Vladimir Bosanac: Hey everybody, welcome back to the Real Perspectives Podcast. I am one of your co-hosts today, Vladimir Bosanets, co-founder and publisher of the registry. And today I am joined by my other co-host, Tom Fisher, Principal and Director of Capital Markets at JB Matheson in in San Mateo, California. Tom, good to see you. How are you?
Tom: Doing well, Vlad, great to see you as well. hope things are good on your side it too.
Vladimir Bosanac: Can't complain. we are recording this sort of in the early phases of Q3, but in California at least school has started, so it's a little more quiet around the household these days. that's right.
Tom: And a little bit longer to get to get to the office.
Vladimir Bosanac: That's right. but Tom, we have a great conversation today. We are going to tackle the multifamily space. we're gonna kind of Go around the country and you know touch upon some of the you know bigger markets and then close off with some of the markets that that that you know we track, which now includes Texas and also the Western markets of California and Oregon and Washington. some interesting data that we pulled here kind of from kind of first half of the year and I think indicative of where you know the industry is heading and what it means for for the rest of the year as well. So Tom, you have Have access to a report from Newmark, I believe, that that we kind of wanted to kick it off with, correct?
Tom: Yes, and thanks Vlad, appreciate the intro and look forward to our conversation today. Yeah, the you know, Newmark is one of the nationwide brokerage companies out there, is active in the multifamily space, both on investment sales and financing. they produce a quarterly report that I find to be fairly valuable on a national basis. And as you had mentioned earlier, we're now early in the third quarter, so all the brokerage houses are publishing their second quarter data. And I would highlight four points I think that are worthwhile on a national basis. Basis that are in that report, and we're sort of we see in the markets that we cover. And certainly on the absorption, really, there's four main points. On the absorption side is a very strong second quarter and first half absorption. It's one of the, I think it's the second best on record of first half absorption. And then you combine that with the supply pipeline that's largely disappearing or stabilizing, given that debt's no longer free, construction costs continue to remain. Elevated combination of those two things are really starting to see some improvement on the occupancy side on a nationwide basis. I think the third point worth highlighting is that there's a return of bank lending, and that has driven a higher debt origination in the first half of 26 versus the first half of 25. And then as is the case that we're seeing on our own at JB Madison on the transaction side, as you are starting to. See more transaction flow free up as people's debt mature, joint venture partners are kind of putting saying no moss, and/or this properties are getting stabilized. So we're starting to see an increase in transaction volume. It's about 11% year over year, and cap
Vladimir Bosanac: Yeah.
Tom: rates, cap rates are higher. So I think that's a good national indicator of what we're seeing in the multifamily space, those four points.
Vladimir Bosanac: Yeah, let's let's unwrap those a little bit. you know, you're you're an investor in this in this in this space. and I know you don't invest everywhere around the country. You have certain markets where where you guys are, you know, mainly mainly focused on. But did the absorption kind of initiative or you know, numbers, if you will, you know, surprise you in in terms of you know what what what the Newmark report is saying? is it and and this is you know Just sort of a question maybe because I don't know, but is it a little bit of a zero sum game? So, you know, does one market gain and another market sort of loses? you know, what what's your perspective?
Tom: Yeah, though. Good question. certainly I think we see some of all of the above, depending on market that we're in. I am surprised by that net absorption number because it does it's a national basis, so job growth and household formation. We're not really seeing a lot of job growth. So the fact that we had absorption of apartments was a pleasant surprise. Certainly in some of the markets we cover, like in Pacific Northwest and Seattle, we've seen better demand than we expected. I wouldn't say that's necessarily translating into strong. rent growth because there's still some deliveries that are coming in the Pacific Northwest Seattle specifically. So I'm I'm pleasantly surprised on the absorption numbers, but I would say it's not necessarily translated into strong rent growth yet.
Vladimir Bosanac: And this is this is in your markets, but also what what is what is Newmark saying? Like are they seeing the rent growth, you know, beginning to you know, creep up el elsewhere or is it still kind of flat?
Tom: Yeah, so the you know the occupancy's improved. they're getting on a national basis rent growth on a on renewals, so people who are staying in their apartments, but landing new tenants is a negative trade-out, meaning that they still need to offer concessions in order to entice residents to take those units. So it's it's a little bit of a
Vladimir Bosanac: interesting.
Tom: bifurcated market. So again, you're seeing on a national basis, which largely matches our experience for the first half, is on renewals you're getting three to five. 4% increases, and on new leases, you're getting negative 3% to 4% when you factor in the concessions.
Vladimir Bosanac: interesting. it these are average numbers, obviously, c kinda kind of across the country, right? and and and as you and I know, in this industry it's all about location, location, location. And some markets are going to be very different, including our own here, which which we'll, you know, touch upon a little bit. What what are what is the Newmark report saying about you know overall you know deliveries, construction, any anything on that side?
Tom: Yeah, certainly a dramatic drop off in deliveries well below or or I should say we're we're back in line with where deliveries were pre-COVID. but that's still a dramatic drop-off from when debt was free and everyone, every developer in the world was planting a shovel on the ground from twenty to twenty twenty through twenty twenty two. So again, that bodes well for setting the stage for what we all market participants hope is some pretty strong rent growth going into the second half of twenty six. 27 and 28, and is certainly a critical part of many people's underwriting for acquisitions that they're working on right now.
Vladimir Bosanac: Yeah. Some of the you know, COVID developments that were, you know, happening in, you know, the southeast and you know that kind of those those sort of areas, have you noticed you know, persistent demand for housing there? does does that report indicate anything or or just just from your understanding of the of of the market in general?
Tom: Yeah, I think the Sunbelt markets still are experiencing population growth and net positive migration. I don't know that it's necessarily a bit strong enough to overcome the supply. So I think the dynamic is very similar in those markets in that people who are builders and developers and owners who are leasing up their properties, they're still offering you know, the percentage of properties offering concessions is really still high. It's probably twenty five percent. Percentage of units out there. And then in terms of what that concession is, it's on average almost a month free rent. And that's both of those are very high from a historical perspective. So there's still that game of capturing the demand that's out there. But given the drop in supply, everyone is banking on that translating into rent growth again in the second half of this year and certainly 27 to 28.
Vladimir Bosanac: Yeah. Yeah. And then you also mentioned that. talk to us about kind of you know what you're seeing personally but also what what what the report is indicating.
Tom: Yeah, I mean we're our strategy is really low leveraged, fixed rate interest only. So we often our debt on our acquisitions is almost always gonna either be agency or life company. But and we talk to banks, we canvass the market when we're looking for debt financing on acquisitions or refinancing, and really who's come back strong are the banks. if you recall when interest rates w you know spiked in twenty twenty one, a lot of banks were upside down in their holdings, they really turned off the spigot for real estate lending and that's coming back. So that's That's really that, and and debt funds are back in given that the debt funds are more floating rate focused, short end of the market. We're starting to see more interest there. So more options out there, that's great, improves liquidity. The marketplace obviously makes it a little bit more difficult on the buy side because we we prefer when we're buying property, we prefer more less competition than more. But I think that's in general across the market, we're seeing the debts the the banks come back, debt funds come back, and that. That debt is plenty of debt options out there, and it's probably nearly a historical tight credit spreads.
Vladimir Bosanac: interesting. And then you know, given some indications that, you know, we're likely not going to see a you know, rate reduction for the for the rest of the year, that's you know highly unlikely. Do you anticipate or have you kind of heard from you know the banking industry what what that might mean? You know, does that mean you know, tighter lending or does that mean sort of this is a new normal?
Tom: I I think from a nominal interest rate perspective, it's a new normal, if not higher. we're certainly seeing that reflected in cap rates. you know, they are continue to increase. So what was so this is gonna be a little bit rough numbers, but what was maybe nationally a five to five and a half is now a five and a half to six. So I I do think we're seeing the cost of debt start to flow through the overall market and be reflected in the cap per. that properties are trading, which is to be expected.
Vladimir Bosanac: Yeah. anything else from that report? Any kind of, you know, surprises, things that you've seen that are kind of interesting to, you know, highlight?
Tom: Well I think certainly You know, the markets that we cover being the mountain, Denver, Salt Lake City, and then the Pacific markets, it's always interesting to see what's happening in markets that we're not in. And
Vladimir Bosanac: Right.
Tom: like how strong New York is. It's so such a dramatic turnaround. Places like Philadelphia, Detroit, Cleveland, Kansas City, s all these, you know, a lot of Midwest and East Coasts that suffered from COVID out migration are really starting to bounce back pretty strong now. So that I would say that's an interesting. I don't know that it necessarily leads us to those markets because I don't see us going too much further geographically than we already are, but it's that's always an interesting thing to see how the rest of the country is performing.
Vladimir Bosanac: Yeah, no, it is, it is for sure. And so, you know, one of the things that, you know, we've seen and you know, as I said in my intro, you know, we cover you know, the Texas market, California, Oregon, and Washington. I pulled some you know data from from our you know reporting over the last few months on in in each in each of those markets. I'll start off with you know Texas because it's kind of the worst of the of the of
Tom: Yeah.
Vladimir Bosanac: the four, unfortunately. Unfortunately. so and then we'll kind of get get to the best at the end. you know, a little little sneak sneak preview. The the best is going to be in San Francisco and San Jose, which you know seem to be number one, number two markets in the country. And and by yeah,
Tom: That's right. Yeah, so what do you w what'd you find out in Texas?
Vladimir Bosanac: yeah. So interesting thing in Texas. this was sort of the kind of epicenter of the national oversupply, if you will. You know, record record deliveries in twenty three, twenty four, basically pushing rents negative everywhere. however this pipeline seems to be emptying fast and at least based on some of the reporting, you know, that we've done on the on the ground there, things are quote unquote turning around. And by turning around meaning, you know, the rents are not going, you know, negative single digits, high single digits now they're negative, you know, low single digits, maybe even positive in certain cases, right? and so that's kind of interesting, right? if you if you look at what's happening in Dallas Fort Worth area, this seems to be the market that's turning first. Austin is kind of at an inflection point and then Houston seems to be where the recovery still still still is still is lagging. backing kind of the Dallas-Fort Worth area, you know, the occupancy is just above 92, you know, percent, so relatively healthy. but you're looking at average rents at about 1,500, you know, bucks per you know month. And like I said, rent growth of negative sort of 1.6%. Year over year it's up a little bit. but but this, you know, Anticipation that you know things are going to move there quickly may or may not sort of pan pan pan out, right? let's see, Austin kind of you know similar occupancy. We're at about 92, 92 percent, you know, also rent slightly lower. So Dallas, like I said, was about 1500 bucks a month, about 1524. In Austin, we're at averaging about 1508, so just about the same negative rent growth of 3.7%. So you know more than double where where where it is in Dallas. and but you know some reports are framing it sort of as a you short term pain, long term game. I mean things
Tom: Haha. Yeah, it's also it's also it's also interesting to hear those occupancy and rents from a you know, West Coast perspective because certainly the rent seems so inexpensive. And then I would also Yes. And I would say from our
Vladimir Bosanac: It d it really is. It really is. Yeah and
Tom: ex or I'm just real quickly say from our experience the inflection point is somewhere between like nine it like in the ninety-four to ninety-five percent range is where you pricing power historically moves to the landlord as opposed to being in the tenants. So that that that kind of jobs as well.
