Welcome to Inside the Deal, the podcast where insights meet execution. I'm your host, Ernie Kittay. As you know, if you're a listener, there's zero fluff here. We're here to share inside scoop on how to seamlessly execute your next deal. Welcome to part two, where we take a look at the state of the multifamily sector with guest Jay Parsons. Jay is a rental housing economist, advisor, and speaker. He has advised numerous multifamily and single family rental housing stakeholders from institutional investors, REITs, regional operators, lenders, regulators, and government agencies, and several more that we don't even mention here. In part one, we really took a macro outlook at the industry. In part two, we're going to dive into what's driving deals in 2026 and what Jay thinks the market will bring in 2027. Jay, what's one multifamily narrative people keep repeating that you think is outdated or just flat out wrong? Oh, wow. That's a great question. One of the things I love about being a rental housing economists is I love the myth busting aspect of it. So there are so many things I could get into, but I'll just give you one to the top of mind right now. It's been very timely as I was talking to a reporter yesterday and I had told this guy a couple of years ago when mortgage rates went up, you know, all the narrative ever back then was, Hey, this is going to be a good thing for rental housing. Rents are going to go back up. And I told him, I said, you know, that's never been true. And you see investors, they put together their packets. They say they're in the same thing. hey, no one's buying. That's going to be a great thing for rentals. And what I tell people is, hey, like throughout history, the strongest periods for apartments, you know, rentals, build to rent, it's during periods when homes are selling. There's more household formation. There's a better economy. All those demand drivers, it's a rising tide boost all ships. The great thing about rental housing is we have a higher floor than the four-cell housing market because obviously we're seeing better retention. But the best days for apartments, it's going to be when homes are selling. Jay, I got to confess, I was in that same camp and saying that same thing. And, you know, I should have paid attention a couple of years back, but you have been absolutely dead on on that one, to say the least. With that said, how would you characterize capital availability in multifamily? The key word is bifurcated. I think that if you have good quality real estate, you know, in the right location, and it's a deal that, you know, is reasonably priced and a newer vintage. Everybody wants that stuff as long as you align on the pricing for it. But I think that we see this report about dry powder. I think a lot of it's not deployed. It's like they're targeting that stuff at unrealistic pricing because the owners have no reason to do motivation to sell the discounts the buyers really want. But that capital is there. And I think a lot of it's going to have to eventually deploy and say, hey, if we really want these better quality deals in good locations, you're going to have to pay for it. otherwise you're gonna have to move down market when you look at the you know the what i would call like your more blue collar working class sub markets even in great msas even in a dallas or nashville or whatever that capital wants to be in if you're in the working class sub markets and you have a 70s 80s vintage deal there's just not a lot of capital for that stuff um right and so i think it's just a again bifurcated world right now so does 2026 feel like a year of more liquidity or just more selective? No, I think it's more. I think it's getting, you know, we always like to, us econ nerds, like to debate like the shape of recovery is one a V or is a U. Like it feels like a check mark, right? Like it's like slowly getting, like it's like the, you know, or a Nike swoosh. It's like we're trending up, but it's not like, you know, there's definitely more capital availability, liquidity this year, but it's not that much better. It's not quite the hockey stick that we're all longing for, right? Definitely not a hockey stick, right? Yeah. So in your day to day, who's really driving deals today? Is it the private buyers, institutional capital, lenders, recap capital? What's what's driving deals? I mean, that's a great question. I mean, it's private capital institutional that has kind of a couple of qualities. Number one is that they have a longer term focus. You know, when I talk to groups that are buying these days and you tell me if you hear otherwise, like I think one of the boxes you have to check is I'm not beholden to a very firm time period. The flexibility of the exit, which is going to be more private capital, institutional capital, like that is really important because you're basically saying, hey, like we believe in this space. We love this asset. We just don't know if it's going to be where you want it to be in three years or eight years or 10 years. But we're willing to take that ride. And I think that's obviously a big one. And then, of course, also, I think one of the more interesting stories is going to be like, you know, the capital that's been on the debt side. All these debt fund groups have spun up. I saw a great stat the other day. It's like debt fund originations are now almost higher than banks, which is wild. Yeah, that is incredible. I think one of the big question marks is all of these groups that were traditional equity players and got more involved, they're heavier on the debt side. At some point, they're going to have to shift back because that space has gotten so crowded, debt yields have compressed. So I think that becomes the next sort of waves like when and how and how much of that starts to shift back toward the equity and what do they target Yeah Are we finally seeing