of asset in those specific locations, you got to a point where three deals were competing each other on the same block. And so, you had some concessed environments, specifically it’s more a very local submarket basis, but that did weigh on pricing power. And so, as you move further out into the suburbs, supply had been relatively contained in those locations. And so not only that, you have to fight with nimbyism and try and push deals through local jurisdictions that are going to fight tooth and nail. And so, you had seen suburban assets outperforming urban locations by a considerable margin, especially on a lease basis, the absorption levels on existing assets, and then the ability to push rents as well. And so suburban assets had been outperforming urban locations even before the pandemic. And then once the Corona virus hit, it just accelerated those trends. Think of people wanting more space, getting out of ultra-dense locations to just fuel that demand to suburban locations. And so, with that we saw leasing levels spike, rent growth returned the fastest in those suburban locations. And not only that, it was the flow of renters out of gateway markets into non-gateway, you saw the non-gateway suburban assets performing the best across the country, and that has continued into today’s environment. Now with that, what has changed is the investment mindset. So, it’s almost done a 180 from where we were back in 2010, 2011, where now the institutional capital, stepping back a bit, is that across the globe, everyone has seen that residential, in particular US residential, has held up extremely well during the pandemic. And so, it is more recession resilient. Also, in specifically multifamily, if you look at it on a risk adjusted basis, it has outperformed industrial office over certain time periods. So very attractive from a risk adjusted standpoint. And so that story is now global. And so, you’ve had this wall of capital that may have gone to office or specific retail locations or lodging that has now been shifted to US residential and specifically multifamily. Kind of linking that to the non-gateway suburban story. Now there’s a tremendous amount of capital being deployed with that investment thesis. So outside of the major markets and outside of the urban core locations, there is a tremendous amount of capital chasing this suburban non-gateway story. And so, part of that is not just traditional kind of woody walk up, multifamily, it’s also spilling over to the build for rent sector as well. And so many of those garden typical apartment complexes will now begin competing with some of the build for rent product.

Colley: First off, earlier this year in May at our national ULI Multifamily Product Council, I heard you talk about the pandemic’s role in the multifamily suburbs versus more central cities, flight to the suburbs. And so, you kind of went into that a little bit. Do you think that’s sustainable and is going to continue to happen, or do you see the influx back to the central cities?

Montesi: Yeah. And I’d say, what do you see the long-term effects of COVID being on the industry?

Davis: Yeah, so great questions, and probably if you asked us a year ago, we’d have a slightly different answer. So we’re constantly updating our priors as new data comes in. But globally, thinking about gateway markets, a lot of talk about gateways, New York, San Francisco, LA, they’re dead. We take the opposite view. We think that they’re going to be longer to recover, more knocked out, but not completely dead. And so, we think those will come back, but it’s going to take a longer time for those markets to. And a lot depends on the pandemic and the associated policy responses at the local level in terms of economic activity, and that speaks to the ability to fill apartments. And so, we do think that they will come back, but it’s just going to take a bit longer than some of these other markets. There is one concern that, okay, how sustainable is the demand out in the suburbs? We do think that it’s there. There may be some people that have moved out on a temporary basis that are going to move back into the central city. But really that decision to live in an urban core versus in an outlying area or a more suburban location really probably has more to do with life stage decision in terms of wanting a better school district, you have a kid, you get married, etc. And so, you’re going to be more willing to move outside for maybe more affordability reasons rather than staying in the central city.

Colley: Over the last several years, we’ve talked a lot about millennials and millennials’ decision to rent in the urban city. Gen Z is kind of the new topic of what we talk about. Do you see gen Z wanting to live in the suburbs, or are they still around the same mindset, wanting to live in the urban core?

Davis: Yeah, specifically, I think that right now, there’s probably a bit of elevated demand for the suburban locations, just from a pandemic standpoint, they’ve signed leases and etc. But I do think that they will want to live in the city where the action is while they can. That’s where you’re going to go out and meet people. You can walk to different places, different venues, etc. It’s just harder to do that out in a suburban location. So, I do think that they still will live in the city, but are more open to potentially choosing a suburban location, then also just more mindful of when they’re choosing to lease an apartment, what are the pandemic precautions associated with that building? Is there lots of outdoor space, breezes coming through, filtration systems, package delivery. I remember kind of the joke back in April 2020 is how many people do you want a ride in the elevator with? And so that’s one concern. And are there those pandemic specific aspects? How comfortable are they when they’re trying to decide on, hey, do I want to live in this specific building?

Montesi: Will you require filtration in that elevator if you’re going to ride it with multiple people? I’d like to have a follow up on that. Did you see the walkable, urban infill areas that had a flood of supply added pre COVID, has the supply slowed substantially in the last few years in those areas?