Vladimir Bosanac: interesting. Interesting. Yeah, yeah. So so looks like we still have a little a little bit of ways to go, at least in, you know, Dallas and Austin. And then Houston, like I said, is the is the softest of the of the three. you know, all occupancy is about ninety one point six percent. You know, this is based on one report, Yarty is you know reporting it around there. Cushman of Wakefield is reporting it closer to eleven percent vacancy versus
Tom: Yikes, yeah.
Vladimir Bosanac: you know nine. So there's there's some there's some oscillation there, right? And average rent here, you know, if if Dallas and Austin surprise you, you know, Tom, you know, Houston we're looking at thirteen hundred or thirteen five as kind of the average monthly, monthly rate. and and again, negative rent rent growth. So sort of sort of a sort of across the board there also. but you know the story that you know is not told by these numbers quite now you know quite quite quite you know vividly is that when you look at where most of the population growth and job growth is happening, it is in Texas, right?
Tom: Yep. Mm-hmm.
Vladimir Bosanac: And and I think, you know, this you know statement, you know, short term pain, long term gain
Tom: Yeah.
Vladimir Bosanac: may have some y you know, strength to it and I and I wouldn't be surprised if you know six to ten, twelve months from now we see these numbers quite quite the opposite. what are what are your thoughts?
Tom: Yeah. Yeah, I think the just all continue to be surprised by the strength of Texas and other Sunbelt markets to attract population growth. you know, something we may touch on later, w on one of our lighter hearted topics, but it it is that continues to to surprise me. I I don't know how you feel about that, Vlad, but just the Part of me maybe it's just being from California and having that bias, but that there might be a return to the states, you know, reversing that. But I don't know. What are your thoughts on that?
Vladimir Bosanac: Yeah, I mean I think certainly when we talk about, you know, job job growth, in terms of, you know, where you know, you know, where we're seeing, you know growth in terms of you know data centers and even manufacturing and you know finance and that kind of thing. definitely seems to be happening in in the great state of Texas for sure. I however I don't know and you know this will be something that we'll have to watch closely if the you know demand is going to surpass the you know supply. Now in all three of these markets you know the supply of units has gone down sick sick you know sick you know by by a big number. in Dallas, Fort Worth, down 43%. however, they still have over 30,000 units under construction. in Austin, we're looking at you know, you know, deliveries sort of down also by a by a big number, but again, over 20,000 units are under under development. same, same with Houston, you know, a huge drop-off, you know, about thirty-six six percent year over year in terms of you know. the you know development but still somewhere between you know you know you know around fifteen to you know twenty thousand units depending on the on the on the on the source. So still a lot of units to be delivered and then I wonder if even even with you know job growth they're gonna be filled up. that may not be the case.
Tom: Yeah. Well, time will tell. and then certainly I think the from a delivery perspective, we not only always think about it when we're evaluating the markets we're in and our acquisition opportunities, it's not only the nominal units, but also as a percentage of the existing inventory. So like a like a Dallas with that number of deliveries is something of in the neighborhood of like a two and a half percent of existing inventory, whereas you know, some of the West Coast markets like a San Francisco, it's point five percent of
Vladimir Bosanac: Right.
Tom: So,
Vladimir Bosanac: Yeah, yeah, yeah, yeah. So let's jump over to you know, Southern California, which is, you know, geographically obviously a big market. So we're going to make some generalizations here that may or may not necessarily be accurate for the for for a specific sub sub sub market within within Southern California. Los Angeles, I'll I'll start start off with there. you know, vacancy is about five point five percent. so you know, definitely you know lower than some of the stuff we're seeing in, you know, Texas. Average rents here now are growing, you know, twenty three twenty three ten per you know month. rent growth essentially flat, however. At about 0.2% year over year. Orange County is sort of the tightest of the three. If you look at Los Angeles, Orange County, and San Diego, vacancy is about 4.3%. Average rent there is now over $2,700. And rent growth is approaching 2%. So that's an interesting kind of market to you know look at. And then San Diego vacancy close to LA, about five and a half percent. average rent about 24.53, with rent growth basically turning positive at just under 1% year over year. all of these markets, the one that we didn't sort of highlight here is inland empire, which I think we probably should have, but that may have to be done at a at a different time.
Tom: That's yes. only so many hours in the day.
Vladimir Bosanac: Only seven hours of day, exactly. but you know, Los Angeles is looking at a development pipeline of over twenty-five thousand units. you know, in Orange County we're only looking at about thirty one hundred units, so this is a small, small number, and San Diego about twelve thousand units. So there's some development going going there. And you know, I think, you know, the sort of typical kind of, you know, challenges in, you know, California you know, persist persist in these in these markets here. what what are your thoughts on Southern California?
Tom: Yeah, so In number of you know, just reflecting on those in the context of markets that we cover and markets that we own property in. So you talked about LA, the number of deliveries, that's about, you know, going back to the concept of or the metric of percentage of existing inventory. That's about one percent of the inventory. San Diego is more like two percent of the inventory. And as you mentioned, Orange County is less than one percent.
Vladimir Bosanac: Yeah.
Tom: so I I certainly think that the those stats mat largely mat. Match what we're experiencing on the ground. Go into specific assets that we own in those markets. So, for example, you mentioned strong growth or at least positive lease trade out in Orange County. That matches our experience. We own a 93-unit town home property there. So that you know the big units, three and four bedrooms, average rents on those are like $4,400, $4,500. And we're seeing strong rent growth there because people can't afford to buy homes in Orange County. So it's a great substitute. from that perspective, families so on and so forth who aren't able to buy. In LA, we own in Long Beach, that has been a little bit, we've been able to stay occupied, but a little bit more of a struggle, both from a regulatory collections perspective, etc. You know, downtown LA is, I think, starting to see a recovery so that matches. And
Vladimir Bosanac: Mm.
Tom: then, you know, we then we own out in Ventura and in the inland empire. So we straddle LA. For those other two assets.
Vladimir Bosanac: Right.
Tom: And I would say Inland Empire is kind of decent. Well, really, both Ventura and Inland Empire were seeing some okay lease trade-out staying occupied, but not big rent growth.
Vladimir Bosanac: Yeah, and I imagine you're seeing cap rates beginning to, you know, kind of drift up in in the Southern California market. That's that's reporting that we're we're also seeing and kind of a couple of wild cards is the insurance costs sort of post the twenty twenty five wildfires in Southern California. That seems to be
Tom: Yes.
Vladimir Bosanac: you know one of the drivers there. And then LA's measure ULA transfer tax, which is you know basically on any any property sold over I believe five million dollars if if I have that correctly.
Tom: Yeah, it's either four or five billion, yes. And it's a it's a progressive scale. So above a certain amount, it's at the full percentage.
Vladimir Bosanac: Yep.
Tom: So it it ends up being pretty steep and certainly a regulatory hurdle and has impacted sales. And in fact, there's discussions Yeah, and
Vladimir Bosanac: Yeah, it's Hinder Tails for sure, right?
Tom: in fact there's some discussion about either amending it or repealing it. I given the political wins in LA and it's left of leading center, I I don't see that happening, but maybe.
Vladimir Bosanac: Yeah, there is something in November where I think there is a proposal to sort of limit it or put sort of a cap on some, you know, properties or or at least you know, certain age of properties. I'm I'm butchering this this now, but I remember seeing something recently about that. So, you know, we'll see kind of how how that play plays itself out. But Southern California, you know, we're seeing institutional capital return to the multifamily side. you know, certainly there are acquisitions being being made from LA down to San Diego and I imagine that will only continue to be so. what are your projections in terms of you know where you think you know rent might rent rent growth is there, employment and and thing things like that?
Tom: Certainly there is a return of buying appetite. I would say that certainly institutions are coming back. The bets that are being made are more on a replacement cost from their perspective to say if I can buy it for, as an argument, $400,000 a unit and it costs me $600,000 a unit. What I'm collecting right now, I don't necessarily, it's not that I don't care, but I'm less focused on what I think I can sell the property for. So a lot of people are making that bet. And I think that they'll do quite well. Well, because there's a lot of smart people who've done it before and are making those bets now. In terms of operationally speaking, I don't see the balance of 26 being a big mover on the rent growth side. But if LA continues to recover and if job growth does at least or immigration stabilizes or turns positive, then certainly this stage is set for rent growth there as well.
Vladimir Bosanac: Yeah, and really quickly, per unit cost of sales. So we have a couple of you know, numbers here. metro average in LA about two hundred and eighty one thousand per unit. you know, inland, if you move more inland, it's closer to 260, West Hollywood closer to 500, and then Santa
Tom: Yeah.
Vladimir Bosanac: Monica closer to sort of 840.
Tom: Yes.
Vladimir Bosanac: so wide a wide range of you know c cost per unit and obviously based on the you know quality of the asset as well but just kind of an indication
Tom: Of course, of course.
Vladimir Bosanac: of you know where where the numbers are there, right?
Tom: Yeah, I think those are Yeah, I'm glad you pulled those stats and interesting to walk through. And I I do think most of them mirror what we experience or what we are projecting on a go-forward basis. on the acquisition side, we would love to we don't own in San Diego, we'd love to buy there, and we'd love to own more in Orange County and certain parts of LA. We're just not seeing our strategies focus on cash on cash yield the day we close, and we're just seeing people pay prices through that relative to for that market in particular.
Vladimir Bosanac: Yep. Yeah. Yeah. So let's jump north to the Pacific Northwest. you know, the you know Seattle region. demand is a bright spot here. based on our, you know, reporting strong absorption, which is powered by kind of AI and tech leasing. So, you know, recently we've seen Some you know leases of big tech and AI firms from the Bay Area actually making moves in the in the in the Seattle market. We're also seeing Amazon you know really trying to push hard. This you know five-day back back to the office. Microsoft also TikTok just announced something about you know wanting everybody into the in the office five five days a week and they have a they have a presence up in up in Bellevue that's you know pretty significant. supply. However, is pulling hard, pulling back really, really hard. So just like we've seen in you know Southern California and also in Texas, we have deliveries in the Pacific Northwest market down 53% year over year. So you know very much a slowdown. in terms of new sort of you know development, you know, however, it's still you know, several thousand, you know, tens of thousands units kind of, you know, under under under under you know development there. what are your kind of thoughts before I go into into some you know vacancy numbers here in terms of you know Seattle in general?
Tom: Yeah. Well I'm I am curious, Vlad, you mentioned the the the back to work and given your business you overlap tech and real estate. Are you hearing is that are are those announcements successful? Are people getting back into the office?
Vladimir Bosanac: You know, it's it's it's really hard to tell, to be honest with you. I think when I talk to commercial brokers, the you know, message is, yeah, this is great. Everybody's coming back to the office. You can see the vibrancy and then I anecdotally will talk to people that are either in you know, work at tech firms or or just sort of friends of friends that I, you know, kind of know. And you can still tell that they're not going to the office every every day. It's maybe two, three
Tom: Yeah.