the bid ask spread narrow in a real way I mean we had this gap and how do you feel about that? So I got to go back to the bifurcated story. I think the bid ask spread is lower than sideline buyers want to admit for good class A deals in high quality sub markets. And someone will say, well, Jay, those should be six gaps. It doesn't matter what you think they should be. They're not. There are sub five caps today. And you may not like it, but that's what it is. And that's what's trading and not big volumes, I'll admit. But like, that's what's happening. And the owners, they've got, it's not easy or cheap or painless, but they would rather, you know, refinance, recap, and hold on than sell that deal to you at a six cap. Now, that said, so I don't think the bid-ask spread is as big as people want it to be. Now, on the other side of this, again, going back to if you're heavy value add deals or the wrong locations, that bid-ask spread is still pretty big. And I think there's some still disillusionment among current owners. Some of that stuff is just probably not going to trade until we're, you know, I don't know, make up a number mid-sixes. That's good. Right. Right. That correction still needs to happen. So what kind of deals are getting done right now that maybe weren't clearing in the market, let's say, 12 months ago? Oh, that's a good question. I don't I don't know there's any big change. But the one thing I'm hearing a little bit is that I've heard more investors, institutional investors this year saying they're more shouldn't value add again. But when they say value add, and I always pin them on this, like, OK, what is value add? Define it right. And then, yeah, and that definition is much narrower than it was three, four years ago where they're talking about, hey, like I want to buy, you know, a 20 year old deal that needs a cosmetic remodel or I want to buy the worst deal and the best sub market. And so it's very specific. But my sense is if you check all the boxes except for one and you could be a viable, you know, that fit that narrow path of workable value adds, I think that bucket seems to be getting back in favor. So is the story today distress, recapitalization, or just repricing? Oh, I mean, I think a little bit of both. I mean, especially the first two. I think that the recap activity is obviously huge, but we're also seeing distress. I mean, there's been a few headlines recently about, you know, fairly sizable syndicator portfolios that have had real distress. In fact, I'm working on a paper or article about this. I think that a lot of this, as you know, Ernie, it's not like anything new has happened in 2026 other than the fact that they're running out of time. The runway is down, right? And so it's really a story from three, four years ago that's finally starting to unwind. So I think you're going to see more of that, and that's part of the narrative right now as well. But again, that's going to be concentrated more in the what I call busted value add category. Right. With that, let's talk supply, because for the last couple of years, that's been the headlines over almost every multifamily conversation. You know, we have our weekly calls internally and, you know, we do Texas and we do Phoenix and Denver. How much is supply still defining issue in 2026 now that we're halfway through the year? Yeah, anybody who's heard me speak, you'll think I'm kind of a broken record on this topic. But I think supply is the number one, number two and number three headwind for multifamily these last few years. And everybody always wants to try to, you know, blame something on the demand side. Demand has not been the problem. Supply has been the problem. So where we are right now, I would say it's shifting, it's transitioning. Supply, in terms of completions this year, it's going to be back to kind of pre-COVID levels and coming down fast. I think we'll end up more like mid-2010s type levels, way below the peaks we've seen. I mean, just for those who don't know this, for context, the 23 to 2025 supply period, that was the biggest supply wave since the 1970s. And so now we're really coming down. But I think what I always like to remind people of, Ernie, though, is that when we talk about supply, it's not about deliveries anymore. What's physically completing right now this year. It's about properties that completed in 24 and 25 that are still in prolonged stages of lease up. Yeah. Right. There's a lot of that still out there. So until that stabilizes, supply is still the story. So with that, are we still seeing most of the pressure from deliveries or is it these elongated lease ups? It's elongated lease ups. Yeah. I mean, there's exceptions. I mean, if you're on the west side of Phoenix, the West Valley, you know, Goodyear, Glendale, Avondale, like, supplies, new deliveries are still a big story. But in most of the U.S., it's about lease-ups. Yeah, that makes sense. That makes sense. Which markets have handled this way better than maybe you expected? I can make an argument for all of them just because the rents haven't cratered as much as you might have, as a spreadsheet might have said. But I would say the ones that have been more resilient, I would say that there's been a lot said about Atlanta recovering a little faster than expected. I will say the supply wave wasn't as big. Nashville has been a very positive story. It was really in a day with supply, but it's actually shown some real green shoots. Salt Lake City has been one that has shown some real momentum. And then there's certain parts of Dallas that have done well. Then I would also call out Charlotte Charlotte been a market that had just as just as much supply almost as you know Nashville and Austin but doesn really get the same credit as Austin and Nashville It's not quite as sexy. And bear in mind, Charlotte got its challenge. It's not out of the woods by