Davis: Yes, it has. So, it really began to slow-

Montesi: Maybe time to invest again.

Davis: That’s what we’ve talked to several clients about. Maybe a counter cycle play would be to invest in San Francisco and that ultra class A location.

Montesi: Or even the walkable parts of Austin and Dallas and Houston.

Davis: Yeah, exactly. And those areas, Austin, for a time, got hit pretty hard in downtown, and some of it has to do with the university as well. But downtown Dallas and Houston, yeah, there is that counter cyclical story that could be very compelling three, five years down the road from now.

Colley: Many institutions keep saying they’re having to lower their IRR target rates to stay competitive, to deploy capital, which is also compressing cap rates. Why? And what’s next?

Davis: Cap rates by IRR targets have been ratcheting down a very different pattern that we saw during prior recoveries. That’s a very different pattern. It speaks to the wall of capital that I mentioned earlier in terms of, okay, you aren’t going to be able to deploy it in an office specific strategy. So, let’s pivot to residential, reflective of the amount of capital chasing the residential story and then specifically multifamily. And then looking at some of the trends in terms of flows, specifically within the US, I don’t know how many different custom analyses we’ve done for a family office in Boston, a generational firm that has been there only in Boston and now wants to get some of their money out of Boston. And then we talk to them two months later, and they say, oh yeah, we bought a deal in Nashville. And so, we’ve done that for California and Seattle, etc. And so, there’s been a shift of where different groups are investing. And so, there’s just a lot of money chasing too few assets. And so that’s bidding up prices, leading to lower cap rates. And then in addition, when you are getting these silly rent growth numbers right now, because my question that we get often from clients is, well, what do we put in our rent growth performer models? It’s double digits in the near term, but then don’t expect that forever. So eventually markets are going to begin to normalize, especially when this wave of new construction eventually gets delivered. And so, we think that markets will trend towards more normal 3-4% rent growth. But there’s a time right now where it’s pedal to the metal, and to be able to win a deal, you have to put in some very, very aggressive assumptions. But then even if you’re buying a deal with a two handle in terms of a cap rate, you look two years down the road and you’re getting these big rent increases, then that has gone up considerably.

Montesi: Yeah, if it happens. Do you see anything on the horizon that could potentially slow down multifamily’s momentum in the US or at least in the Sunbelt in the US? What should you tell your clients to keep them up at night?

Davis: Yeah, so I think right now, everything kind of begins and ends with the pandemic and the related responses. So, who knows what that’s going to bring as we go forward, but that’s one kind of risk factor out there.  

Montesi: What about non-COVID related? Because even though you’re a doctor, I don’t really expect you to know what is going to happen  with COVID.

Davis: Not at all. So non COVID related, I think the biggest risk factor out there right now is supply and not just multifamily supply. It’s broader than that. It’s overall housing supply, single family, especially in the build for rent space, the billions of dollars that are chasing that type of investment is significant and will begin to limit the ability to push rents out in the suburbs. So, we’ve seen multifamily supply increase, started 430,000 units over the past year. We think it’s going to ramp up. We’re looking at a run rate of above 450 this year and then into next year. And we have some developer clients that have it over or under at 550. We don’t think we’re going to get that high. But if we see this continued momentum in terms of new construction, it’s not going to impact us immediately because it takes some time to get those units delivered, but as they eventually come online, you’re going to have a lot of product competing with each other. And so that could limit the ability to really push rents. So, I think that’s the biggest concern from our standpoint. Another factor is inflation and what does that mean? So, as we are standing here today, the CPI increased 6.2% over the past year, and that’s not incorporating some of the big increases in what the government calls shelter, so home prices and rents that we’ve seen so far. So those will begin to trickle into the overall inflation measures. And so, there are several risks from that standard. Number one, what does that mean for your debt strategy? Should you be locking in rates if you think interest rates are going to increase? And so that’s one aspect. Another is this hyperinflation. We think the risk to that is very limited right now, but if the situation evolves where there’s need for more stimulus, then that could continue to stoke the inflation fire. But even if that does pan out in terms of higher-than-expected inflation, which I think all signs are pointing to, assets are a good place to be invested in, and so real estate in particular. And so, you would think that while your purchasing power has maybe eroded a bit, you’re invested in an asset that’s going to appreciate. And so that’s some kind of offset.

Colley: A hedge against-

Davis: A hedge, exactly. But then getting back to what does the fed do? And the fed pretty much caused every recession that we’ve had other than what we experienced back in March and April of last year. And that’s they typically tend to raise interest rates too fast, too quickly. And so, if we get into a situation where that occurs, that could slow the economy down more than they’re expecting and could lead us into a recession. So, I think kind of the inflation and what that means for interest rates and then the potential for oversupply is what keeps me up at night in terms of our ability to forecast continued rent growth.