Vladimir Bosanac: times a, you know, week essentially. In some cases I've heard, you know, companies wanting everybody to go back five days a week. And then they don't have enough space for for, you know, everybody because they've, you whittled down the space based on based on the needs over the last few years. And so, you know, that that's another challenge, right? I know in tech it's kind of A kind of a weird directive because I, you know, from personal experience can you know tell you that you know it's it's the world of has and have nots. And there
Tom: Mm-hmm.
Vladimir Bosanac: are going to be you know leaders of certain groups or certain you know
Tom: Okay.
Vladimir Bosanac: rock star you know developers who are going to do whatever they want to do. I used to work for a company Palo Alto, this was pre-COVID. and we had you know one of our chief developers lived lived in you know Tahoe. and
Tom: yeah.
Vladimir Bosanac: you know that's And nobody could tell him. Nobody could tell him. And that's where he stayed, exactly. And and the company did fine and you know, it's it's just one of those one of those sort of things. so I can't tell, to be honest with you, you know, if if this is really happening. I think if we look at sort of, you know, traffic, traffic is sort of a, you know, I think a confusing metric because I think there are just people, you know, during the day doing stuff. maybe they're running errands, maybe they're going to meetings,
Tom: Sure.
Vladimir Bosanac: maybe they are going to the office, but I don't I don't think that that we're we're seeing kind of anywhere close to the sort of pre pre-COVID numbers.
Tom: Sure. No, I and I well I appreciate that feedback. I I think like you Take the foot traffic numbers with a grain of salt and also balance that just you know, thinking back to our own personal or company experience when I'm in Seattle for meetings or seeing property. I like to spend time walking around downtown, various neighborhoods, and feel what it's like. And certainly it feels better than it did, but
Vladimir Bosanac: Yeah.
Tom: it but it doesn't necessarily match. The hoopla that the brokerage and investment sales community be like, it's back in the office five days a week. It's so much more active. So truth is somewhere in the middle. and then I just the other part you mentioned in the context of our portfolio is there are certain submarkets in Seattle that are around those employers that I think are experiencing some pretty strong rent growth. But the city Seattle properties that we own, ones in Lake City, ones in Columbia City, we're not really seeing that on our our our experiences doesn't match that. So we are struggling to maintain stabilized occupancy and are seeing anemic rent growth if any.
Vladimir Bosanac: Yeah, interesting. So both of those, Lake City and all also Columbia City, these are you know somewhat, you know, neighbors neighborhoods within within Seattle. so metro vacancy, the numbers that we're seeing is around six point seven percent is kind of what where where where we are. This is above that number, Tom, that I think you said you know, where this sort of
Tom: Pricing power, yeah.
Vladimir Bosanac: Pricing power sort of shifts. average rent in Seattle seems to be kind of between 2000 and 2025 per per per month, with essentially flat rent growth of about 1% year over year.
Tom: Yep.
Vladimir Bosanac: across the lake in Bellevue, this is the tightest and maybe the priciest market in the in the in the region. But even there, vacancy is at 6.6%. and
Tom: Yeah.
Vladimir Bosanac: we're looking at rents there high. over three thousand doll dollars a month at at about thirty one hundred bucks and the rent growth there seems to be actually probably the strongest between January from January to May of this year we've seen rent growth there of five point six percent which is outperforming the state and certainly one of the highest numbers in the in the in the in in the US also and then South south in you know Pierce County, you know, Tacoma, Pierce County, this is where the affordability I think play
Tom: Yes.
Vladimir Bosanac: is, you know, hap happening mostly. Rents are between 1700 and 1900 bucks a month. you know, you know, much more affordable com compared to the Seattle Bellevue Bellevue market. and you know, r rent growth is almost non existent there because I I th there there are still you know properties to that that That needs to be absorbed. the one market that's not mentioned here, which is north of Seattle, which is you know, Snohomish County. I don't have the specific numbers here, but I believe Snohomish County County is probably going to be closer to Seattle. it is it is perceived, I think, a somewhat you know, you know, high higher end sort of suburb, if you will. And
Tom: Agreed. Yeah.
Vladimir Bosanac: but also a lot of new projects were also delivered there, which I think will probably keep keep rents fairly fairly fairly flat. thoughts on this, Tom?
Tom: Yeah, I I certainly so we don't own s in the south market. we've looked in the Tacoma region, Pierce County, and also agree with your thoughts on Snomish. on the east side, certainly we have great recent experience because the property that we own there was at Issaquah. We just sold and it closed at the end of July. So we certainly are cognizant of the sales market there. It was 134 units sold for 55 one. so it works out to about a four hundred and eleven. thousand dollar per unit. it was the oldest property in our portfolio. Buyers are gonna undergo a pretty extensive value add renovation of the 134 units there, 35 are town homes. So they'll be completely redone and get four or five thousand dollar rents and the apartments are big units. So we certainly it was did match our investment thesis or our investment thesis on a go-forward basis so we ended up selling it going to the market and I would say that the dynamic we experienced in that sale Process matches with the stats that you're seeing here. So people are banking on rent growth on the east side. It is much less exposed to new inventory, other than perhaps downtown Bellevue. And given the employers that are there, Microsoft, etc., it still remains a very strong sub market. So I that largely jibes with our experience there.
Vladimir Bosanac: Yeah, anecdotally, and we'll jump into the, you know, Northern California market here shortly. As I said earlier, Northern California is the number one, number two market in the in the country in terms of mul multifam family. And I was recently part of a meeting where there were a couple of researchers from Green Street advisors who specifically called out, you know, you know, Seattle is perhaps the sort of the next kind of market to kind of, you know, follow what's what what what is happening in Northern California. And and I think certainly with some of the even though there's still some you know tech layoffs going on across the sort of you know Puget Sound region, it does seem that there's job growth there, you know, also because as I said earlier, some of these Northern California AI firms have leased, you know, considerable space. I imagine they plan to, you know, fill it with people as well. So
Tom: Yes, yeah, yeah. It's certainly that is the that is the mantra and tagline for the investment sales brokerage community up there on the multifamily side saying, look at all this stuff that's coming. We've seen this we've
Vladimir Bosanac: Right.
Tom: seen this play out before. Now's the time to buy.
Vladimir Bosanac: It and and a variable it might be, especially if the supply, you know, continues to be you know, a lot lower than than where it was. although this is if if if I can say just one more thing, this is a fairly developer friendly sort of you know region. So I so I do think even though you may not have a lot of deliveries happening now, there are a lot of projects in the pipeline that could kick off very, very quickly should the market turn. So it's it's one of those where you know there might be a short window of investment before new product
Tom: Yeah, and yeah.
Vladimir Bosanac: might might kick in, right?
Tom: Yeah, no, I I think glad you hit the nail on the head there. Seattle is, unlike most West Coast markets, more developer friendly and they have this multifamily tax exemption program that does encourage development. So it is more attuned to supply and demand and doesn't and turns more quickly. So you're absolutely right there that you may not see that same dynamic as you would see in other like a San Francisco or San Diego or LA.
Vladimir Bosanac: All right, so we kinda started off at the off at the sort of you know worst of the of the four, if you will, and we're ending it here in Northern California where you know, it's basically sort of the the envy of the multifamily market across
Tom: Yes.
Vladimir Bosanac: the country. Tom, I'm gonna let you kind of give us a, you know, perspective and then I'll jump into some of some of the numbers here.
Tom: Yeah, think we are starting to see the ripple effects. So certainly San Francisco was the epicenter of AI demand. Rent growth was really tremendous, double digit over the last four quarters, and that is now we're starting to a ripple effect of that. So we own property in San Rafael, in Novato and Petaluma as you go further up north in in Marin and Sonoma counties. And I would say the rent growth we're seeing is direct. Reflected by proximity to the city. So again, from a personal experience, we are, or portfolio experience, we're starting to see the overflow effect. And I would also argue that tracking the properties done in the market, whether JLL or IPA or the other major brokerage shops, the properties that they're bringing out, certainly they're getting investors to buy off on really strong rent growth to justify their underwriting and the purchase price. Yeah.
Vladimir Bosanac: That's right. That's right. And this this anecdote that I that I brought up a few minutes ago about you know, Green Green Street research, I think they were projecting rent growth in the the San Francisco Bay Area region of eight percent keger for the next three years, which I think is just an unheard of number.
Tom: Wow. Yes, that is that is unheard of. I I mean, yeah, that's not something many people will underwrite, but maybe not. I don't know.
Vladimir Bosanac: Yeah. and and again, you know, but we're we're talking, you know, San Francisco pipeline of, you know, fourteen hundred units, you know, not fourteen thousand, fourteen hundred, right? Silicon Valley, about a thousand units, you know, even even in Oakland, right? We have a pi pipe pipeline, you know, that could be as big as forty thousand units, but you and I know this is not going to break ground anytime soon.
Tom: Yes, and and those are like and going back to that other metric, those are all well below one percent of existing inventory for San Jose, San Francisco.
Vladimir Bosanac: That's right. That's right. Very, very, very low. Exactly. And then, you know, tack on to that is then also, you know, vacancies. So in San Francisco, we're looking between sort of two to four percent range. you know, I have a number here that says average rent of about twenty-eight fifty. I challenge you to find anything for twenty-eight fifty in San Francisco.
Tom: I yeah, yeah, yeah, I I would agree. Yes, as I go s s sign me up, I'm gonna turn around and subtle at that.
Vladimir Bosanac: I I don't know. I don't know where this average exists. but strong rent growth. I think year over year we were seeing, you know, double digit numbers. just in this year, I believe we've studied we've seen something like high single digits. and again, San Francisco is the number one market in the in the country. job growth and one other thing that you mentioned, you know, proximity to the you know AI firms anecdotally I haven't heard Or seen anything sort of you know specific on this, but anecdotally we did hear that, you know, some of these firms are offering incentives for people to be closer to the office. So
Tom: Sure.
Vladimir Bosanac: obviously what you know, what is that going to do? Just going to drive rent, rent up, unfortunately.
Tom: I'm I and and and I'm curious what when in those in those incentives, have you heard specifics of how they're structuring them? That 'cause that's that's really interesting to me that that is a dynamic that they they want to have and are gonna be willing to pay for it.
Vladimir Bosanac: Yeah, I haven't I I haven't heard specifically whether it's like a sort of a monthly kind of, you know, bonus or allowance or you know however they you know call it or if it's like an annual thing. but but I've definitely heard from a couple of sources that you know if you're within like a 15 minute sort of distance whether that's you know you know a 15 minute drive or 15 minute walk, whatever, you you you will be paid more effectively, right?
Tom: Mm.
Vladimir Bosanac: And so that that that is interesting. this is not the first time that we've seen something similar. back in the day when Facebook was headquartered in You know, Palo Alto. this is the early sort of this is the late aughts 2000 and sort of eight and nine. you know, we heard that they
Tom: Mm-hmm.
Vladimir Bosanac: were giving an allowance of about $600 if you would live like you know, in you know, Palo Alto, right? And basically all they did is all the local you know landlords in Palo Alto just jacked up the prices by $600 and just captured all of that essentially, right?
Tom: And they just captured all that, right?