any means. But, you know, I don't think Charlotte gets enough credit for how the demand story there has been even stronger than some of its pure markets. And the rents have not fallen as much as Austin. And so I think that's been a pretty good story, all things considered. So at what point then does the conversation shift from these deliveries and supply to what comes next? Well, I think buyers are already having that shift. I mean, in developers, everyone's trying to build based on the view that, hey, very little will complete. So let's be one of the few that do. So that's starting to be part of the narrative. I think that this is a year where we're talking about green shoots. Like, hey, we're seeing some good things in Nashville. We're seeing some good things in the northern Atlantis and suburbs. You know, by the spring of next year, we're talking about real actual rebounds in some of these markets. And then, you know, there'll be some laggards that are, you know, I think places like Phoenix take a little bit longer. But I think a year from now, we'll be having a very different conversation. Assuming the economy still holds up, I would not be surprised to see some sunbelt markets back in the national leaderboard for rent growth and then, you know, call it 12 months. So it kind of sounds like some people are overestimating the long-term damage from the supply cycle. It's taking care of itself and is really starting to come back. I would agree with that statement, but I will say this. I think people are looking in the wrong places for the damages. Like, I want to be sensitive to if you have new construction, obviously you're feeling the challenges of lease-ups. But I think when we look back on this period and the recovery that follows, the story is not going to be about challenges in new construction and good quality real estate. I think it's going to be about class C buildings in high supplied markets where they've lost a lot of renters upmarket, the flight to quality factor. And I think that is going to be the segment of the market that takes longer to bounce back. Yeah, that makes sense. That makes sense. Let's dive down. Let's get a little micro on you. You know, what metrics do you think matter most in the second half of 2026 as we look to day to day fundamentals of running these properties? I mean, nothing too shocking. I mean, I would give you a few things. I think that the absorption number has been really good on a macro basis. But you mentioned micro at the property level, the leasing traffic and lease signing numbers have still been sluggish because you're all that demands being spread out among all this, all these new lease ups. So if I'm looking at a property or portfolio, what I want to see is, OK, as supply competitive headwinds come down, as lease ups start to stabilize, am I capturing more traffic and am I converting that into leads and then improving my occupancy? because that's when you could actually get more pricing power back and start to burn down concessions. And so that's what I'd really want to be getting to is getting that leasing funnel bigger, converting some of those qualified traffic into leads, getting occupancy, and then starting to be able to regain some pricing power. Yeah, that's interesting. I was with a client over the weekend, and we had that exact conversation. That's where he was focusing, is converting the leads much better than they have been. and that's where he's putting his focus for the second half of the year. So interesting that that's kind of where you're seeing it too. Are effective rents telling us more than asking rents right now? Yes, I think they always do. I'm a fan of effective rents over asking rents and I will tell you the data for this year has been encouraging. I mean, the headline rent numbers are not good but the effective rent numbers for these last four months have been positive. It's the first time we had four straight months of effective rent growth in a few years. And it's been modest. Don't get me wrong. It's not great, but it's at least in the right direction. So we are seeing that. But the one twist I'll tell you, Ernie, that's been really interesting is that concessions remain really high. And asking rents are starting to inch up again. And so traditionally, you start to see concessions burn off first and then asking rents move up. And we're seeing a little bit of the opposite this time around. And I think it's because concessions have been sticky. renters expect a deal. And so you're seeing property managers that say, all right, like they want a deal, we'll give them that discount tag on top, but we're going to raise the asking rent below it. And so I think that's been an interesting sort of nuance to this pattern, this year as well. So how important then are those concessions as you read market health? So I was talking to some property managers, I have some deals in Austin recently. And Austin, of course, for those listening, like this is one of the, you know, probably like, you know, exhibit a for high supply, you know, rent cuts market. And what I heard was that, Hey, renters today expect the deal. You know, they come into the leasing office or they call you or chat or text or whatever. And, you know, their mindset is, Hey, my buddy got a deal. I want a deal. And, and I, let me just back up a little bit, Ernie. I want to say this, like, I don't, I'm not a believer in concessions. Like I think concessions are like with the old days having like cable TV, it's like you get a 12 month discount and then it jumps up. I don't think that's in the best interest for the consumer or the operator long term because it sets an unrealistic expectation of what happens when that lease expires and it may or may not happen So it doesn give you the predictability that you need on either side of the equation I think just bottom line effective pricing is the