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Jay Parsons spends a lot of time looking at issues that are important for real estate investors.
As chief economist at rental data firm RealPage, Parsons researches national housing trends along with the headwinds faced by builders, property managers and others involved in real estate operations.
After a run-up in rent and housing prices, investors watched as rent growth slowed to a halt last year. That coincided with a spike in interest rates that made finding deals that cashflow more difficult.
Jay Parsons | RealPage chief economist
Parsons was one economist watching to see if the drop in renter demand and the slowdown in rent prices was a return to seasonal normalcy after the COVID-19 housing market accelerated the price of, well, everything.
Then the banking collapses reared its head.
At a time when all eyes are seemingly on the fall of Silicon Valley Bank and Signature Bank — two institutions with billions in real estate loans — Parsons is watching the impact of something else.
The following interview has been edited for length and clarity.
Inman: We’ve got a situation with high-interest rates, high inflation and banks collapsing. What are you watching right now?
Parsons: The real challenge is more to do with interest rates, cap rates, cost of debt. There’s this freeze in the market right now that really doesn’t have so much to do with supply and demand, it’s just to do with seller expectations.
They want to still see last year’s pricing to sell. The buyers can’t make that work because interest rates and therefore the cost of capital has gone up so fast. It’s just a stare-down contest that we’re in right now. I don’t think that’ll get resolved here until maybe the summer, second half of the year.
So which types of investors are getting into trouble right now?
As we get into later in the year and early next year, I think we’ll see some of the value-add investors who bought at peak pricing, late 2021, early 2022. Their strategy was to do some renovations and try to push the rents up by double digits.
Now that’s just getting much harder to do. Capital costs have gotten much more expensive and the ability to achieve those higher rents has gotten more difficult.
I don’t want to say there’s going to be a massive storm, but there’s going to be enough in the market where you have forced sellers facing a refinancing event. Now all the sudden they are going to have higher loan payments than they can pay for. It’s not like it’s going to be the entire market but there is a niche.
I know we’ve been waiting for spring to see whether the rent slowdown in mid- to late-2022 was a return to seasonal norms or something bigger and more sustained. I’m curious what we’re seeing so far.
In terms of investor activity, the investors aren’t necessarily all that worried about supply and demand fundamentals. I think a lot of the would-be buyers are mid- and longer-term players who understand that demand is cyclical. There’s going to be more demand than supply again.
They like the long-term story, the long-term tailwinds for rental housing. So it’s still very much in favor among investors and particularly mid- and longer-term investors.
Economists had been thinking we’ll probably see a recession of some kind later this year, and everyone is watching for that. Then out of nowhere, banks start collapsing and we’ve got some curveballs. Where is your head at with the failure of Silicon Valley Bank and Signature Bank?
The good news for multifamily is the banks play a role, but they’re very much secondary to Fannie and Freddie, [who] are insulated, as far as we know, from all of this.
They’re still active in the market. Obviously, they’re still impacted by higher rates, but they also have caps that they try to reach. One of their goals is to keep liquidity in the market.
It sounded like there might be an impact on markets here and there. Signature Bank was maybe more of an issue in New York City than Chicago. But right now, is it not armageddon for real estate?
During the Great Financial Crisis, we saw a lot of bad loans. Unless [the banking issues] spread to the broader financial markets, then it really shouldn’t have that big of an impact. Interest rates are a much bigger factor for anybody in real estate.
Even Signature Bridge, it’s still there. Things are getting worked through. So we’ll see where it plays out. But as of now, I don’t think we’re seeing any flashing red lights as it relates to multifamily or single-family rentals in terms of the impact.