Vladimir Bosanac: so that's that's in San Francisco, you know, Silicon Valley, you know, similar. similar vacancy three point four percent you know we're you know, looking at you know, average rents at about thirty six hundred dollars. Again, you know, I I don't know if that's for a one bedroom, probably for a one bedroom, and I can I I can, you know, you know, certainly tell you that, you know, class A stuff go goes for that that amount. and then Oakland, East Bay, we heard Oakland is beginning to pick up steam. obviously, you know, this is usually the laggard. It follows what happens in San Francisco as and as we see, you know, pressure. build up in the city. It goes across to Bay, and we see rent rent growth there there also. even in Oakland, you know, vacancy is about 5%. And some of the numbers that we're seeing is that it's that it's improving, meaning going, going down. But you know, you're looking at average rents there at around $2,500, $2,600 a month. So still lower than what you're gonna see in other other parts of the other parts of the region.
Tom: Yeah, I think You know, w those price per units are certainly skewed by age and average transactions and potentially smaller, more mom and pop, not non institutional sales, but just anecdotally seeing some San Francisco sales in excess of seven hundred thousand a unit, some South Valley s Santa Clara transactions in excess of six hundred thousand dollars a unit. So and when I talk with the brokerage community about how people are underwriting their rent growth, that is, you know, four or five 6% compound annual growth, which is scary when you think about it from a nominal perspective, but
Vladimir Bosanac: Yeah.
Tom: that's how people are getting comfortable with paying some pretty aggressive numbers.
Vladimir Bosanac: Yeah, and you were citing the you know Newmark report that you know there are still landlords giving giving out incentives. I don't think there's any incentives anywhere in the in the in the in the in the
Tom: Yeah.
Vladimir Bosanac: in the in the Bay Area. And we've heard of you know, numbers on, you know, turn tur turnouts. Is that is that the term Tom when when a tenant leaves that a new person comes in?
Tom: Yeah, so so we the the phraseology we use is lease trade out and whether it's a renew whether whether
Vladimir Bosanac: Lease lease trite out, yep.
Tom: it's a renewal or a new lease. So again the the le or LTO lease trade out, what we're seeing portfolio wide and more nationwide is three to four percent on renewals, negative three to four percent on new leases. But you're absolutely right in San Francisco, Silicon Valley, and now spreading to Oakland concessions are largely gone. We own property in Mill. Petis and we we're we've been 99 to 100% lease and just the amount of demand for we're not short on demand in that property. So we are starting to see some pretty strong lease trade out.
Vladimir Bosanac: Yeah, and and anecdotally, I've heard that some of these, you know, turn turnout, you know, leases are as high as twenty-five percent. So meaning when you get a new tenant in, you're able to charge more. Now you're going from a lower baseline, obviously, right, to to a you know market.
Tom: As well as as well as as well as you probably had to offer the last tenant a concession.
Vladimir Bosanac: That's right.
Tom: So if you even a month concession is already eight percent or eight point three percent below. So even if you offer no concession, you've already increased your rent by eight point three percent for a one if you drop a one month concession.
Vladimir Bosanac: That's right. Yeah, yeah, yeah. So, you know, re very remarkable numbers. certainly you know you're you're you know this is not an average, this is this is an exception you know across the country. And you know, I think you know, I think you know what this means, if it's going to continue, I don't know. because I just I just don't know how much higher these rents can can actually go. But I guess time time will tell. And you know, certainly in the last cycle we saw a push into into further sort of, you know, suburban markets. you know, markets when you think about like like you know Fremont or even further East Bay, even into like, you know, Livermore closer to Central Valley, you know, Tracy, Stockton, and even in Sacramento, you see rents there go up as well as a result of what's happening across across sort of the you know markets closer closer to San Francisco.
Tom: Yep.
Vladimir Bosanac: so it's going to have a you know reverberating effect, you know, throughout throughout the region for sure.
Tom: Yeah, and it it it seems to exhibit many aspects of past cycles.
Vladimir Bosanac: That's right. That that is that is that is right. So anyway, so on that note, I thought we kind of close off with with sort of a kind of you know related but interesting kind of you know ti tidbit here. So UHAL puts together kind of a mid year migration trend figures. I I, you know, look at these, they're kind of interesting in a in a sense 'cause it gives you, you know, you know, a a a real time perspective in terms of, you know, which states and which, you know, cities are kind of, you know, gaining. Tom, I sh I shared this with with you. So why don't we go kind of generation by generation and maybe
Tom: Yeah, because I y yeah, when you brought up Vlad, I was very curious because, you know, I had preconceived notions about what the numbers might say, but what what did we learn? What'd you s what'd you find?
Vladimir Bosanac: on the on the on the U Hall, on the U Hall studies specifically?
Tom: Yeah.
Vladimir Bosanac: Yeah, yeah, yeah, yeah. No, so so so it's interesting how it's very different from when you when you go from generation to generation.
Tom: Course, yeah.
Vladimir Bosanac: and and I think you know we're seeing basically the you know life cycle of you know, you know, family formation to, you know, working to, you know, retirement. And I think some of the sort of, you know, typical kind of, you know, markets that, you know, usually you know, gain folks, you know, when they're starting off work to where they're getting more established to when people retire. We're we're seeing at least from my perspective, some of those, you know, trends actually continue. So let's start off with Gen Z. This is the sort of youngest co cohort born between ninety seven and twenty twenty twenty twelve. the states, well let me go by cities first. The top
Tom: Sure.
Vladimir Bosanac: five cities that are that are gaining in this generation are New York City, Dallas, Chicago, San Francisco Bay Area, and Los Angeles. I'll throw in number six as Austin here. does that surprise you, Tom?
Tom: Well, I so I have two kids that are in that generation. one who moved back from school in Chicago to work in Berkeley, so that kinda makes sense. and my other
Vladimir Bosanac: Yeah.
Tom: my younger daughter just graduated and is gonna be moving to the UK, so that doesn't quite jive. But if I
Vladimir Bosanac: Yeah.
Tom: think about her friends, yeah, it's New York, LA, Bay Area. That kinda makes sense.
Vladimir Bosanac: Yeah, it is it is interesting. And and these are, you know, obviously the kind of when when you think about it, so the you know, biggest markets, certainly the Bay Area number four is not one of the biggest markets in the country. It's probably like, you know, top, top, top ten, but the top four, you know, New York, LA, Chicago, and Dallas are are are all all all up there. for for the millennials. So this is the you know, cohort born between eighty-one and ninety-six. the top five markets are going to be Dallas, Houston, Orlando, San Francisco Bay Area, and then Sarasota, Braden Bradenton Flor Flor Florida area. does that surprise you?
Tom: Again, not really when I think about at that age you have a young family or starting a family
Vladimir Bosanac: Yeah.
Tom: since we're all since you know adolescence now goes to thirty. so that kind of jives I I think with my preconceived notions. How about you?
Vladimir Bosanac: Yeah, yeah. I mean it is it is interesting. I mean, out of these top ten markets for the for the millennials, we have three are based in Texas, three are based in Florida.
Tom: Or the yeah.
Vladimir Bosanac: If we have one in Idaho, one in Alabama, and then we have one in California and it's and it's in the Bay Area. And I think it's I would say this is job related, probably around technology and you know, AI. If you are in this industry, you're an established, let's say, you know, developer, programmer, whatever, you're probably going to go to the Bay Area to kind of be part of this next sort of gold rush, if you will, right? so that one that one surprised me a little bit because I think the sort of narrative that we've heard typically is that you know California is losing population. and you know, at least in these two cohorts, we're we're still not seeing it. We're just getting exactly exactly exactly
Tom: We're just getting younger. Cause 'cause 'cause now you're gonna go to the next generation, which I'm in, which you're gonna tell me I'm supposed to be leaving.
Vladimir Bosanac: So the next generation, Tom, which is our generation, Gen X, you know,
Tom: Yes.
Vladimir Bosanac: it's between 1965 and 1919. so we are we are, you know, California is not in this in this list at all. Looking at you know the top sort of you know markets, Fort Myers, Florida, Charleston in South Carolina, Sarasota, Bradenton sort of area, Miami, Fort Lauderdale area, Nashville, Salt Lake City, Wilmington, Tampa, San Diego, and Gainesville. So Florida seems to be represented here very strongly. And then I think of the western markets, we're basically seeing, you know, Utah, and San Diego. Does does this one surprise you?
Tom: Again, not really. I mean, well, maybe a little bit because I would thought my generation, I th you know, I'm 55, I'm thinking about working at least another 10 years. So retirement seems so far away, and those seem more like moving for retirement and or ha not having an income tax and or a much lower cost of living. That's how that's how that's my takeaways. How about you?
Vladimir Bosanac: Yeah, I think I think there's there's there's a couple of things here that I think are very interesting. So first of all, Gen X of the four generations that I think I'm going to call here, in terms of just sheer numbers is the smallest generation. so you know that that I think in and of itself is very s sort of you know interesting. but also there is recent numbers from the you know on unemployment figures that about a million people in the last year have left the you know workforce. You you and I are hitting mid sort of you know 50s. I think if you and I you know got laid off today and were sort of forced to find a new job I think it'd be it'd be it'd be hard. our education
Tom: Yes.
Vladimir Bosanac: and and the and experience not not notwithstanding we both went went to the same school so that's that then all that that would certainly help us.
Tom: That's right.
Vladimir Bosanac: I would I would hope. but but I do think that you know you're starting to see a generation that probably is experiencing some early retirement and maybe moving to
Tom: Yeah, good part.
Vladimir Bosanac: some of these, you know, states where it's either lower cost, you know, no income tax or whatever, right? seems to be kind of a c you know, kind of kind you know, kind of a draw, right?
Tom: Yeah. I guess I'll have to add the U-Haul to my speed dial in case I get that in case I get that call from my boss.
Vladimir Bosanac: Exactly. And then let's close off with with with the boomer generation, born between nineteen forty-six and nineteen sixty-four. I'm gonna read off sort of the top ten, you know, states here, which are are not gonna be a big, you know, surprise, but South Carolina, North Carolina, Florida, Arizona, Alabama, Tennessee, Arkansas, Idaho, Oklahoma, and Georgia. you know, in terms of, you know, cities, it's you know, Gainesville, Myrtle Beach, Phoenix, Charleston, Lake Havasu, you know, Spokane, Washington, Tucson air air air Arizona, Daytona Beach, and Wilmington. these are
Tom: Yeah.
Vladimir Bosanac: probably, you know, your prototypical retirement communities, right? And the growth there I think is, you know, specifically based on that, right? Would you would you agree?
Tom: Yeah, I a hundred percent. I those all sound except for Idaho and Spokane, th those also all sound like you know, snowbird cities, right? Where people are like,
Vladimir Bosanac: Right, exactly.
Tom: I'm I'm retired now, let's go enjoy the sun for eight days of the month or eight months of the year I should say, yeah.
Vladimir Bosanac: Right. Right. Right. Right. Right. Wonderful. yeah, so Tom, you know, great conversation here. an hour spent about talking about mul multifamily. hopefully interesting for our audience in terms of, you know, how how things are going. thanks for all your feedback and enjoyed our conversation.
Tom: Yeah, absolutely vibe. Thank you so much. always appreciate co-hosting. Great to have this conversation go through some multifamily stats, both nationwide and market specific. And then certainly the the you know, the U-Haul information is interesting. so appreciate your time today.