Montesi: I have a follow-up. So, reading just this morning a New York Times article and just watching friends and my kids try to buy a home, home prices have just gone crazy in a lot of these markets we’re talking about, the Sunbelt markets, the attractive places to live, where the higher wage jobs are being created. What is the impact, these really rapid increases in home prices that is making it difficult for a lot of people to get a house even remotely affordably, what is the impact on that on the multifamily business? And does that have any impact, and if so, what is the impact on that, say, the next five years? It seems like it would be good for the rental business, but that’s a very simple conclusion.

Davis: Yeah. So right now, even with the stunning numbers in terms of price appreciation that we’ve seen over the past year, that’s still with record low mortgage rates at the end of last year, they since increased, still from an affordability perspective, owning a home is relatively affordable if you look at it in terms of a share of income basis. Now part of that is because of the stimulus efforts. But overall, owning has a relative affordability advantage over multifamily right now. Now as the outlook is for continued rate increases, mortgage rates should tick higher, and then also the home price appreciation will continue. We don’t expect it to be 20% on a national average, well above that 40% plus in Austin in some instances, we don’t think that will continue, but still it’s going to be double digit for the next one or two years. So, combining that with the double digit home value increases and then rising interest rates, that’s going to delay the purchase decision for many. And then also it takes a good bit of savings to come up with a down payment. Then even if you have the down payment and you qualify, etc., try and go out and buy a house right now. It’s crazy with inventories so low, homes are selling for less than a week. You have to come in and basically submit an offer the day you see it. And so many of our clients on the multifamily side competing for an apartment deal are doing some crazy things in terms of millions of money hard that they won, etc., you’re having to do that on the home side as well. And so that’s going to push people to rent for longer. And so, it’s a good thing for multifamily in the near term. But then, even going forward, as more supply comes online, the home investment isn’t appreciating at such a rapid clip, there may be more people that eventually move out of apartments to either rent a single-family home or actually purchase a home, there’s going to be plenty more people coming into the front door to fill up those units that have households that have left to go purchase a home.

Colley: Ryan, Trademark recently entered the multifamily development business. We’re primarily focused on growth markets in the Sunbelt, particularly DFW and Austin. From your perspective, what advice would you give us in this new adventure?

Davis: Well, I’ll begin with Austin because that’s kind of a hot topic right now. So, I mentioned just Austin’s fantastic employment picture in terms of overall and the high wage growth and people moving here, etc. Well, it’s also been the hottest market in terms of new supply. So over the past year, started  almost 25,000 units in Austin alone. So that’s about 10% new starts rate. And then you combine that with the fact that Austin had expanded its apartment stock by the most of all the markets that we had covered. So, call it 35-40% from 2011. And going forward, going to look about a third of the apartment stock, probably more, will have been built since 2010 in Austin. So, a very top-heavy market, and there’s a wave of supply coming in 2023 and 2024. So, to put that in perspective, that’s 25,000 units. Austin’s apartment stock is about 250,000 right now. And then if you combine Dallas and Fort Worth, DFW combined, it started at 25,000 units, and it is double the size of the Austin market. So extremely large numbers. We’re kind of a broken record with our clients right now in terms of we’ve never seen a development cycle as intense as we have in Austin over the past several quarters. So, lots of supply coming in Austin. And so, we expect rent increases to eventually stall in 2023 and 2024 as all this supply is trying to get filled up.

Colley: So, Austin, Austin’s hot. Should we invest in Austin?

Davis: Absolutely. But you have to have the perspective that there’s turbulence ahead. And specifically for the top of the market, if we are thinking overall market rent, gross stalls, that means the top of the market, class A, new development is experiencing declines. And so, there’s going to be a period of a concessed environment, but if you can withstand that, then we think Austin over five, ten years is potentially the best market to be in. So, you just have to go in with knowing the outlook, and there’s going to be plenty of demand to fill up those units.

Colley: So, demand, you mentioned 25,000 units from a supply standpoint. Roughly what would you say a yearly demand is?

Davis: At peak supply, 24,000 units. So, you are going to fill up the units, but there’s a price to that occupancy.

Colley: Demand, 40,000. What is kind of being demanded today?

Davis: Demanded today, probably in the 18,000-unit range, demand has exceeded supply. We’re probably close to 15,000 units on a net supply basis.

Colley: And how do you see kind of the DFW market compared to that?

Davis: Yeah, it’s holding up better than Austin. So going forward, 4% rent growth, still above average. DFW normal market is 2.5%. Part of that is that on a supply basis, supply is growing by 3-4%, so not the 9-10% numbers that we’re seeing in Austin. And we’ve seen the supply peak in DFW, kind of different in terms of timing for Dallas 2018, Fort Worth more in ’19 and 2020. So we think we’re below, again, kind of peak supply is behind us, but still is going to be elevated, but nothing like the tremendous ramp up that we are seeing in Austin.