way to go But I kind of sometimes I come back to like the JCPenney story, which like when they tried to get rid of their, you know, mass discounting program and just say, hey, we're gonna have low prices, it backfired on them. And so there's something to be said. It's not every market, but in certain high supplied markets, like we've condition renters to expect a deal. And I think it's proving to be very sticky, not because of affordability. You buy a car, you're not paying MSRP, you're paying a discount off of that. You seem to think you're going to negotiate. And that's what you talk about when you buy your car. I got 20% off, you know, that is actually a really good point. What are you hearing from operators on occupancy, retention, bad debt, and just leasing velocity? Let me start with the easy ones. I think that the retention story has been shockingly positive. I mean, renters today have a lot of options and there's a lot made of the fact that, hey, people are renting longer because they can't afford to buy to move out. But the reality is renters still have options. There's a ton of new apartments or single-family rentals that are open and they're still staying put. And so I think that's been a really positive story. And obviously the renewals have really, I think, been saving the day for operators who've seen challenge on the new lease side. The bad debt story has been very good. And we're seeing, and again, I'm speaking very broadly nationally, like, you know, despite all the concerns about affordability and all the negative headlines you see, it's like we're seeing better numbers in rent collections and in delinquency and bad debt. So that's been a positive. Now, the third part of your question is the leasing traffic, I think, has still been a problem where, you know, I kind of alluded to this earlier, earlier, Ernie, but I will tell you, it's like I have learned the hard way that when I talk to people who are asset managers, property managers, operations focused, like if I just talk about absorption, I lose them because they're saying, hey, I am not seeing that in our portfolio. And I have to really explain to them, sorry, yeah, you're right. Like this is household formation. There's a lot of it. There's a lot of new renters. It doesn't necessarily convert to leasing traffic at your property because that demand is being spread across a lot more properties. And I don't think that renters are looking at as many properties today as they have in the past because the search process is a lot easier than it has been in the past. So they may look at one or two and just go with it. So what separates assets that are outperforming from assets that are just surviving? Is it all market location? Yeah, I think it's a couple of things. I think that there's been a flight to quality among renters right now. And so if you have a deal that is not as well maintained, if you don't have the same, you know, living experience amenities, and you have a similar price, you're going to lose those deals. And I talked to property owners today, we'll tell you, like, the little things matter. It's like the, you know, how you maintain your property, the look of it, the maintenance, like, you know, those things, execution really matters. And I think that your overall quality really matters. And I think the other thing that really matters is realistic expectations. And so when you see properties that are having, you know, good quality real estate and physically good deals, but they're 89 percent occupied. And despite being built five years ago, there's probably some disillusion around what rent should be for that type of deal. And so I think to be realistic on both the new and renewal side and focus on occupancy users, you know, a vacant unit generates zero cash flow, as you know. And so I think that those that are occupancy focused, heads on beds, take care of little things, resolve maintenance issues, resident satisfaction, you know, those are the ones that are doing OK, all things considered. Jay, I could do this all day and I don't want to stop, but I realize we have to at some point let you go. But first off, I want to thank you because this has been incredibly insightful. insightful. I'm in this market every day. And every time I get to spend or hear something that you've put together, whether it's an article, a podcast, I always come away with actionable insights, right? Things to think about as we're talking to clients and that type of thing. I mean, I guess this is a good time to close the episode. I would want to hit you with one more thing. Crystal Ball, January 2027. Where are we at? Okay, let me first say the crystal ball is fuzzy. Let's get that out there. I'm not going to be one of those guys who tells you this is what's going to happen. But I would say this, I think that 2026 is the first year since COVID that seems to be playing out according to script, for the most part, where it's getting slowly better, but still not great. I think we get together for the big industry conference at NMHC annual meeting in January. I think that the tone will be more upbeat and more hopeful that, hey, like we had a pretty good second half of the year, supply is in the rearview mirror, and we're going to see a strong leasing season. And so I don't think January is going to be the period where like, man, look at these numbers. But I think it's going to be like, all right, like we are trending in the right direction. So I think that'll be the mood in January. Thanks, Jay. Thank you. Next time, join us again on Inside the Deal. This is a commercial real estate podcast by Bercadia as we sit down with usually a Bercadian and a really tough deal. But we took a little turn today. I think we're all much more knowledgeable because of it. Join us next time because you won't want to miss it. I'm Ernie Kate. I'll see you on the next deal. Thank you.