Vladimir Bosanac: We'll talk soon.
Tom: Absolutely vibe. Thanks so much.
Tom: Doing well, Vlad, great to see you as well. hope things are good on your side it too.
Vladimir Bosanac: Can't complain. we are recording this sort of in the early phases of Q3, but in California at least school has started, so it's a little more quiet around the household these days. that's right.
Tom: And a little bit longer to get to get to the office.
Vladimir Bosanac: That's right. but Tom, we have a great conversation today. We are going to tackle the multifamily space. we're gonna kind of Go around the country and you know touch upon some of the you know bigger markets and then close off with some of the markets that that that you know we track, which now includes Texas and also the Western markets of California and Oregon and Washington. some interesting data that we pulled here kind of from kind of first half of the year and I think indicative of where you know the industry is heading and what it means for for the rest of the year as well. So Tom, you have Have access to a report from Newmark, I believe, that that we kind of wanted to kick it off with, correct?
Tom: Yes, and thanks Vlad, appreciate the intro and look forward to our conversation today. Yeah, the you know, Newmark is one of the nationwide brokerage companies out there, is active in the multifamily space, both on investment sales and financing. they produce a quarterly report that I find to be fairly valuable on a national basis. And as you had mentioned earlier, we're now early in the third quarter, so all the brokerage houses are publishing their second quarter data. And I would highlight four points I think that are worthwhile on a national basis. Basis that are in that report, and we're sort of we see in the markets that we cover. And certainly on the absorption, really, there's four main points. On the absorption side is a very strong second quarter and first half absorption. It's one of the, I think it's the second best on record of first half absorption. And then you combine that with the supply pipeline that's largely disappearing or stabilizing, given that debt's no longer free, construction costs continue to remain. Elevated combination of those two things are really starting to see some improvement on the occupancy side on a nationwide basis. I think the third point worth highlighting is that there's a return of bank lending, and that has driven a higher debt origination in the first half of 26 versus the first half of 25. And then as is the case that we're seeing on our own at JB Madison on the transaction side, as you are starting to. See more transaction flow free up as people's debt mature, joint venture partners are kind of putting saying no moss, and/or this properties are getting stabilized. So we're starting to see an increase in transaction volume. It's about 11% year over year, and cap
Vladimir Bosanac: Yeah.
Tom: rates, cap rates are higher. So I think that's a good national indicator of what we're seeing in the multifamily space, those four points.
Vladimir Bosanac: Yeah, let's let's unwrap those a little bit. you know, you're you're an investor in this in this in this space. and I know you don't invest everywhere around the country. You have certain markets where where you guys are, you know, mainly mainly focused on. But did the absorption kind of initiative or you know, numbers, if you will, you know, surprise you in in terms of you know what what what the Newmark report is saying? is it and and this is you know Just sort of a question maybe because I don't know, but is it a little bit of a zero sum game? So, you know, does one market gain and another market sort of loses? you know, what what's your perspective?
Tom: Yeah, though. Good question. certainly I think we see some of all of the above, depending on market that we're in. I am surprised by that net absorption number because it does it's a national basis, so job growth and household formation. We're not really seeing a lot of job growth. So the fact that we had absorption of apartments was a pleasant surprise. Certainly in some of the markets we cover, like in Pacific Northwest and Seattle, we've seen better demand than we expected. I wouldn't say that's necessarily translating into strong. rent growth because there's still some deliveries that are coming in the Pacific Northwest Seattle specifically. So I'm I'm pleasantly surprised on the absorption numbers, but I would say it's not necessarily translated into strong rent growth yet.
Vladimir Bosanac: And this is this is in your markets, but also what what is what is Newmark saying? Like are they seeing the rent growth, you know, beginning to you know, creep up el elsewhere or is it still kind of flat?
Tom: Yeah, so the you know the occupancy's improved. they're getting on a national basis rent growth on a on renewals, so people who are staying in their apartments, but landing new tenants is a negative trade-out, meaning that they still need to offer concessions in order to entice residents to take those units. So it's it's a little bit of a
Vladimir Bosanac: interesting.
Tom: bifurcated market. So again, you're seeing on a national basis, which largely matches our experience for the first half, is on renewals you're getting three to five. 4% increases, and on new leases, you're getting negative 3% to 4% when you factor in the concessions.
Vladimir Bosanac: interesting. it these are average numbers, obviously, c kinda kind of across the country, right? and and and as you and I know, in this industry it's all about location, location, location. And some markets are going to be very different, including our own here, which which we'll, you know, touch upon a little bit. What what are what is the Newmark report saying about you know overall you know deliveries, construction, any anything on that side?
Tom: Yeah, certainly a dramatic drop off in deliveries well below or or I should say we're we're back in line with where deliveries were pre-COVID. but that's still a dramatic drop-off from when debt was free and everyone, every developer in the world was planting a shovel on the ground from twenty to twenty twenty through twenty twenty two. So again, that bodes well for setting the stage for what we all market participants hope is some pretty strong rent growth going into the second half of twenty six. 27 and 28, and is certainly a critical part of many people's underwriting for acquisitions that they're working on right now.
Vladimir Bosanac: Yeah. Some of the you know, COVID developments that were, you know, happening in, you know, the southeast and you know that kind of those those sort of areas, have you noticed you know, persistent demand for housing there? does does that report indicate anything or or just just from your understanding of the of of the market in general?
Tom: Yeah, I think the Sunbelt markets still are experiencing population growth and net positive migration. I don't know that it's necessarily a bit strong enough to overcome the supply. So I think the dynamic is very similar in those markets in that people who are builders and developers and owners who are leasing up their properties, they're still offering you know, the percentage of properties offering concessions is really still high. It's probably twenty five percent. Percentage of units out there. And then in terms of what that concession is, it's on average almost a month free rent. And that's both of those are very high from a historical perspective. So there's still that game of capturing the demand that's out there. But given the drop in supply, everyone is banking on that translating into rent growth again in the second half of this year and certainly 27 to 28.
Vladimir Bosanac: Yeah. Yeah. And then you also mentioned that. talk to us about kind of you know what you're seeing personally but also what what what the report is indicating.
Tom: Yeah, I mean we're our strategy is really low leveraged, fixed rate interest only. So we often our debt on our acquisitions is almost always gonna either be agency or life company. But and we talk to banks, we canvass the market when we're looking for debt financing on acquisitions or refinancing, and really who's come back strong are the banks. if you recall when interest rates w you know spiked in twenty twenty one, a lot of banks were upside down in their holdings, they really turned off the spigot for real estate lending and that's coming back. So that's That's really that, and and debt funds are back in given that the debt funds are more floating rate focused, short end of the market. We're starting to see more interest there. So more options out there, that's great, improves liquidity. The marketplace obviously makes it a little bit more difficult on the buy side because we we prefer when we're buying property, we prefer more less competition than more. But I think that's in general across the market, we're seeing the debts the the banks come back, debt funds come back, and that. That debt is plenty of debt options out there, and it's probably nearly a historical tight credit spreads.
Vladimir Bosanac: interesting. And then you know, given some indications that, you know, we're likely not going to see a you know, rate reduction for the for the rest of the year, that's you know highly unlikely. Do you anticipate or have you kind of heard from you know the banking industry what what that might mean? You know, does that mean you know, tighter lending or does that mean sort of this is a new normal?
Tom: I I think from a nominal interest rate perspective, it's a new normal, if not higher. we're certainly seeing that reflected in cap rates. you know, they are continue to increase. So what was so this is gonna be a little bit rough numbers, but what was maybe nationally a five to five and a half is now a five and a half to six. So I I do think we're seeing the cost of debt start to flow through the overall market and be reflected in the cap per. that properties are trading, which is to be expected.
Vladimir Bosanac: Yeah. anything else from that report? Any kind of, you know, surprises, things that you've seen that are kind of interesting to, you know, highlight?
Tom: Well I think certainly You know, the markets that we cover being the mountain, Denver, Salt Lake City, and then the Pacific markets, it's always interesting to see what's happening in markets that we're not in. And
Vladimir Bosanac: Right.
Tom: like how strong New York is. It's so such a dramatic turnaround. Places like Philadelphia, Detroit, Cleveland, Kansas City, s all these, you know, a lot of Midwest and East Coasts that suffered from COVID out migration are really starting to bounce back pretty strong now. So that I would say that's an interesting. I don't know that it necessarily leads us to those markets because I don't see us going too much further geographically than we already are, but it's that's always an interesting thing to see how the rest of the country is performing.
Vladimir Bosanac: Yeah, no, it is, it is for sure. And so, you know, one of the things that, you know, we've seen and you know, as I said in my intro, you know, we cover you know, the Texas market, California, Oregon, and Washington. I pulled some you know data from from our you know reporting over the last few months on in in each in each of those markets. I'll start off with you know Texas because it's kind of the worst of the of the of
Tom: Yeah.
Vladimir Bosanac: the four, unfortunately. Unfortunately. so and then we'll kind of get get to the best at the end. you know, a little little sneak sneak preview. The the best is going to be in San Francisco and San Jose, which you know seem to be number one, number two markets in the country. And and by yeah,
Tom: That's right. Yeah, so what do you w what'd you find out in Texas?
Vladimir Bosanac: yeah. So interesting thing in Texas. this was sort of the kind of epicenter of the national oversupply, if you will. You know, record record deliveries in twenty three, twenty four, basically pushing rents negative everywhere. however this pipeline seems to be emptying fast and at least based on some of the reporting, you know, that we've done on the on the ground there, things are quote unquote turning around. And by turning around meaning, you know, the rents are not going, you know, negative single digits, high single digits now they're negative, you know, low single digits, maybe even positive in certain cases, right? and so that's kind of interesting, right? if you if you look at what's happening in Dallas Fort Worth area, this seems to be the market that's turning first. Austin is kind of at an inflection point and then Houston seems to be where the recovery still still still is still is lagging. backing kind of the Dallas-Fort Worth area, you know, the occupancy is just above 92, you know, percent, so relatively healthy. but you're looking at average rents at about 1,500, you know, bucks per you know month. And like I said, rent growth of negative sort of 1.6%. Year over year it's up a little bit. but but this, you know, Anticipation that you know things are going to move there quickly may or may not sort of pan pan pan out, right? let's see, Austin kind of you know similar occupancy. We're at about 92, 92 percent, you know, also rent slightly lower. So Dallas, like I said, was about 1500 bucks a month, about 1524. In Austin, we're at averaging about 1508, so just about the same negative rent growth of 3.7%. So you know more than double where where where it is in Dallas. and but you know some reports are framing it sort of as a you short term pain, long term game. I mean things
Tom: Haha. Yeah, it's also it's also it's also interesting to hear those occupancy and rents from a you know, West Coast perspective because certainly the rent seems so inexpensive. And then I would also Yes. And I would say from our
Vladimir Bosanac: It d it really is. It really is. Yeah and
Tom: ex or I'm just real quickly say from our experience the inflection point is somewhere between like nine it like in the ninety-four to ninety-five percent range is where you pricing power historically moves to the landlord as opposed to being in the tenants. So that that that kind of jobs as well.