Montesi: What other notable trends do you see coming down the horizon that we have not yet discussed? Anything?

Davis: Yeah, notable trends, I’ll just kind of reiterate the single-family rental side and build for rent. It’s kind of like pioneers get the arrows, settlers get the land. There’s a lot of capital being deployed in that, and kind of everyone thinks they can do it, from the home builders to the apartment developers, kind of everyone thinks, oh, my skill set will translate to this. And speaking from some of the experiences with our clients that, yeah, it’s a little bit harder than they initially expected, but they’re still going to move forward and see how things progress. And obviously there’s the theory that, okay, there’s a new life stage step, where typically you go from a multifamily rental to owning a single family. Well, now you’re going to go from an apartment complex to renting a single family and then finally to own a single-family home. So, there is kind of that theory. And if that develops, then that could be a win-win for everyone, but there’s a lot of unknowns out there right now in terms of that specific segment. And especially as you get further out, you’re going to compete with some of the garden type assets that are really in vogue from a new development standpoint. So, I think that’s one aspect. Another is cap rate, what happens to cap rates going forward? We think they decline from current levels significantly or rise. We think they’ll kind of remain relatively in the same place, but if there’s any transition in terms of IRR targets, which really are the driver behind cap rates – not treasuries, it’s buyer IRR targets – if there’s any shift in that, which we don’t think that there is, but there’s also forecasting interest rates is a fool’s game at some point. And so, if there’s any shift there, then that could lead to some disruption. But all, I think we’re in a very healthy situation from a supply demand standpoint. I know that there’s a debate out there right now if we actually do have a housing deficit or a housing shortfall, because some estimates are we have 4, 5, 7 million fewer units then we typically have, where other firms are saying, no, we actually don’t have a housing shortage. And so we’re kind of in between. We’ve been estimating at 1.5 to 2 million units fewer than the normal. And so, we do think we actually have-

Montesi: I think that is about where Linnemann is.

Davis: Is that right? Okay. But we are shifting in terms of since 2011, we’ve seen demand outstrip supply in terms of globally single family, for sale, multifamily, rental. Except for if you add up all those, we are transitioning to a phase where there’s going to be more supply delivered than households formed. So, we’ll begin to eat away at that housing shortage, but still, it’s not going to be such a tremendous gap that deficit will be eliminated immediately.  

Colley: And what is your time period forecast on that? So, I mean, that’s no time soon, right? So, are you saying that’s kind of over a five to ten year period?

Davis: About five years when we get back to equilibrium. So, we enjoy the general shortage that elevates home prices and rents in the near term. And then about five years out, we get into a well-balanced situation.

Montesi: I was wondering, we’ve been watching particularly in Texas, but all over the country, mixed-use premiums for every use in mixed-use projects or walkable districts. Have y’all seen that, that multifamily in mixed-use areas, walkable areas have gotten premiums? And do you think that they will continue to justify premiums going forward?

Davis: Honestly, I couldn’t speak one way or the other on that specific topic. I do think that going forward that you will have less of an investment in that mixed-use walkable space. And so, if you are aware of that, and you see that there may be less competition going forward, then you are going to get a premium. So, it wouldn’t surprise me at all if a premium persists on those specific assets, especially over the near term. And then as we get two to three years out, we do think that it will begin to shift in terms of the supply concentration out in the suburban locations, that that will decrease pricing power. And the urban locations, there’ll be a shift.

Montesi: It’s a cyclical business, isn’t it?

Davis: It is, yes.

Colley: Ryan, any new or evolved multifamily housing concepts you find particularly interesting?

Davis: Yeah, and this was true even before 2020 in terms of trying to solve the affordable piece or apartments that are affordable, not necessarily in terms of a tax credit basis, but there’s several innovative concepts out there where you’re going to be a little bit further out than maybe you’d typically be. And then also you aren’t going to do as high a finish out or maybe not have the patios, etc., kind of really pull back on your dollars a bit, but then you’re able to charge a little bit less of a rent. And so, there was success with that type of product even before the pandemic. And so, I thought that’s a neat shift in terms of typically A plus, plus, plus in terms of new development, whereas there was a need developing in terms of filling that missing middle, and some private market concepts were being developed to serve that. So, I thought that was neat.

Colley: So no longer the competition of amenities.

Davis: Exactly. Yeah.

Colley: So, pull back on amenities for some of these projects and really be able to hit the missing middle.

Montesi: Yeah, to fill the affordable gap. Okay well, Doctor, we sure appreciate your time today. Ryan, that was really fun and interesting. And we look forward to following the dynamic multifamily business in the US along with you guys. Thank you very much.

Colley: Thank you, Ryan.

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