Vladimir Bosanac: interesting. Interesting. Yeah, yeah. So so looks like we still have a little a little bit of ways to go, at least in, you know, Dallas and Austin. And then Houston, like I said, is the is the softest of the of the three. you know, all occupancy is about ninety one point six percent. You know, this is based on one report, Yarty is you know reporting it around there. Cushman of Wakefield is reporting it closer to eleven percent vacancy versus
Tom: Yikes, yeah.
Vladimir Bosanac: you know nine. So there's there's some there's some oscillation there, right? And average rent here, you know, if if Dallas and Austin surprise you, you know, Tom, you know, Houston we're looking at thirteen hundred or thirteen five as kind of the average monthly, monthly rate. and and again, negative rent rent growth. So sort of sort of a sort of across the board there also. but you know the story that you know is not told by these numbers quite now you know quite quite quite you know vividly is that when you look at where most of the population growth and job growth is happening, it is in Texas, right?
Tom: Yep. Mm-hmm.
Vladimir Bosanac: And and I think, you know, this you know statement, you know, short term pain, long term gain
Tom: Yeah.
Vladimir Bosanac: may have some y you know, strength to it and I and I wouldn't be surprised if you know six to ten, twelve months from now we see these numbers quite quite the opposite. what are what are your thoughts?
Tom: Yeah. Yeah, I think the just all continue to be surprised by the strength of Texas and other Sunbelt markets to attract population growth. you know, something we may touch on later, w on one of our lighter hearted topics, but it it is that continues to to surprise me. I I don't know how you feel about that, Vlad, but just the Part of me maybe it's just being from California and having that bias, but that there might be a return to the states, you know, reversing that. But I don't know. What are your thoughts on that?
Vladimir Bosanac: Yeah, I mean I think certainly when we talk about, you know, job job growth, in terms of, you know, where you know, you know, where we're seeing, you know growth in terms of you know data centers and even manufacturing and you know finance and that kind of thing. definitely seems to be happening in in the great state of Texas for sure. I however I don't know and you know this will be something that we'll have to watch closely if the you know demand is going to surpass the you know supply. Now in all three of these markets you know the supply of units has gone down sick sick you know sick you know by by a big number. in Dallas, Fort Worth, down 43%. however, they still have over 30,000 units under construction. in Austin, we're looking at you know, you know, deliveries sort of down also by a by a big number, but again, over 20,000 units are under under development. same, same with Houston, you know, a huge drop-off, you know, about thirty-six six percent year over year in terms of you know. the you know development but still somewhere between you know you know you know around fifteen to you know twenty thousand units depending on the on the on the on the source. So still a lot of units to be delivered and then I wonder if even even with you know job growth they're gonna be filled up. that may not be the case.
Tom: Yeah. Well, time will tell. and then certainly I think the from a delivery perspective, we not only always think about it when we're evaluating the markets we're in and our acquisition opportunities, it's not only the nominal units, but also as a percentage of the existing inventory. So like a like a Dallas with that number of deliveries is something of in the neighborhood of like a two and a half percent of existing inventory, whereas you know, some of the West Coast markets like a San Francisco, it's point five percent of
Vladimir Bosanac: Right.
Tom: So,
Vladimir Bosanac: Yeah, yeah, yeah, yeah. So let's jump over to you know, Southern California, which is, you know, geographically obviously a big market. So we're going to make some generalizations here that may or may not necessarily be accurate for the for for a specific sub sub sub market within within Southern California. Los Angeles, I'll I'll start start off with there. you know, vacancy is about five point five percent. so you know, definitely you know lower than some of the stuff we're seeing in, you know, Texas. Average rents here now are growing, you know, twenty three twenty three ten per you know month. rent growth essentially flat, however. At about 0.2% year over year. Orange County is sort of the tightest of the three. If you look at Los Angeles, Orange County, and San Diego, vacancy is about 4.3%. Average rent there is now over $2,700. And rent growth is approaching 2%. So that's an interesting kind of market to you know look at. And then San Diego vacancy close to LA, about five and a half percent. average rent about 24.53, with rent growth basically turning positive at just under 1% year over year. all of these markets, the one that we didn't sort of highlight here is inland empire, which I think we probably should have, but that may have to be done at a at a different time.
Tom: That's yes. only so many hours in the day.
Vladimir Bosanac: Only seven hours of day, exactly. but you know, Los Angeles is looking at a development pipeline of over twenty-five thousand units. you know, in Orange County we're only looking at about thirty one hundred units, so this is a small, small number, and San Diego about twelve thousand units. So there's some development going going there. And you know, I think, you know, the sort of typical kind of, you know, challenges in, you know, California you know, persist persist in these in these markets here. what what are your thoughts on Southern California?
Tom: Yeah, so In number of you know, just reflecting on those in the context of markets that we cover and markets that we own property in. So you talked about LA, the number of deliveries, that's about, you know, going back to the concept of or the metric of percentage of existing inventory. That's about one percent of the inventory. San Diego is more like two percent of the inventory. And as you mentioned, Orange County is less than one percent.
Vladimir Bosanac: Yeah.
Tom: so I I certainly think that the those stats mat largely mat. Match what we're experiencing on the ground. Go into specific assets that we own in those markets. So, for example, you mentioned strong growth or at least positive lease trade out in Orange County. That matches our experience. We own a 93-unit town home property there. So that you know the big units, three and four bedrooms, average rents on those are like $4,400, $4,500. And we're seeing strong rent growth there because people can't afford to buy homes in Orange County. So it's a great substitute. from that perspective, families so on and so forth who aren't able to buy. In LA, we own in Long Beach, that has been a little bit, we've been able to stay occupied, but a little bit more of a struggle, both from a regulatory collections perspective, etc. You know, downtown LA is, I think, starting to see a recovery so that matches. And
Vladimir Bosanac: Mm.
Tom: then, you know, we then we own out in Ventura and in the inland empire. So we straddle LA. For those other two assets.
Vladimir Bosanac: Right.
Tom: And I would say Inland Empire is kind of decent. Well, really, both Ventura and Inland Empire were seeing some okay lease trade-out staying occupied, but not big rent growth.
Vladimir Bosanac: Yeah, and I imagine you're seeing cap rates beginning to, you know, kind of drift up in in the Southern California market. That's that's reporting that we're we're also seeing and kind of a couple of wild cards is the insurance costs sort of post the twenty twenty five wildfires in Southern California. That seems to be
Tom: Yes.
Vladimir Bosanac: you know one of the drivers there. And then LA's measure ULA transfer tax, which is you know basically on any any property sold over I believe five million dollars if if I have that correctly.
Tom: Yeah, it's either four or five billion, yes. And it's a it's a progressive scale. So above a certain amount, it's at the full percentage.
Vladimir Bosanac: Yep.
Tom: So it it ends up being pretty steep and certainly a regulatory hurdle and has impacted sales. And in fact, there's discussions Yeah, and
Vladimir Bosanac: Yeah, it's Hinder Tails for sure, right?
Tom: in fact there's some discussion about either amending it or repealing it. I given the political wins in LA and it's left of leading center, I I don't see that happening, but maybe.
Vladimir Bosanac: Yeah, there is something in November where I think there is a proposal to sort of limit it or put sort of a cap on some, you know, properties or or at least you know, certain age of properties. I'm I'm butchering this this now, but I remember seeing something recently about that. So, you know, we'll see kind of how how that play plays itself out. But Southern California, you know, we're seeing institutional capital return to the multifamily side. you know, certainly there are acquisitions being being made from LA down to San Diego and I imagine that will only continue to be so. what are your projections in terms of you know where you think you know rent might rent rent growth is there, employment and and thing things like that?
Tom: Certainly there is a return of buying appetite. I would say that certainly institutions are coming back. The bets that are being made are more on a replacement cost from their perspective to say if I can buy it for, as an argument, $400,000 a unit and it costs me $600,000 a unit. What I'm collecting right now, I don't necessarily, it's not that I don't care, but I'm less focused on what I think I can sell the property for. So a lot of people are making that bet. And I think that they'll do quite well. Well, because there's a lot of smart people who've done it before and are making those bets now. In terms of operationally speaking, I don't see the balance of 26 being a big mover on the rent growth side. But if LA continues to recover and if job growth does at least or immigration stabilizes or turns positive, then certainly this stage is set for rent growth there as well.
Vladimir Bosanac: Yeah, and really quickly, per unit cost of sales. So we have a couple of you know, numbers here. metro average in LA about two hundred and eighty one thousand per unit. you know, inland, if you move more inland, it's closer to 260, West Hollywood closer to 500, and then Santa
Tom: Yeah.
Vladimir Bosanac: Monica closer to sort of 840.
Tom: Yes.
Vladimir Bosanac: so wide a wide range of you know c cost per unit and obviously based on the you know quality of the asset as well but just kind of an indication
Tom: Of course, of course.
Vladimir Bosanac: of you know where where the numbers are there, right?
Tom: Yeah, I think those are Yeah, I'm glad you pulled those stats and interesting to walk through. And I I do think most of them mirror what we experience or what we are projecting on a go-forward basis. on the acquisition side, we would love to we don't own in San Diego, we'd love to buy there, and we'd love to own more in Orange County and certain parts of LA. We're just not seeing our strategies focus on cash on cash yield the day we close, and we're just seeing people pay prices through that relative to for that market in particular.
Vladimir Bosanac: Yep. Yeah. Yeah. So let's jump north to the Pacific Northwest. you know, the you know Seattle region. demand is a bright spot here. based on our, you know, reporting strong absorption, which is powered by kind of AI and tech leasing. So, you know, recently we've seen Some you know leases of big tech and AI firms from the Bay Area actually making moves in the in the in the Seattle market. We're also seeing Amazon you know really trying to push hard. This you know five-day back back to the office. Microsoft also TikTok just announced something about you know wanting everybody into the in the office five five days a week and they have a they have a presence up in up in Bellevue that's you know pretty significant. supply. However, is pulling hard, pulling back really, really hard. So just like we've seen in you know Southern California and also in Texas, we have deliveries in the Pacific Northwest market down 53% year over year. So you know very much a slowdown. in terms of new sort of you know development, you know, however, it's still you know, several thousand, you know, tens of thousands units kind of, you know, under under under under you know development there. what are your kind of thoughts before I go into into some you know vacancy numbers here in terms of you know Seattle in general?
Tom: Yeah. Well I'm I am curious, Vlad, you mentioned the the the back to work and given your business you overlap tech and real estate. Are you hearing is that are are those announcements successful? Are people getting back into the office?
Vladimir Bosanac: You know, it's it's it's really hard to tell, to be honest with you. I think when I talk to commercial brokers, the you know, message is, yeah, this is great. Everybody's coming back to the office. You can see the vibrancy and then I anecdotally will talk to people that are either in you know, work at tech firms or or just sort of friends of friends that I, you know, kind of know. And you can still tell that they're not going to the office every every day. It's maybe two, three
Tom: Yeah.
Vladimir Bosanac: times a, you know, week essentially. In some cases I've heard, you know, companies wanting everybody to go back five days a week. And then they don't have enough space for for, you know, everybody because they've, you whittled down the space based on based on the needs over the last few years. And so, you know, that that's another challenge, right? I know in tech it's kind of A kind of a weird directive because I, you know, from personal experience can you know tell you that you know it's it's the world of has and have nots. And there
Tom: Mm-hmm.
Vladimir Bosanac: are going to be you know leaders of certain groups or certain you know
Tom: Okay.
Vladimir Bosanac: rock star you know developers who are going to do whatever they want to do. I used to work for a company Palo Alto, this was pre-COVID. and we had you know one of our chief developers lived lived in you know Tahoe. and
Tom: yeah.
Vladimir Bosanac: you know that's And nobody could tell him. Nobody could tell him. And that's where he stayed, exactly. And and the company did fine and you know, it's it's just one of those one of those sort of things. so I can't tell, to be honest with you, you know, if if this is really happening. I think if we look at sort of, you know, traffic, traffic is sort of a, you know, I think a confusing metric because I think there are just people, you know, during the day doing stuff. maybe they're running errands, maybe they're going to meetings,
Tom: Sure.
Vladimir Bosanac: maybe they are going to the office, but I don't I don't think that that we're we're seeing kind of anywhere close to the sort of pre pre-COVID numbers.
Tom: Sure. No, I and I well I appreciate that feedback. I I think like you Take the foot traffic numbers with a grain of salt and also balance that just you know, thinking back to our own personal or company experience when I'm in Seattle for meetings or seeing property. I like to spend time walking around downtown, various neighborhoods, and feel what it's like. And certainly it feels better than it did, but
Vladimir Bosanac: Yeah.
Tom: it but it doesn't necessarily match. The hoopla that the brokerage and investment sales community be like, it's back in the office five days a week. It's so much more active. So truth is somewhere in the middle. and then I just the other part you mentioned in the context of our portfolio is there are certain submarkets in Seattle that are around those employers that I think are experiencing some pretty strong rent growth. But the city Seattle properties that we own, ones in Lake City, ones in Columbia City, we're not really seeing that on our our our experiences doesn't match that. So we are struggling to maintain stabilized occupancy and are seeing anemic rent growth if any.
Vladimir Bosanac: Yeah, interesting. So both of those, Lake City and all also Columbia City, these are you know somewhat, you know, neighbors neighborhoods within within Seattle. so metro vacancy, the numbers that we're seeing is around six point seven percent is kind of what where where where we are. This is above that number, Tom, that I think you said you know, where this sort of
Tom: Pricing power, yeah.
Vladimir Bosanac: Pricing power sort of shifts. average rent in Seattle seems to be kind of between 2000 and 2025 per per per month, with essentially flat rent growth of about 1% year over year.
Tom: Yep.
Vladimir Bosanac: across the lake in Bellevue, this is the tightest and maybe the priciest market in the in the in the region. But even there, vacancy is at 6.6%. and
Tom: Yeah.
Vladimir Bosanac: we're looking at rents there high. over three thousand doll dollars a month at at about thirty one hundred bucks and the rent growth there seems to be actually probably the strongest between January from January to May of this year we've seen rent growth there of five point six percent which is outperforming the state and certainly one of the highest numbers in the in the in the in in the US also and then South south in you know Pierce County, you know, Tacoma, Pierce County, this is where the affordability I think play
Tom: Yes.
Vladimir Bosanac: is, you know, hap happening mostly. Rents are between 1700 and 1900 bucks a month. you know, you know, much more affordable com compared to the Seattle Bellevue Bellevue market. and you know, r rent growth is almost non existent there because I I th there there are still you know properties to that that That needs to be absorbed. the one market that's not mentioned here, which is north of Seattle, which is you know, Snohomish County. I don't have the specific numbers here, but I believe Snohomish County County is probably going to be closer to Seattle. it is it is perceived, I think, a somewhat you know, you know, high higher end sort of suburb, if you will. And
Tom: Agreed. Yeah.
Vladimir Bosanac: but also a lot of new projects were also delivered there, which I think will probably keep keep rents fairly fairly fairly flat. thoughts on this, Tom?
Tom: Yeah, I I certainly so we don't own s in the south market. we've looked in the Tacoma region, Pierce County, and also agree with your thoughts on Snomish. on the east side, certainly we have great recent experience because the property that we own there was at Issaquah. We just sold and it closed at the end of July. So we certainly are cognizant of the sales market there. It was 134 units sold for 55 one. so it works out to about a four hundred and eleven. thousand dollar per unit. it was the oldest property in our portfolio. Buyers are gonna undergo a pretty extensive value add renovation of the 134 units there, 35 are town homes. So they'll be completely redone and get four or five thousand dollar rents and the apartments are big units. So we certainly it was did match our investment thesis or our investment thesis on a go-forward basis so we ended up selling it going to the market and I would say that the dynamic we experienced in that sale Process matches with the stats that you're seeing here. So people are banking on rent growth on the east side. It is much less exposed to new inventory, other than perhaps downtown Bellevue. And given the employers that are there, Microsoft, etc., it still remains a very strong sub market. So I that largely jibes with our experience there.
Vladimir Bosanac: Yeah, anecdotally, and we'll jump into the, you know, Northern California market here shortly. As I said earlier, Northern California is the number one, number two market in the in the country in terms of mul multifam family. And I was recently part of a meeting where there were a couple of researchers from Green Street advisors who specifically called out, you know, you know, Seattle is perhaps the sort of the next kind of market to kind of, you know, follow what's what what what is happening in Northern California. And and I think certainly with some of the even though there's still some you know tech layoffs going on across the sort of you know Puget Sound region, it does seem that there's job growth there, you know, also because as I said earlier, some of these Northern California AI firms have leased, you know, considerable space. I imagine they plan to, you know, fill it with people as well. So
Tom: Yes, yeah, yeah. It's certainly that is the that is the mantra and tagline for the investment sales brokerage community up there on the multifamily side saying, look at all this stuff that's coming. We've seen this we've
Vladimir Bosanac: Right.
Tom: seen this play out before. Now's the time to buy.
Vladimir Bosanac: It and and a variable it might be, especially if the supply, you know, continues to be you know, a lot lower than than where it was. although this is if if if I can say just one more thing, this is a fairly developer friendly sort of you know region. So I so I do think even though you may not have a lot of deliveries happening now, there are a lot of projects in the pipeline that could kick off very, very quickly should the market turn. So it's it's one of those where you know there might be a short window of investment before new product
Tom: Yeah, and yeah.
Vladimir Bosanac: might might kick in, right?
Tom: Yeah, no, I I think glad you hit the nail on the head there. Seattle is, unlike most West Coast markets, more developer friendly and they have this multifamily tax exemption program that does encourage development. So it is more attuned to supply and demand and doesn't and turns more quickly. So you're absolutely right there that you may not see that same dynamic as you would see in other like a San Francisco or San Diego or LA.
Vladimir Bosanac: All right, so we kinda started off at the off at the sort of you know worst of the of the four, if you will, and we're ending it here in Northern California where you know, it's basically sort of the the envy of the multifamily market across
Tom: Yes.
Vladimir Bosanac: the country. Tom, I'm gonna let you kind of give us a, you know, perspective and then I'll jump into some of some of the numbers here.
Tom: Yeah, think we are starting to see the ripple effects. So certainly San Francisco was the epicenter of AI demand. Rent growth was really tremendous, double digit over the last four quarters, and that is now we're starting to a ripple effect of that. So we own property in San Rafael, in Novato and Petaluma as you go further up north in in Marin and Sonoma counties. And I would say the rent growth we're seeing is direct. Reflected by proximity to the city. So again, from a personal experience, we are, or portfolio experience, we're starting to see the overflow effect. And I would also argue that tracking the properties done in the market, whether JLL or IPA or the other major brokerage shops, the properties that they're bringing out, certainly they're getting investors to buy off on really strong rent growth to justify their underwriting and the purchase price. Yeah.
Vladimir Bosanac: That's right. That's right. And this this anecdote that I that I brought up a few minutes ago about you know, Green Green Street research, I think they were projecting rent growth in the the San Francisco Bay Area region of eight percent keger for the next three years, which I think is just an unheard of number.
Tom: Wow. Yes, that is that is unheard of. I I mean, yeah, that's not something many people will underwrite, but maybe not. I don't know.
Vladimir Bosanac: Yeah. and and again, you know, but we're we're talking, you know, San Francisco pipeline of, you know, fourteen hundred units, you know, not fourteen thousand, fourteen hundred, right? Silicon Valley, about a thousand units, you know, even even in Oakland, right? We have a pi pipe pipeline, you know, that could be as big as forty thousand units, but you and I know this is not going to break ground anytime soon.
Tom: Yes, and and those are like and going back to that other metric, those are all well below one percent of existing inventory for San Jose, San Francisco.
Vladimir Bosanac: That's right. That's right. Very, very, very low. Exactly. And then, you know, tack on to that is then also, you know, vacancies. So in San Francisco, we're looking between sort of two to four percent range. you know, I have a number here that says average rent of about twenty-eight fifty. I challenge you to find anything for twenty-eight fifty in San Francisco.
Tom: I yeah, yeah, yeah, I I would agree. Yes, as I go s s sign me up, I'm gonna turn around and subtle at that.
Vladimir Bosanac: I I don't know. I don't know where this average exists. but strong rent growth. I think year over year we were seeing, you know, double digit numbers. just in this year, I believe we've studied we've seen something like high single digits. and again, San Francisco is the number one market in the in the country. job growth and one other thing that you mentioned, you know, proximity to the you know AI firms anecdotally I haven't heard Or seen anything sort of you know specific on this, but anecdotally we did hear that, you know, some of these firms are offering incentives for people to be closer to the office. So
Tom: Sure.
Vladimir Bosanac: obviously what you know, what is that going to do? Just going to drive rent, rent up, unfortunately.
Tom: I'm I and and and I'm curious what when in those in those incentives, have you heard specifics of how they're structuring them? That 'cause that's that's really interesting to me that that is a dynamic that they they want to have and are gonna be willing to pay for it.
Vladimir Bosanac: Yeah, I haven't I I haven't heard specifically whether it's like a sort of a monthly kind of, you know, bonus or allowance or you know however they you know call it or if it's like an annual thing. but but I've definitely heard from a couple of sources that you know if you're within like a 15 minute sort of distance whether that's you know you know a 15 minute drive or 15 minute walk, whatever, you you you will be paid more effectively, right?
Tom: Mm.
Vladimir Bosanac: And so that that that is interesting. this is not the first time that we've seen something similar. back in the day when Facebook was headquartered in You know, Palo Alto. this is the early sort of this is the late aughts 2000 and sort of eight and nine. you know, we heard that they
Tom: Mm-hmm.
Vladimir Bosanac: were giving an allowance of about $600 if you would live like you know, in you know, Palo Alto, right? And basically all they did is all the local you know landlords in Palo Alto just jacked up the prices by $600 and just captured all of that essentially, right?
Tom: And they just captured all that, right?
Vladimir Bosanac: so that's that's in San Francisco, you know, Silicon Valley, you know, similar. similar vacancy three point four percent you know we're you know, looking at you know, average rents at about thirty six hundred dollars. Again, you know, I I don't know if that's for a one bedroom, probably for a one bedroom, and I can I I can, you know, you know, certainly tell you that, you know, class A stuff go goes for that that amount. and then Oakland, East Bay, we heard Oakland is beginning to pick up steam. obviously, you know, this is usually the laggard. It follows what happens in San Francisco as and as we see, you know, pressure. build up in the city. It goes across to Bay, and we see rent rent growth there there also. even in Oakland, you know, vacancy is about 5%. And some of the numbers that we're seeing is that it's that it's improving, meaning going, going down. But you know, you're looking at average rents there at around $2,500, $2,600 a month. So still lower than what you're gonna see in other other parts of the other parts of the region.
Tom: Yeah, I think You know, w those price per units are certainly skewed by age and average transactions and potentially smaller, more mom and pop, not non institutional sales, but just anecdotally seeing some San Francisco sales in excess of seven hundred thousand a unit, some South Valley s Santa Clara transactions in excess of six hundred thousand dollars a unit. So and when I talk with the brokerage community about how people are underwriting their rent growth, that is, you know, four or five 6% compound annual growth, which is scary when you think about it from a nominal perspective, but
Vladimir Bosanac: Yeah.
Tom: that's how people are getting comfortable with paying some pretty aggressive numbers.
Vladimir Bosanac: Yeah, and you were citing the you know Newmark report that you know there are still landlords giving giving out incentives. I don't think there's any incentives anywhere in the in the in the in the in the
Tom: Yeah.
Vladimir Bosanac: in the in the Bay Area. And we've heard of you know, numbers on, you know, turn tur turnouts. Is that is that the term Tom when when a tenant leaves that a new person comes in?
Tom: Yeah, so so we the the phraseology we use is lease trade out and whether it's a renew whether whether
Vladimir Bosanac: Lease lease trite out, yep.
Tom: it's a renewal or a new lease. So again the the le or LTO lease trade out, what we're seeing portfolio wide and more nationwide is three to four percent on renewals, negative three to four percent on new leases. But you're absolutely right in San Francisco, Silicon Valley, and now spreading to Oakland concessions are largely gone. We own property in Mill. Petis and we we're we've been 99 to 100% lease and just the amount of demand for we're not short on demand in that property. So we are starting to see some pretty strong lease trade out.
Vladimir Bosanac: Yeah, and and anecdotally, I've heard that some of these, you know, turn turnout, you know, leases are as high as twenty-five percent. So meaning when you get a new tenant in, you're able to charge more. Now you're going from a lower baseline, obviously, right, to to a you know market.
Tom: As well as as well as as well as you probably had to offer the last tenant a concession.
Vladimir Bosanac: That's right.
Tom: So if you even a month concession is already eight percent or eight point three percent below. So even if you offer no concession, you've already increased your rent by eight point three percent for a one if you drop a one month concession.
Vladimir Bosanac: That's right. Yeah, yeah, yeah. So, you know, re very remarkable numbers. certainly you know you're you're you know this is not an average, this is this is an exception you know across the country. And you know, I think you know, I think you know what this means, if it's going to continue, I don't know. because I just I just don't know how much higher these rents can can actually go. But I guess time time will tell. And you know, certainly in the last cycle we saw a push into into further sort of, you know, suburban markets. you know, markets when you think about like like you know Fremont or even further East Bay, even into like, you know, Livermore closer to Central Valley, you know, Tracy, Stockton, and even in Sacramento, you see rents there go up as well as a result of what's happening across across sort of the you know markets closer closer to San Francisco.
Tom: Yep.
Vladimir Bosanac: so it's going to have a you know reverberating effect, you know, throughout throughout the region for sure.
Tom: Yeah, and it it it seems to exhibit many aspects of past cycles.
Vladimir Bosanac: That's right. That that is that is that is right. So anyway, so on that note, I thought we kind of close off with with sort of a kind of you know related but interesting kind of you know ti tidbit here. So UHAL puts together kind of a mid year migration trend figures. I I, you know, look at these, they're kind of interesting in a in a sense 'cause it gives you, you know, you know, a a a real time perspective in terms of, you know, which states and which, you know, cities are kind of, you know, gaining. Tom, I sh I shared this with with you. So why don't we go kind of generation by generation and maybe
Tom: Yeah, because I y yeah, when you brought up Vlad, I was very curious because, you know, I had preconceived notions about what the numbers might say, but what what did we learn? What'd you s what'd you find?
Vladimir Bosanac: on the on the on the U Hall, on the U Hall studies specifically?
Tom: Yeah.
Vladimir Bosanac: Yeah, yeah, yeah, yeah. No, so so so it's interesting how it's very different from when you when you go from generation to generation.
Tom: Course, yeah.
Vladimir Bosanac: and and I think you know we're seeing basically the you know life cycle of you know, you know, family formation to, you know, working to, you know, retirement. And I think some of the sort of, you know, typical kind of, you know, markets that, you know, usually you know, gain folks, you know, when they're starting off work to where they're getting more established to when people retire. We're we're seeing at least from my perspective, some of those, you know, trends actually continue. So let's start off with Gen Z. This is the sort of youngest co cohort born between ninety seven and twenty twenty twenty twelve. the states, well let me go by cities first. The top
Tom: Sure.
Vladimir Bosanac: five cities that are that are gaining in this generation are New York City, Dallas, Chicago, San Francisco Bay Area, and Los Angeles. I'll throw in number six as Austin here. does that surprise you, Tom?
Tom: Well, I so I have two kids that are in that generation. one who moved back from school in Chicago to work in Berkeley, so that kinda makes sense. and my other
Vladimir Bosanac: Yeah.
Tom: my younger daughter just graduated and is gonna be moving to the UK, so that doesn't quite jive. But if I
Vladimir Bosanac: Yeah.
Tom: think about her friends, yeah, it's New York, LA, Bay Area. That kinda makes sense.
Vladimir Bosanac: Yeah, it is it is interesting. And and these are, you know, obviously the kind of when when you think about it, so the you know, biggest markets, certainly the Bay Area number four is not one of the biggest markets in the country. It's probably like, you know, top, top, top ten, but the top four, you know, New York, LA, Chicago, and Dallas are are are all all all up there. for for the millennials. So this is the you know, cohort born between eighty-one and ninety-six. the top five markets are going to be Dallas, Houston, Orlando, San Francisco Bay Area, and then Sarasota, Braden Bradenton Flor Flor Florida area. does that surprise you?
Tom: Again, not really when I think about at that age you have a young family or starting a family
Vladimir Bosanac: Yeah.
Tom: since we're all since you know adolescence now goes to thirty. so that kind of jives I I think with my preconceived notions. How about you?
Vladimir Bosanac: Yeah, yeah. I mean it is it is interesting. I mean, out of these top ten markets for the for the millennials, we have three are based in Texas, three are based in Florida.
Tom: Or the yeah.
Vladimir Bosanac: If we have one in Idaho, one in Alabama, and then we have one in California and it's and it's in the Bay Area. And I think it's I would say this is job related, probably around technology and you know, AI. If you are in this industry, you're an established, let's say, you know, developer, programmer, whatever, you're probably going to go to the Bay Area to kind of be part of this next sort of gold rush, if you will, right? so that one that one surprised me a little bit because I think the sort of narrative that we've heard typically is that you know California is losing population. and you know, at least in these two cohorts, we're we're still not seeing it. We're just getting exactly exactly exactly
Tom: We're just getting younger. Cause 'cause 'cause now you're gonna go to the next generation, which I'm in, which you're gonna tell me I'm supposed to be leaving.
Vladimir Bosanac: So the next generation, Tom, which is our generation, Gen X, you know,
Tom: Yes.
Vladimir Bosanac: it's between 1965 and 1919. so we are we are, you know, California is not in this in this list at all. Looking at you know the top sort of you know markets, Fort Myers, Florida, Charleston in South Carolina, Sarasota, Bradenton sort of area, Miami, Fort Lauderdale area, Nashville, Salt Lake City, Wilmington, Tampa, San Diego, and Gainesville. So Florida seems to be represented here very strongly. And then I think of the western markets, we're basically seeing, you know, Utah, and San Diego. Does does this one surprise you?
Tom: Again, not really. I mean, well, maybe a little bit because I would thought my generation, I th you know, I'm 55, I'm thinking about working at least another 10 years. So retirement seems so far away, and those seem more like moving for retirement and or ha not having an income tax and or a much lower cost of living. That's how that's how that's my takeaways. How about you?
Vladimir Bosanac: Yeah, I think I think there's there's there's a couple of things here that I think are very interesting. So first of all, Gen X of the four generations that I think I'm going to call here, in terms of just sheer numbers is the smallest generation. so you know that that I think in and of itself is very s sort of you know interesting. but also there is recent numbers from the you know on unemployment figures that about a million people in the last year have left the you know workforce. You you and I are hitting mid sort of you know 50s. I think if you and I you know got laid off today and were sort of forced to find a new job I think it'd be it'd be it'd be hard. our education
Tom: Yes.
Vladimir Bosanac: and and the and experience not not notwithstanding we both went went to the same school so that's that then all that that would certainly help us.
Tom: That's right.
Vladimir Bosanac: I would I would hope. but but I do think that you know you're starting to see a generation that probably is experiencing some early retirement and maybe moving to
Tom: Yeah, good part.
Vladimir Bosanac: some of these, you know, states where it's either lower cost, you know, no income tax or whatever, right? seems to be kind of a c you know, kind of kind you know, kind of a draw, right?
Tom: Yeah. I guess I'll have to add the U-Haul to my speed dial in case I get that in case I get that call from my boss.
Vladimir Bosanac: Exactly. And then let's close off with with with the boomer generation, born between nineteen forty-six and nineteen sixty-four. I'm gonna read off sort of the top ten, you know, states here, which are are not gonna be a big, you know, surprise, but South Carolina, North Carolina, Florida, Arizona, Alabama, Tennessee, Arkansas, Idaho, Oklahoma, and Georgia. you know, in terms of, you know, cities, it's you know, Gainesville, Myrtle Beach, Phoenix, Charleston, Lake Havasu, you know, Spokane, Washington, Tucson air air air Arizona, Daytona Beach, and Wilmington. these are
Tom: Yeah.
Vladimir Bosanac: probably, you know, your prototypical retirement communities, right? And the growth there I think is, you know, specifically based on that, right? Would you would you agree?
Tom: Yeah, I a hundred percent. I those all sound except for Idaho and Spokane, th those also all sound like you know, snowbird cities, right? Where people are like,
Vladimir Bosanac: Right, exactly.
Tom: I'm I'm retired now, let's go enjoy the sun for eight days of the month or eight months of the year I should say, yeah.
Vladimir Bosanac: Right. Right. Right. Right. Right. Wonderful. yeah, so Tom, you know, great conversation here. an hour spent about talking about mul multifamily. hopefully interesting for our audience in terms of, you know, how how things are going. thanks for all your feedback and enjoyed our conversation.
Tom: Yeah, absolutely vibe. Thank you so much. always appreciate co-hosting. Great to have this conversation go through some multifamily stats, both nationwide and market specific. And then certainly the the you know, the U-Haul information is interesting. so appreciate your time today.
Vladimir Bosanac: We'll talk soon.
Tom: Absolutely vibe. Thanks so much.
